Credit unions continued to see solid growth in their lending portfolios in 2007. Although the spread between loan and share growth has narrowed in the past few years, credit union loan growth is still outpacing share growth. This gap is causing the average credit union loan-to-share ratio to rise. As of December, the loan-to-share ratio rose to 83.3%, up from 82.1% as of year-end 2006.
As the loan to share ratio increased, credit unions turned to non-share sources to fund their lending. As a result, credit union borrowing increased substantially during 2007. At year-end, total credit union borrowings totaled $28.2 billion. This marked a 34.3% increase from the $21.0 billion in credit union borrowings at the end of 2006.
Smaller CU Count Impacts Average Balances
Although credit union borrowing totals have increased, the number of individual credit unions that have outstanding borrowings has actually decreased. At the end of 2006 there were 1,283 credit unions with outstanding borrowings. During the course of the year, that number fell almost 20%. As of the most current cycle, only 1,042 credit unions reported borrowings outstanding. The average loan-to-share ratio for these credit unions that reported outstanding borrowings was 92.5% in December, well above the industry average.
For many credit unions however, liquidity is not the issue. “We have liquidity” says Ralph Reardon, CFO of Coastal FCU ($1.9B in Raleigh , NC ), “but borrowing plays into our ALM interest-rate risk strategy.” Reardon notes that as rates begin to drop and retail rates are pressured to come down, borrowing can become an important part of leveraging that risk.
The increase in overall borrowing and decrease in the number of credit unions that are engaging in borrowing has impacted average borrowing balances. Average borrowing balances increased nearly 66% during the course of 2007, rising from $16.4 million per credit union at the end of 2006 to $27.0 million at year-end 2007.
CUs Pursued a Different Borrowing Maturity Structure in 2007
The largest gain in balances occurred in borrowings with maturities between 1-3 years, up 56% during the year to total $7.7 billion. This increase helped this category make the largest leap in percentage of portfolio, comprising 27% at December, up from 23% the year before. Balances of longer-term maturity borrowings grew approximately 34% during the year leaving their percentage of the composition practically unchanged at 33.6%.
As member demand for loans slowed last year, credit unions may become concerned about their capacity to lend as share growth is outpaced. Although credit unions still have ample liquidity, a long-term borrowing strategy is an important factor for credit unions to consider as they respond to changing member needs.