Two years since the start of the pandemic, the coronavirus's impact is still taking its toll on credit unions' balance sheets.
A combination of members
Credit unions reported a 2.97% yield-on-assets ratio in the fourth quarter of last year, down from 3.27% in the fourth quarter of 2020. The metric measures how much income a company’s assets are bringing in.
CUNA Mutual reported that credit unions’ loan-to-assets ratio fell to 61.3% in January 2021, from 63.1% in the previous January. Combined with yield on assets, the ratios measure a credit union's financial health.
The cumulative effect could be net interest margins becoming further squeezed, ultimately lowering net income.
“Everyone is looking for loan growth to offset the deposit surge from the pandemic,” said Vincent Hui, managing director at Cornerstone Advisors. “The impact will vary based on the credit union and how strong their lending capability is."
The market is not very conducive to auto or mortgage lending right now, and business lending is tough as credit unions are competing against banks, according to Hui. The impact of lower yields will be very credit union-specific. “It depends on how strong their lending engine is and how much share they can take,” he said.
It also depends on the geographic area, as some markets are rebounding faster than others.
Everyone is looking for loan growth to offset the deposit surge from the pandemic.
At Pinnacle Credit Union in Atlanta, the loans-to-assets ratio rose slightly to 62% at the close of last year, from 60% at the end of 2020.
Matt Selke, CEO of the $88 million-asset Pinnacle, said assets rose for all financial institutions during the height of the COVID crisis. For most credit unions in Georgia, deposits continue to be high, he said.
Pinnacle has been proactive to put as much of that growth back out in loans and has also been lucky, Selke said.
“The Atlanta area is booming in the last 12 months in all aspects of lending, real estate, autos, etc. Of course everyone is going to face some headwinds in 2022 with rising rates and continued supply chain issues,” he said.
Atlanta and other Southern markets — including Nashville and Memphis in Tennessee, Austin, Texas — and San Antonio that have not stopped growing and have seen increased growth during the pandemic as people appear to be fleeing places like California and New York, Selke said.
“We do not expect a slowdown in growth over the next year or so,” he said.
And when it comes to assets, all growth is not created equal, said Jim Adkins, managing partner for Artisan Advisors.
If the source of the credit union’s growth is higher-yielding time deposits — products such as certificates of deposit that require the customer to commit to a specific length of time — it might be a challenge to make a positive spread. But if lower-cost checking and savings products are driving growth, the credit union should be able to make a positive net spread, he said.
One thing all credit unions can try to do is keep savings and time deposit rates in check, Adkins said.
“If you have excess liquidity, you can afford to not increase rates as fast as the Fed may be increasing their benchmark rates,” he said. “You might also want to look at your loan pricing as well in order to determine if your loan rates are competitive and not overpriced. Maintaining rates in a rising rate environment should make the credit union more competitive.”
Consumers are saving more and borrowing less, making it harder for credit unions to meet a key ratio that the National Credit Union Administration uses to gauge their financial health.
Because of their tax structure, credit unions can defer on loan rate increases, underpricing bank competitors that will want to use Fed increases to raise rates more quickly, Adkins said.
“We have seen very competitive situations in specialized lending areas, like motorsport lending, where the combination of fintech service delivery and lower pricing on loans allows credit unions to be more competitive than banks,” he said.
Selke said he sees promise for some lending lines.
While home prices are rising faster than expected, the lack of supply will keep home prices elevated in the near term, according to Selke. And once the supply chain issues are rectified and people begin to feel better about traveling and spending, they will take out more loans, he said.
“Credit unions and banks will once again be fighting over deposits very soon as members and customers feel better about spending all the savings they have accumulated over the last two years,” he said.
