Solutions to the Increase in Deposits

The numbers throughout this year’s first three quarters look good. By most traditional standards credit unions are doing very well. Just look at savings growth: For the first time since the 1980s, credit unions are looking at back-to-back double-digit deposit growth.

 
 

The numbers throughout this year’s first three quarters look good. By most traditional standards credit unions are doing very well. Just look at savings growth: For the first time since the 1980s, credit unions are looking at back-to-back double-digit deposit growth.

But let's look out beyond the beam of the headlights. It's always good to be prepared for what might be lurking out there.

Let's look principally at this influx of deposits. The ''trouble'' that comes riding along with all the deposit money, of course, is the need to do something with it. We are not money market funds merely passing along what the market presents; we have to add value. Mainly, this is done by making loans. Although loan growth has picked up and share growth slowed over the last two quarters, the cash inflow of shares has exceeded loans by $139.2B. Credit unions need to find ways to make up the difference.

Wholesale Lending
The normal means of making loans is, of course, making loans to members. This is done one loan at a time, one evaluation at a time. Increasingly, however, this is not going to handle our present situation, especially at the large credit unions. Money has been coming in wholesale; it is difficult to make it go out retail.

So perhaps we ought to be thinking more about lending wholesale. At this credit union we have been successful at loan participation. In addition, I know that some credit unions are looking at buying HELOCs wholesale. Aside from these two ideas, it would probably be a good idea to approach the likes of Home Depot and Lowe's and come to an agreement about home improvement loans. Recently, at least Home Depot has been announcing over intercoms in their stores that they are offering $30,000 loans. I doubt they are the lenders themselves. We should think about becoming indirect lenders for such merchandisers. We probably also should be approaching the makers of mobile homes, boats and furniture makers. Perhaps we should approach Staples and Office Depot, whose customers might want loans for office furniture and computers.

Real Estate Lending
Another strategy might be in adjusting the loan portfolio. Some credit unions do not like taking their segment devoted to fixed-rate first mortgages past 25 percent of all loans. But might it go safely as high as 50 percent? It's worth considering. What with all the hedges, swaps and mixture of products available, such a strategy might do well at certain credit unions.

In addition, the average life of even a fixed-rate 30-year mortgage is only about five years. That makes the interest rate risk far less than in the past. Indeed, people do not see fixed-rate mortgages the way they did a decade ago. They move homes frequently, and even if they do not move they are quick to refinance when rates drop. And they are quicker to refinance with less significant drops in interest rates than in the past because the costs associated with refinancing is dropping.

Indeed, more of the refinancing work is falling to technology. This includes titling, appraising, and back office functions. And the work along these lines is only half done; technology is going to keep reducing these charges, which means even less expensive refinancings, which means more refinancings.

Business Lending
Another place to look for loans is in the world of small business. Everyone knows that this is where the economy has been growing. Hundreds of new businesses start every day.

Do I hear you say that business lending is risky? You are right. To succeed in business lending, you really have to know what you are doing and you have to use your brains. Still, it can work.

 

 

 

Dec. 9, 2002


Comments

 
 
 
  • Great article if you are a community credit union or a large multiple SEG. If you are a "single" sponsor, then the concept of wholesaling at Lowes or Home Depot is not realistic. Additionally, the idea of 30 year mortgages having average lives of only 5 years in very simplistic and based on the current interest rate environment, one that has not existed in 40 years when FNMA and FHLMC did not securitize mortgage loans. Mr. Callahan needs to be careful when he suggests such a strategy that in a few years might have significant impacts on a credit union's interest rate risks and/or credit quaility....
    Anonymous
     
     
     
  • Old news!
    Anonymous