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Are we approaching the Mendoza Line with loan-to-share ratios?

By Perry Jones, VP Portfolio Manager

Perry JonesJuly 24, 2015 -- For baseball fans, the Mendoza Line represents the threshold of what is considered competent hitting. Classically defined as a .200 batting average, the Mendoza Line falls well below the overall league average of .250 to .270.

Over the years, I’ve often thought there is an equivalent Mendoza Line for the loan-to-share ratio. While I’m no quantitative analyst, the following commentary provides some insight on where this loan-to-share “Mendoza Line” might lie.

With a quarterly average loan-to-share ratio for credit unions of 74% over the last 15 years, it would be easy to assume this level represents a normal operating average with the Mendoza Line falling somewhere below. However, I challenge that this average ratio of 74% realistically represents the Mendoza Line and does not represent the level of optimal performance.

Mendoza Line As we all know, achieving a higher level of loans to shares will typically increase the accumulation rate of earnings, which allows for more asset growth and also provides a bigger cushion when economic activity contracts. The optimal average loan-to-share ratio should really lie around 80% to 85%.

It’s interesting to note that loan-to-share ratios consistently exceeded 85% in the 1960s and 1970s but contracted sharply through the 1980s and 1990s. Since the late 1990s, the loan-to-share ratio has moved counter to the general economy and the unemployment rate as seen in the chart below. However, at no time in recent history has the loan-to-share ratio experienced ratios greater than 90% as seen in the late 1960s and 1970s.

Despite the normal first quarter contraction, the loan-to-share ratio is clearly headed north and will soon breach 75%. As a sign of the growth in loans, the first quarter contraction of the loan-to-share ratio was only 2.1%, which is well below the normal first quarter contraction of 4% to 6%. The only other first quarter in recent history with a contraction rate lower than 2.1% was March 2005 with a contraction rate of 1.4%.

Also, the recent upward trend in the loan-to-share ratio is closely tracking the 2003 to 2005 performance, which was the start of the last growth phase of the loan-to-share ratio. This phase coincided with the housing market hysteria and the rapid exit of banks from the lending market. But the peak loan-to-share ratio fell well short of the low 90% experienced in the late 1970’s.

While the growth of loan-to-share ratios is clearly positive, this kind of growth could also put funding pressure on credit unions. The ultimate question is how high will the industry, or the general economy, push loan-to-share ratios in this cycle. And, are we prepared to manage through any liquidity challenges that develop?

Establishing a solid funding strategy: member education and loan specials

Need funding? Check out the following offerings:

Funding strategies webinar –
July 28

This webinar will help you learn how your credit union can leverage:

  • Lending products from Corporate One
  • Issuance through SimpliCD
  • Liquidity provided through Multi-Bank Securities
Register Here

Corporate One term loan specials

  • 1-month 0.50%
  • 5-month 0.55%

Stay tuned for future offerings that include floating rate advances and amortizing loans.

For more information about our liquidity options, visit our rates page or contact your investment representative.

Liquidity remains a primary concern with the NCUA for 2015, and Corporate One continues to assist credit unions with bolstering their liquidity plans through solutions and information. After all, providing liquidity to our members when they need it is one of the primary reasons corporates were created in the first place.

In this light, we recently conducted another series of funding strategy seminars. For those that haven’t attended a session or would like a refresher, we are conducting a funding strategies webinar on July 28. We’ll cover the various funding solutions through Corporate One, as well as developments in our approach to delivering liquidity solutions to members.

And since we are entering the seasonal period when credit unions’ demand for external funding increases, we will also be developing and issuing term loan specials throughout the summer and into the fall.

The first offering is a one-month term loan at a rate of 50 basis points for Partner members. Future offerings will include floating rate advances and amortizing loans. We would also like to know what a “loan special” means to you. Consider it an opportunity to create your own loan special. At Corporate One, we strive to provide the solution that best serves your funding needs.

Please contact me or your senior investment representative if we can assist you with liquidity planning or you would like to discuss how we can best serve your liquidity needs. I can be reached at or 800/342-0203, ext. 4030.