Posts

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Are Your Members Sending You A Signal?

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According to NCUA’s first quarter data, shares grew an average of almost 11% (annualized) while loan growth declined 4.76% (annualized)─over a 15% differential.  Funds not loaned out are sitting in investments (generally not earning very much) and are putting a squeeze on the margin.  With loan demand down, many of our clients are requesting what-if scenarios on purchasing longer-term investments with these “excess funds” to pick up a little extra yield.

While running what-if scenarios on the asset side of the balance sheet is a good idea, don’t forget the other half of the equation.  Another common theme we are seeing is an increase in non-maturity shares and a decrease in CDs.  This certainly takes some pressure off the cost of funds today, but it could be costly to mistake a potentially short-term member adjustment to current market conditions for a long-term trend.

At many places today, the rate differential between a money market and a CD is not that big—so it seems that members are willing to give up a few basis points.  But for what? Are your members sending you a signal that they are positioning themselves to move to the stock market as soon as “things turn around?”  Or back to CDs when rates tick up some?  We recommend that you test out these potential scenarios, and more, to help you get a better handle on how things could possibly play out in the future.

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Consumers Shunning Risk

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The question that many credit union leaders are asking themselves lately is, how far do we reach for yield?  With 10-year Treasury Rates rounding near 3% recently, how far can the balance sheet be pushed to make up for a squeezing margin?

Consumers at large are facing a similar dilemma when it comes to managing their own balance sheet.  How much risk is too much?  And with the world turning on its head, with perceived threats of war on the Korean Peninsula and dark concerns about the financial stability of European markets, that question is becoming harder to answer.  Even as consumer confidence is up on news of positive job forecasts, the Dow has tumbled below 10,000—not crossing that threshold since February 8th of this year (Dow Falls Under 10000 as Risk Is Shunned, WSJ, 5/25/10).

As the world continues to become more complex, and as ripples from the financial crisis and new developments in world affairs unfold, be mindful of consumers’ tendency toward safety.  While many credit union leaders cannot imagine another influx of low-cost funding, the perceived chaos in the world around the consumer could theoretically cause just that.  Consider stress testing what could happen if you experience another flight to safety of similar (as well as greater) magnitude combined with anemic loan demand to see the impact to your net worth ratio.  If net worth is at high risk of dropping below Well or Adequately Capitalized, identify viable steps you can take to be prepared.

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Mini Age of Austerity?

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Consumer behavior, specifically spending statistics, is being tracked with much anticipation these days.  Given that consumer spending accounts for 70% of the economy, this is no surprise.  So what is the forecast?

According to a new Associated Press Economy Survey, two-thirds of the 44 economists surveyed believe that the frugality created during the Great Recession will endure beyond the crisis (New Frugality for Many Outlive Recession, MSNBC.com, May 2, 2010).  This prediction comes despite a drop in the national savings rate to 2.7% as of March from its high of 6.4% in 2009 and a recent increase in retail sales (U.S. Bureau of Economic Analysis).  These economists believe that spending will increase as the recovery continues; however, consumers will not run up large amounts of debt to fund spending sprees.  Rather, they’ll continue to save and remain conservative with their money in a Mini Age of Austerity, much like Britain experienced post WWII.

While there are some positive economic signs, we could be in for a slow recovery.  Only time can tell how long this Mini Age of Austerity will last or if it will continue indefinitely.

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Bankruptcies on the Rise and the Evolving U.S. Debt Burden

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Building on our last post on U.S. household debt being reduced primarily by default, and with consumer credit drying up, more and more struggling consumers are turning to bankruptcy as the only solution to solve their debt burden.  There were 158,141 U.S. bankruptcy petitions filed last month, a 35% increase over February’s figure.  Moreover, filings in a dozen states increased by double-digit percentages in the first quarter of 2010 compared to 2009 monthly averages (Personal Bankruptcies Hit a High and May Keep Rising, Time.com, April 5, 2010).

With a steady unemployment rate, and even an increasing “underemployment” rate ticking up to 16.9% according to the BEA, how long will the bankruptcy trend last?

Perhaps even more interesting is the vast increase in the debt burden causing the wave of bankruptcies.  According to the Federal Reserve, personal borrowing in the U.S. is ten times greater than in 1960 if you adjust for inflation.

During your strategic planning process, it may be worthwhile to consider the monumental increase in U.S. consumers’ debt burden over time.  What could happen if consumers become more and more debt averse?  Will the challenges facing adult consumers today socialize younger generations for a thriftier lifestyle?

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Which Bills Should I Pay? How Consumer Priorities are Changing

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As the present economic crisis continues to unfold, some noteworthy changes in consumer behavior have started to emerge.  One with far-reaching consequences for credit unions is the increasing tendency for consumers to forgo paying for their mortgages while choosing to pay credit card bills.  Between first quarter 2008 and third quarter 2009, the percentage of consumers who were current on their credit cards while delinquent on their mortgages rose from 4.3% to 6.6%.  During the same time period, those who were current on their mortgages while behind on their credit cards dropped from 4.1% to 3.6%.  (Forget the Mortgage, I’m Paying my Credit Card Bill, usnews.com, 2/8/2010)

A variety of reasons are driving this behavior including the fact that it takes much longer to foreclose on a home than it does to shut down a credit card.  Unemployed consumers may need the credit card more acutely since it can pay for daily necessities while the home foreclosure is months down the road.

Although unemployment is the major cause of mortgage defaults, strategic defaults – where consumers who can afford their payments choose to walk away for financial reasons – may be driving some of this behavior change, too.  Brent White, a University of Arizona law professor, makes a thorough argument in favor of choosing strategic default.  Setting aside the complicated moral questions, if more voices like his are heard, could this become the new socially acceptable norm?

What does it mean in terms of projections for loan losses and new loan volumes?  How will underwriting standards change going forward?  Will a consumer who suffered long-term unemployment and lost a home be given a “pass?”  What about one who chose a strategic default?  It is important to consider these shifts in consumer behavior when doing financial and strategic planning recognizing the good, the bad and the ugly emerging trends.

(White, Brent T., Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis, Updated February 2010)