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Budgeting For Loan Growth

In this uncertain economy, many credit unions are seeing loan growth come in below budget.  Others are experiencing loan growth that meets their budgets; however, they are still below budget on loan interest income.  Why?  Interest rates have fallen since their budgets were created and competition for loans has resulted in the credit union getting the loans at a lower rate than budgeted.

Example 1:

 

Can the credit union make up this revenue variance by making more loans?  Maybe, but as the example below indicates, the credit union would need to grow loans 25% over the budgeted amount to breakeven on loan interest income.  Many credit unions would feel this is not achievable in today’s environment.

Example 2:

If the credit union is not able to increase loan growth, then, all else equal, net income will fall short of budget.  However, all else doesn’t have to stay equal.  While cost of funds may be hitting a floor for some places, other credit unions still have room to move lower.  And operating efficiencies are key for surviving today and being successful in the future.  Remember, the point at which you address a problem is directly related to the number of viable options you have to solve it.  If you are in this situation, begin laying out alternative plans now to help achieve your desired level of income.

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Tips For Avoiding Overstating Loan Income In The Budget Process

Loan interest income may be overstated in the budget if there is a large balance of non-performing loans.  This occurs if loan income is budgeted based on what the members are contractually obligated to pay rather than the actual payments received on performing loans.

Here are the two most common ways credit unions are adjusting for this:

  • Code the non-performing loans to separate them from performing loans so that non-performing loans do not overstate the yield on the overall portfolio.  Additionally, this information is helpful in making assumptions as to whether the budget for non-performing loans should show an increase, decrease or stay at current levels over the budget timeframe
  • Calculate, by category (e.g., new auto, used auto, etc.), the difference between current contractual obligations and the current yield on loans and factor this into the budget.  General ledger income can be useful in obtaining the data for this calculation

The decision between the two paths often comes down to how you handle non-performing loans in your database, data processing/reporting capabilities and the style of budgeting that is used.