More competition for loans and low investment yields have put pressure on credit union bottom lines. With income levels down from 2008 to 2009, underemployed Americans living paycheck to paycheck are finding it hard to make ends meet, especially when unforeseen expenses are incurred. Here, credit unions have an opportunity to offer short-term credit and earn a favorable return on excess funds while keeping members out of the hands of predatory institutions, such as payday lenders.
A peer-to-peer comparison of credit unions offering payday loans, micro business loans, and/or micro consumer loans hints at potential benefits and some drawbacks these offerings have on financial performance. To eliminate inconsistencies across asset class, this peer comparison is limited to credit unions in the $250M - $500M range. (Note: Peer groups were selected by including those credit unions that reported offering one or more of the following on their June 2009 5300 Call Report: payday loans, micro business loans, micro consumer loans. This does not necessarily indicate a balance for these line items.)
|Peer Group Comparison
|Data as of June 30, 2009
|Number of Credit Unions
|Average Asset Size
|12-Month Loan Growth
|12-Month Member Growth
|Average Loan Balance
|Average Share Balance
|Source: Callahan & Associates' Peer-to-Peer Software.
At fourth quarter 2010, 12-month member growth for credit unions offering short-term credit options eclipsed those not offering such services. Average loan balance were also higher, reporting a $660 higher average loan balance than their peers at 4Q 2009. Conversely, credit unions not offering short-term credit had a higher average share balance of $622 more than their peers. With an average loan-to-share ratio of 79.3% at 4Q 2009, credit unions offering short-term credit maximized deposits better than peers who reported an average loan-to-share ratio of 70.3%.
Since 4Q 2007, those credit unions offering short-term credit experienced a higher acceleration in reportable delinquencies, with an average overall delinquency 40 bps higher than peers that did'’t offer short-term credit services. Despite a relatively higher acceleration in delinquencies, credit unions offering short-term products almost exactly mirrored a 2.15 multiplier for unemployment which rose from 4.5% to 9.7% over the same period.
Credit unions offering short-term credit exhibited consistently higher yields (between 19bps and 35 bps) on average earning assets over the past five years. As of 4Q 2009, the difference between the two peer groups was 31 bps. A similar trend is exhibited by net interest margin, as the average net interest margin of credit unions offering short-term credit over the past seven years averaged 15 bps higher than those not offering the service.
These trends aren't shocking. The data suggests credit unions offering short-term credit services find more loans for their deposits but experience higher delinquency because of the types of borrowers short-term loans attract. For credit unions that aren't suffering from asset issues and can't find quality yields for growing deposits, short-term loans might provide the needed boost in loan demand.
If your credit union offers short-term lending solutions, how is it going? Are you experiencing similar trends to those listed above? Use the comment area below to share your successes and challenges in short-term credit products.