Tuesday, May 17, 2016

About that Loan-to-Share Ratio...

Loan Some ?
Has your loan-to-share ratio plummeted to a new all-time low? Is your expense ratio getting as tight as your teenager's jeans? No problem.  

Here are The Top 5 time-tested, sure-fire strategies for increasing loans, boosting profitability, and assuring your bonus.           

Don't Worry, Be Happy!!

Everyone Qualifies!!
  1. Lower Credit Standards - Just a little, it won't hurt (much)!  Haven't you heard that lending standards have become way too restrictive? Hey babe, low delinquency is out, the life of Riley is in!  "Yes" is a lot easier than "No". Take a walk on the wild side!
  2. Make Fixed Rate Mortgage Loans and Book
    'Em! -
    Drop the paternalism; c'mon stop trying to give borrowers what they need, give 'em what they want. Earnings will be great and you can always spot future rate spikes far enough in advance to sell off the portfolio for a tidy profit.  If you can't predict rates, then of course hire a consultant who can!
    Light a fire under them!
  3. Offer Incentives To Loan Officers - Heck, the more the merrier! You want performance? You gotta pay these days.  Ignore the old fogies who always question why the common good never lies within the range of incentives. You gotta do something to spark a loan officer's interest (particularly their "self" and "conflict of" types.)

  4. Trumpet Credit Cards - Charge! Stop whining about potential cases of bankruptcy - your members aren't worried about it! Why be such a stick-in-the-mud? Credit cards aren't any more dangerous than hand guns.  Whose money is it anyway?
And last, but most certainly not least....

'Til ya...


5.  "Sell" Loans To The Membership - Aren't we supposed to help cure this recession?  Let's help them shop 'til they drop !!  Nobody said they had to have their entire head above water to qualify for a loan.  Keep lending until you can't see their noses.

   Don't Worry, Be Happy !!

1 comment:

Mike Higgins said...

Jim – Like my submission yesterday, this will be either too long or complex for posting, so please don’t, but let me share a couple of nuggets with you. It keeps my mind engaged in the member value proposition.

The loan to share (I prefer loan to asset) problem demonstrates lack of institutional competency to extend credit. If that is the way a credit union (i.e., savings club) wants to operate, then that is their prerogative, but it is not the most efficient use of member capital.

Two factors are exposing weak credit unions right now. The first is the unending upward spiral of annual operating costs. This cost structure is accelerating due to technology (which is just a cost of entry to stay relevant), increased regulatory burden and health care costs. Now, pair that with a decline in the spread between funding costs and investment yields. In 2007, right before the great recession, the spread between the cost of funds and the investment portfolio for credit unions was 1.98%. The spread between the investment yield and the loan yield was 1.95%. If you did not know how to lend, it did not matter because you could make a killing in the investment portfolio (well, for those who avoided risky investments, anyway).

Fast forward to 2015. The spread between the cost of funds and the investment yield is 0.72% … a 64% decline from 2007 … sixty-four percent. The spread between the investment yield and the loan yield is 3.40%. So, it’s not too hard to see what has happened to those who can’t, or won’t, extend credit.

The second thing is risk avoidance. Not risk aversion, I’m talking about 100% risk avoidance, which again, is inefficient use of the profit taken from members and held as net worth. To your second point in the blog post about booking fixed rate mortgages. This does not have to be a binary decision.

The spread between the investment yield and the loan yield is so massive right now, that real interest rate risk is actually lower that one would perceive. The reason? Opportunity cost. Sure, any squeeze on the asset spread will reduce earnings, but reduce it from where? If you have a huge spread, and it gets a little smaller, then you still have a large spread, and that is efficient use of member capital. Am I advocating, backing up the truck and piling on as many fixed rate mortgages as possible? Of course not. But credit unions with poor loan to asset ratios that sell 100% of fixed rate mortgages seem to have no problem buying someone else’s mortgages via their bond portfolio (and at a significantly lower yield).

The solution to improve member value? Set up your own private bond portfolio and fund it with fixed rate mortgages that fit the characteristics you want. Set a target bond size and stop when you hit that point. Re-evaluate and decide if you want to add another bond or just hold what you have. If you are super risk averse, then set up a reserve for interest rate risk on top of it (just like a loan loss reserve). It’s the 100% risk avoidance that is not fair to members. There are ways to operate that are sound and beneficial at the same time. It does not have to be a yes or no decision.

Thanks for letting me share my thoughts.

Mike Higgins