Lending Surge: Economists Jubilant, Lenders Cautious
Ask credit union economists about lending growth, and then prepare to stand back while they wax enthusiastic about the opportunities available in a new period of growing prosperity.
Lending is on the rise, they asserted, with the data in hand to prove it. Happy days are here again.
Credit union lenders, by contrast, appeared more cautious and thoughtful about the days ahead. They said they know that not all credit unions prosper equally in the new, more bountiful lending environment, and that walking the walk isn’t the same as talking the talk.
But both parties agreed that overall, the credit union economy – like the nation’s economy as a whole – has shown very healthy signs. For those credit unions that haven’t done so lately, they said, it’s time to rev up the engines and start lending again.
“Credit unions are no longer on the verge of a lending surge, they’re in the verge and in a big way,” said Steve Rick, senior economist for CUNA who on June 30 begins his new role as CUNA Mutual’s chief economist. “We’re seeing in the data that loan balances are growing at an annualized rate of nearly 10%, something we haven’t seen since 2005.”
A strengthened economy, increased job growth, pent-up demand and improving consumer confidence have all driven growth in credit union lending across the industry, Rick said. Credit unions with more than $50 million in assets may be in better position to take advantage of the trends, but to one level or another the numbers showed most credit unions have begun to tap the wellspring of new and renewed borrowing relationships.
“Consumer spending is already fairly healthy, with year-over-year retail sales growth more than 4%,” said Curt Long, senior economist for NAFCU. “One of the biggest drivers has been the buildup in household wealth, due to a strong stock market and rising home values.”
Positive economic conditions have contributed a sharp uptick in many lending categories, and credit union loan growth currently is outpacing bank loan growth largely due to lower loan rates, and the resurgence shows little sign of slowing down, Rick said.
“Monthly loan growth of 0.83% through April adds up to annualized rate of 9.96% for the past 12 months,” Rick said. “We’re projecting a 9.6% loan growth rate for 2014, the largest we’ve seen since 2005, when loans grew 11%.”
New auto loans lead the pack, growing at a whopping 1.7% per month for a total of 20% annualized growth over the past 12 months, according to “de-seasonalized” data that’s part of CUNA’s Financial and Statistical Trends program.
“The last time we saw these figures was 1995,” Rick said, “meaning it’s been almost 20 years since we’ve seen this level of loan performance. Bill Clinton was still in his first White House term then.”
Used auto loans aren’t far behind at 1.1% monthly growth for an annualized rate of 13.2%, a growth figure not seen since 1999. Much of that has to do with pent-up consumer demand and the age of autos on the road, which at an average 11 years is likely the oldest figure in many years, Long said.
“The average age of vehicles on the road is no longer rising, so there eventually may be moderately less demand from members looking to replace their aging vehicles,” Long said. “As consumer confidence increases, we would expect vehicle lending to be somewhat more tilted toward new vehicle loans, but both new and used vehicle loans experienced double-digit growth last year.”
In addition to vehicle loans, credit cards and first mortgages posted annualized growth in the 7% range. Even home equity loans, which consumers spent most of the past few years paying down as they sought to stay financially afloat in the recessionary economy, are showing signs of growth, Rick said.
Yet, when it comes to loan growth, as with many other things, size matters. Not all credit unions will be riding the crest of the lending wave due to their asset size, capabilities and nature of their membership, said Dwight Johnston, chief economist with the California and Nevada Credit Union Leagues.
“It’s so dependent on where the credit unions are located. Where are the jobs and where is the money?” Johnston asked. “Larger credit unions are doing better than smaller ones, but chances are if the members are doing well financially, the credit union is doing well.”
Growth in the high tech and oil industries have fueled credit union lending programs in areas of California and Texas, Johnston said. But credit unions need the desire, capabilities and opportunities to rebuild their lending portfolios, and the economic condition of the members is often a key variable.
“A lot of credit unions really need to dig deeper and understand their members and what they do,” Johnston said. “If they understand the employment sectors growing in their market, they can tap into them more quickly with targeted marketing campaigns and begin to grow their loans.”
Bill Vogeny, EVP and chief lending officer at the $4 billion Ent Federal Credit Union in Colorado Springs, Colo., recently broke a few lending records, particularly when it comes to auto loans. His credit union’s size and its community charter assured him that he can compete with anyone, but he said he is still taking cautious steps forward, believing that market, more than size, is what matters.
“Are credit unions enjoying a lending surge? I don’t know. I think that’s a ‘maybe,’” said Vogeney, chair of the CUNA Lending Council. “Some loans are easier to get than others, but credit unions are going to have to work pretty hard for whatever they get.”
With a loan portfolio of $2.3 billion, Ent FCU follows a well-defined model based on member and market analyses. The credit union may alter its tactics based on variables, but never its strategy, Vogeney said. A disciplined approach is the only thing that will help credit unions make money through their lending programs, especially in an industry driven by risk-tolerance levels and pricing concerns.
“I like to look at the market and position ourselves and our products differently than everyone else,” said the lender. “That’s Strategy 101.”
Mark Wilburn, chief lending officer for the $711 million Truity Credit Union, based in Bartlesville, Okla., but with branches in neighboring states Arkansas, Kansas and Texas, said he also takes a cautious approach to loan growth. In his mind, lending also is a local game.
“National lenders look at everything going on, but for us it’s just about what’s going on right here. That’s the challenge we all face as credit unions,” Wilburn said.
With a $541 million loan portfolio that skews heavily toward indirect auto loans, Wilburn said he is enjoying growth levels similar to Ent FCU. He said he is cautious, like many of his credit union counterparts, but would describe himself as optimistic about lending’s future.
“Our market is pretty solid and has been for awhile,” said Wilburn, a former CUNA Lending Council chair. “Our plan this year is to progress just like we have in the past couple of years. We don’t see a boom or a bust, but I think we’ll see a gradual progression.”
A progression, gradual or accelerated, is something that more credit unions can enjoy if they’re willing to work a little harder and take a few more chances when it comes to underwriting loans, Rick said.
“In law, there are two types of errors,” he said. “A Type 1 error is when you hang an innocent man. A Type 2 error is when you let a guilty man go.”
In lending, correspondingly, Rick said a Type 1 error would be rejecting a good loan, while a Type 2 error would be writing a bad loan. Great discipline, a more aggressive stance and a better understanding of members and their economic situations could go a long way for credit unions still hesitant to take advantage of newer, more plentiful lending opportunities, he added.
“Right now, credit unions may be making too many Type 1 errors in their loan programs,” Rick said. “Type 1 errors are always worse than Type 2.”