Loan Surge: Economists Smile, CUs Fret
Ask credit union economists about lending growth, then stand back while they wax enthusiastic about the opportunities available in a new period of growing prosperity. Lending is on the rise, they assert, with the data in hand to prove it.
Happy days are here again.
Credit union lenders, by contrast, appeared more cautious about the days ahead. 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 is showing very healthy signs. For those credit unions that haven't done so lately, they say, 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, former senior economist for CUNA who on June 30 began 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 are all driving growth in credit union lending, Rick said. Larger credit unions may be in a better position to take advantage of the trends, but many institutions 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 to a sharp uptick in many lending categories, and credit union loan growth currently is outpacing bank loan growth largely due to lower loan rates, Rick said, adding that the resurgence shows little sign of slowing down.
Monthly loan growth of 0.83% through April adds up to annualized rate of 9.96% for the past 12 months, the CUNA Mutual economist 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.
Used auto loans aren't far behind at 1.1% monthly growth for an annualized rate of 13.2%, a growth rate 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.
“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,” Long said.
Yet, when it comes to loan growth, 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, according to Dwight Johnston, chief economist with the California and Nevada Credit Union Leagues.
“It's so dependent on where the credit unions are located,” said Johnston. “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.”
Large credit unions are having better luck than smaller ones, some of which have seen their loan portfolios contract, added John Worth, chief economist for NCUA. In fact, credit unions with more than $1 billion in assets saw their portfolios expand an average of 12.8% since first quarter 2013, a bounty that hasn't been experienced by their smaller counterparts.
“This is indicative of the overall performance gap between large and small credit unions, and there are a number of drivers, including demographics, field-of-membership issues, economies of scale and others,” Worth said. “Small credit unions are naturally impacted by economy-of-scale issues. As such, forming strategic alliances with other credit unions and CUSOs and doing loan participations are ways they can overcome some of their size limitations.”
Read more: Geography matters, too ...
Growth in the high tech and oil industries has 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,” said Johnston. “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 for $4 billion Ent Federal Credit Union in Colorado Springs, Colo., has recently broken a few lending records, particularly when it comes to auto loans. His credit union's size and its community charter assures him that he can compete with anyone, but 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, said Vogeney. 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.”
To Mark Wilburn, chief lending officer for $711 million Truity Credit Union, based in Bartlesville, Okla., but with branches in neighboring Arkansas, Kansas and Texas, lending is a local game.
“National lenders look at everything going on, but for us it's just about what's going on right here,” said Wilburn, a former Lending Council chair. “That's the challenge we all face as credit unions.”
With a $541 million loan portfolio that skews heavily toward indirect auto loans, Wilburn is enjoying much the same growth levels that Ent FCU enjoys. 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 a while,” Wilburn said. “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 hard and take a few more chances when it comes to writing loans, Rick said.
“In law, there are two types of errors,” Rick said. “A Type 1 error is when you hang an innocent man. A Type 2 error is when you let a guilty man go free.”
In lending, correspondingly, a Type 1 error would be rejecting a good loan, while a Type 2 error would be writing a bad loan, the economist said. 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.
“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.”