Debate Over What Q1 Lending Decline Might Mean

WASHINGTON-A 5% decline during the first quarter in overall lending at credit unions has led to several different interpretations of what it might portend.

The performance marked one of the sharpest quarterly declines ever reported by credit unions. In its analysis, NAFCU sees the precipitous drop as potentially indicating a more lasting shift in consumer behavior, while CUNA contends the decline signals that a lending rebound will simply be slower than expected.

"We are in the midst of a sustainable economic recovery and that means labor markets will improve substantially and consumer behavioral changes seen the last year or so will begin to turn around," said CUNA Senior Economist Mike Schenk. "But loan demand won't go up quite as rapidly as it typically does in a rebound, because people are concerned about their debt levels. We expect loan demand will be substantially higher in the second and third quarters."

Overall, CUNA is projecting 4% CU loan growth for the entire year, but household debt will continue to mute demand, Schenk noted. "We do believe that history repeats itself. During the last recession in the early 80s, deleveraging took three-and-a-half years. The starting point then was a 63% debt-to-income ratio. We started this recession at 125%."

Other factors influencing slow loan growth are net charge-offs and credit unions selling off large chunks of their mortgage portfolios to avoid interest rate risk, added Schenk.

According to NAFCU President Fred Becker, the 5% decline may be another sign of a shifting financial landscape that credit unions must address.

"The question is to what extent have we had a culture-defining event," said Becker about the recession. "What impact has it had on the psyche of Americans, especially the younger generation? Are they turning into savers rather than spenders?"

Toss into the mix the turmoil in the financial industry from all the regulatory and political pressures, and credit unions should be addressing ways to offset what could be a longer period of reduced lending activity, Becker suggested. The NAFCU president believes it is time for more credit unions to ramp up business lending, with member business loans growing at CUs during the economic downturn, banks pulling back, and proposed legislation to raise the business lending cap.

It's time CUs begin adding the expertise to effectively and prudently add to their business lending portfolios, Becker offered.