Group Sees More Growth In CU Lending In 2004

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The massive inflow of savings that has flooded credit unions the past few years has apparently slowed to a trickle, in some cases, it has even reversed itself to be a net outflow.

Credit unions around the country are reporting the traditional slowing of share growth in the fourth quarter of 2003 was greater than the past few years, with some signs of negative growth, according to members of the CU Economics Group, a group of economists and financial managers at credit unions.

"We've had a small outflow of funds over the last quarter of 2003 and talking to other credit unions in the area they have seen a slowdown in share growth, even some outflow," said Scott Mainwaring, chief financial officer for VyStar CU, Jacksonville, Fla., a group member.

David Colby, chief economist at CUNA Mutual Group, said they have been witnessing evidence in recent months that consumers are ready to shift more funds away from federally insured deposits and back into the stock market and mutual funds. He called this a "wearing off of the safe-haven effect" of the past few years, which has brought record levels of new credit union deposits. "We're going to see consumers slowly put a larger percentage of their savings dollars into instruments paying higher returns," Colby said.

Jeffrey Taylor, an economist with NAFCU and a member of the group, said his recent communications with corporate credit unions indicate similar trends, with several corporates-which are the key liquidity indicators for credit unions-reporting a decrease in shares in recent months.

Mainwaring said his $2.6-billion credit union saw 12% share growth for the first nine months of 2003, then a fall in shares by 1% or 1.5% in the last quarter. While the fourth quarter is typically a slow month for share growth among credit unions, that kind of outflow is a little atypical, he said. That trend appears to be continuing for January. "It appears what we're seeing in January is more money moving back into the stock market and mutual funds."

The group, as a whole, is optimistic about the economy going into 2004. Colby said indicators that include gross domestic product, manufacturing, exports, and even jobs to a lesser degree, are looking good. "You have both fiscal and monetary stimulus that is really going to jolt the economy," he said. "Overall, we've got an extremely favorable environment for the U.S. economy. The last pieces are starting to fall into place."

Group members, who predicted a rise in interest rates last fall, said they still see rates rising from their five-decade lows, but not until later this year. "The outlook is a gradually rising interest-rate environment, starting at midyear of this year," said Taylor, adding that all of the major economic indicators are in place for "strong economic growth." "I expect the Fed to keep rates low, at least until mid-year," said Mainwaring.

That environment will continue to pressure credit unions to maintain their low savings and loan rates. But increased competition for funds will make it difficult to attract new savings. The low loan rates should induce credit union managers to sell off as much paper as possible, because of the potential uptick in rates. "It will be prudent not to keep too many loans on the books for too long," he said.

The group is predicting that rising economic growth will fuel a good loan environment, especially in the consumer lending area. They project loan growth to exceed share growth for the first quarter of the year.

"Two-thousand-and-three was a solid year for credit unions," said Mainwaring. "There's reason to believe that 2004 will be as well."

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