Mid-Year Report: Hidden Opportunities For CUs

MADISON - Even in a stagnant economy, there are a number of hidden opportunities for credit unions to continue to thrive, the key, several economists said, is understanding where CU strengths play to economic weaknesses (and vice versa).

With the mid-year numbers due out soon, Credit Union Journal asked economists to offer a sense of how the year is going so far, what to expect in the second half-and how credit unions can leverage their positions in this environment (for more on the economy, see page 18).

"The basic economy is not real robust," said Dave Colby, chief economist of CUNA Mutual Group, "but credit unions are performing really well. While the economy is presenting challenges, CUs are doing really well."

But that does not come as a surprise to Colby, who said that traditionally he finds that credit unions do well in bad times, due to opportunities that the market brings during those lulls, such as refinancing needs. But something that has surprised Colby this year so far is credit union deposit growth. "We've seen a pleasant surprise there," he said. "It's been a significant improvement trend. I am very positive about that."

But he expects to see some asset growth by year-end. "Consumers are engaging in balance-sheet repair," he said. "I continue to see a ton of competition on both the deposit and lending sides. Also, expenses are probably going to be fractionally higher by year-end."

What Colby doesn't expect to grow for is the number of members. "I don't expect more than a million new members," he said, which is slightly less than the 2006 level of about 1.2 million. "We're also going to see sharper declines," he said, because as people pay off their loans they will end their relationships.

Ron Koza, chief investment officer for Members United Corporate FCU, said that this year is showing a 2% to 3% growth.

He said that is typical due to reduced inventory throughout businesses in first quarters and then the cost of restocking inventory in the second quarter. "It's been very good historically to be able to track that," Koza said.

For later this year, Koza expects there to be a lot of pressure on housing during the later part of 2007. He explained that the housing market loosened its lending standard in the recent past. "So there's probably a lot of people out there that got loans that shouldn't have," he said. "So now we are facing a market with higher lending standards."

"The only surprise," he continued, "is that the economy is doing a little better than expected."

In the near future, Koza expects to see more loan participation programs from CUs. "I think credit unions are going to raise fee incomes, in a wide range of ways," he said.

Dwight Johnston, VP-economic and market research for WesCorp, said the first part of 2007 has been somewhat bleak. "We've been experiencing a slow-down during the first half of the year," he said, especially within the housing market. "We think in the second half of the year, those things might be accelerated."

Johnston said that the traditional outflow of liquidity has not been seen in the first half of this year but may return in the second half. "Right now we're really in the process of sorting what's been going on globally," he said.

Dr. Tun Wai, chief economist and director of research for NAFCU, said that comparing the first half to the second half of the year is not always the best way to look at things. "In reality, the better way to look at things is year-over-year," he said. He said that traditionally, the second half of the year brings more lending opportunities, mainly due to the Christmas holiday and students going back to school, adding, "the seasonal pattern is still holding."

With that in mind, Wai said he expects the economy to pick up during the second half of 2007. "My forecast is loan growth will increase 5.5%, and share growth 4.5%," he said, which shows a slight increase from last year.

Wai stressed that what's very important is how real estate loans are handled, as they are long-term loans. As for auto lending, Wai said "a lot has to do with what is going on in auto sales," which were negative in the first half of the year. "Energy prices will probably influence automobile sales, which will influence the credit-union industry."

Wai stressed that what's very important is how real estate loans are handled, as they are long-term loans. As for automobile lending, Wai said "a lot has to do with what is going on in auto sales," which were negative in the first half of the year. "Energy prices will probably influence automobile sales, which will influence the credit-union industry."