Managing a Balance Sheet with Double Digit Loan Growth

In 2007, loans led the way in the credit union industry. What does this mean for balance sheet management?


In 2007, loans led the way for most credit unions. Although it was a slower year in auto lending credit unions made great strides in adding real estate and unsecured loans to the balance sheet. Total loans were up 6.54% in 2007. The slowdown in auto lending isn’t surprising since according the National Association of Auto Dealers projected in 2007 16.1 million cars were sold the lowest level since 1998. Credit unions were active making auto loans to replace the loans which were paying off in 2007. The data shows that credit unions had a productive year, but in some segments growth is determined by the demand of the member. If members aren’t buying cars, it will be tough to have positive year in auto lending.

The Outlook for 2008

In the marketplace today many lenders are placing risk premiums on loans or tightening lending standards. In the January 2008 Senior Loan Officer Opinion Survey conducted by the Federal Reserve Board, one-third of financial institutions reported having tightened their lending standards on commercial and industrial loans over the last three months. 80% of domestic banks reported tightening their lending standards on commercial real estate loans. Almost 55% of respondents reported tightened lending standards on prime mortgages.

Not only are lenders becoming more strict in their lending policies, the risk premiums placed on many loans have increased as well. The increased risk premiums are caused by two factors; increased credit loss fears and decreased liquidity in the secondary markets.

Because of the increased risk premiums and tightening credit requirements by competitors, 2008 could be a banner year for credit union lending. Many mortgage lenders are no longer in the marketplace. As consumers look for trusted names in lending, credit unions could be the benefactor of this activity. Additionally, credit unions should be able to remain market leaders in terms of pricing of loans. As many lenders need to pass their increased cost of funds on to borrowers, credit unions will be able to offer members better value. Because of this, credit union could see double digit loan growth in 2008.

Managing a Balance Sheet with Double Digit Loan Growth

A balance sheet that is growing loans has some challenges for the CFO. Matching loans with liabilities is more of an art than a science. A growing loan portfolio creates some ALM challenges, in that it can be hard to dictate where share deposits are coming from. Members may not want to lock up term money in certificates which are generally good matches for many loan products.

One tool CFO’s have to manage the balance sheet is the investment portfolio. The member has ultimate control over the loan portfolio but the credit union can add or remove duration and cash flow by properly investing excess member deposits. Join the Callahan Webinar Network March 13, 2007 to learn how to use investments as a balance sheet management tool.