November 2024 - Balancing Act

We’re proud to announce our first guest contributor to this month’s edition of The LoanStreet Beat: Todd Peeples MBA, PMP, CCE , SVP of Sales and Lending at All In Credit Union . Todd reports from the front lines the challenges that credit unions are facing with respect to managing loan and deposit rates. In addition, we recap an active economic news cycle and share our observations on loan trading. Enjoy, share and please comment below!

LoanStreet Market Commentary

Since the Fed’s 50bp cut during their September meeting, yields have surged, with the 2-year Treasury rate being up ~ 60bps.?This move is largely in response to? positive economic data we have received over the last couple of weeks.?Concerns over the labor market and the consumer have largely eased as the September job report showed 254k new jobs, well above the 150k estimate.?Further, the latest jobless claims data showed fewer week to week unemployment claims.?It is important to note that the data is a bit messy with the impact of hurricanes and strikes. When it comes to the consumer, the latest report, as of October 31st, presented an increase in spending equal to 0.5%, above the expected increase of 0.4%.?Lastly, the latest Consumer Confidence survey (https://www.conference-board.org/topics/consumer-confidence), presented a big jump in consumer confidence compared to a month ago.?Consumers are optimistic on the job market as well as wage growth and plan to make large purchases such as homes and cars.

On the inflation end of the Fed’s mandate, the cooling continues, albeit somewhat more slowly.?The CPI report released on October 10th (https://www.bls.gov/news.release/cpi.nr0.htm), showed 0.2% MOM increase and a 0.3% YOY increase, both above estimates by 0.1%.?The story is similar when it comes to the core CPI numbers, which exclude food and energy, as they were also 0.1% above estimate.? While the latest CPE report, released on October 31st (https://www.bea.gov/news/2024/personal-income-and-outlays-september-2024), came in largely in line with estimates, the YOY core number was also 0.1% above estimate.???

The latest data raises the question of what the Fed should do.?While the market expects a 25bps cut every meeting until June 2025, the latest numbers support a slight pause to reevaluate the data.?The justification for a 50bps cut in September was due to a softening labor market, that softening has not materialized based on the latest data.?In addition, consumer spending remains strong, which could put pressure on inflation going forward.???

Loan Trading Trends and Implications

Credit risk and CECL reserve considerations appear to be top of mind for many loan buyers.?Although loan origination volumes are down, buying credit unions are still reluctant to venture outside of their conservative buy-box; most are focused on super-prime auto.? Riskier pools, with parameters outside of the commonly requested 660+ credit, sub 125% LTV and sub 50% DTI, are seeing limited demand despite the outsized yield available.?Meanwhile, auto pools adhering to that common buy-box, are quickly fully subscribed. This means that for sellers who are looking for the quickest execution, super-prime auto is still the best way to go. Buyers who are willing to open up their credit boxes are being rewarded with wider spreads and higher yields.?Furthermore, going into asset classes outside of auto, such as unsecured, will offer higher loss-adjusted returns than were historically available.???

We continue to see ample supply of residential loans, although the types of loans are mixed between fixed rate, ARM and home equity products.?With the sensitivity of residential loans to Treasury rates, pricing for pools can go stale quickly and need to be re-examined.?We also have seen more CRE loans come to the market.?With yields around 6.75-7%, they offer a 275bps to 300bps spread over the 5-year Treasury, which continues to be above historic norms.?The CRE deals are also very conservatively underwritten with low LTVs and attractive DCSR ratios.?For buyers who are unwilling to go outside their general buy-box on auto or purchase unsecured, CRE might be a good place to look for outsized returns.? ? ?

Deep Dive: Balancing Net Interest Margins and Deposit Rates

In this month’s edition of the LoanStreet Beat, we reach out to our network of credit unions in order to get feedback from someone directly involved in the day to day operations of the credit union. The following was put together by Todd Peeples of All In Credit Union, a $3.3B credit union out of Alabama.?Todd is the SVP of Sales and Lending.????

Here are Todd’s remarks:

Credit unions face the challenging task of maintaining competitive loan rates for members while also ensuring they generate sufficient revenue to sustain operations. One of the critical challenges credit unions face in this regard is managing net interest margins (NIM) while responding to steady demand for high deposit rates. Net interest margin is the difference between the interest income generated from loans and the interest paid out to depositors, divided by the credit union’s total assets.

Balancing these two financial levers is essential for the overall profitability and sustainability of credit unions. Below are key considerations and strategies credit unions often employ to manage these competing pressures.

Challenges in Managing Loan Rates and Net Interest Margins

1. Rising Deposit Rates
2. Economic Environment and Rate Sensitivity
3. Loan Growth versus Profitability

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?Strategies for Managing Loan Rates and Maintaining Strong Net Interest Margins

1. Loan-to-Deposit Spread Management
2. Product Innovation and Cross-Selling
3. Loan Participations
4. Efficient Cost Management
5. Liquidity Management

For credit unions, managing loan rates in a competitive environment requires a delicate balance of offering attractive interest rates to members while maintaining healthy net interest margins. Strategies such as spread management, product innovation, and cost control are essential for ensuring both profitability and member satisfaction. Furthermore, credit unions must remain flexible, adjusting to market conditions and competitive pressures while focusing on both loan growth and risk management.

By employing a mix of innovative approaches, credit unions can navigate the challenges of offering competitive deposit rates while generating sustainable revenue from loan portfolios.

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Monthly Economic Data Summary

• Based on the 10/31/2024 report, the PCE gauge of inflation increased 0.2% MOM and up 2.1% YOY. Both in line with estimates.
• From the same report, core PCE, which excludes food and energy, rose 0.3% MOM and 2.7% YOY. The MOM was as expected while the YOY came in above the forecasted 2.6%
• On 10/10/2024 we received the latest CPI gauge of inflation, the headline was an increase of 0.2% MOM while the YOY was up 2.4%. Both +0.1% above estimate.
• The latest jobless claims report for the week ending October 26th, showed a decrease of 12k claims to a total of 216k, compared to the expectation of 227k. The continuing claims climbed from a month ago to 1.86MM.?
• The latest used-vehicle Manheim Market Report (https://site.manheim.com/en/services/consulting/used-vehicle-value-index.html) for mid-October showed an increase of 0.3% MOM. ? Down 2.8% YOY, on an adjusted basis.?
• The Case-Shiller home price index (www.spglobal.com/spdji/en/documents/indexnews/announcements/20241029-1475156/1475156_cshomeprice-release-1029.pdf) showed national home prices decreased MOM by 0.1% while increasing YOY by 4.4%. These are lagging data and reflect the CS indices for 08/24.
• Based on the CME market watch tool (https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html), the expectation is the Fed will cut by 25bps in November and December.?

This article was authored by Matt Rudzinski, Director of Sales and Trading.

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Disclaimer

LoanStreet is not a Registered Exchange, Financial Planner, Investment Adviser, or Tax Adviser. The information provided herein is for general informational purposes only, and does not, and is not intended to, constitute legal, financial, investment, or tax advice.