CUs Looking for Lending Uptick in 2013
Focus on fundamentals and keep an eye on risk, lenders advise.
Credit unions expect modest loan growth this year as the economy improves.
First mortgages and vehicle loans should do well, especially if credit unions capitalize on their strengths: knowing their members and providing exceptional service.
Consider members’ circumstances
Aventa Credit Union, Colorado Springs, Colo., will continue on its current consumer lending path, although it has had to adapt to members’ changing financial circumstances due to the recession.
“Members don’t fit into the same boxes they used to in terms of credit, disposable income, and other factors,” says Sandra Wells, senior vice president of lending at the $150 million asset credit union. “Our portfolio grew in 2012 with more B- and C-tier loans, and I know that will continue” with proper risk safeguards in place.
Aventa plans to evaluate the possibility of adding member business loans in 2013.
“There’s a huge opportunity if you can handle the compliance challenges, and small businesses will need the help,” Wells says. “Sometimes [big banks] shy away from smaller businesses, so that’s something for credit unions to look into.”
Used-vehicle loans and loan consolidations remain strong for Aventa.
“And we built up our mortgage department last year, expecting significant opportunities there,” says Wells. “Because interest rates will stay low, borrowers will still look to refinance and consolidate, and some will purchase homes.”
She expects short-term personal loans to be popular this year. “They’ll be $1,000 or $2,000 quick-cash loans,” she predicts. “Members can be in and out in 30 minutes, depending on their qualifications.”
By the end of January, Aventa will implement e-signatures, further enhancing member convenience.
“They won’t even have to come into a branch,” says Wells. “We recently acquired a credit union in a struggling rural area, and we needed a lending strategy for those members.”
Wells forecasts consumer loan growth of around 2%, but foresees fewer loans for newer, high-end vehicles and boats.
“It might just be our geographic area, but that’s not something borrowers are looking for. Credit card lending will probably increase slightly, but people are still cautious.”
Member bankruptcies have increased during the past couple of years, as has members’ use of unsecured debt. Most borrowers’ FICO scores are in the 650 to 690 range vs. the 700s, Wells notes.
“Our area has a higher unemployment rate than the national average,” she adds. “It’s getting slightly better, and members are able to get jobs, but they’re either part-time or at substantially lower salaries.”
Wells believes credit unions have a real advantage over other lenders.
“If we lend the traditional credit union way, based on understanding our membership and thinking outside the box, we’ll see growth.”
NEXT: Focus on fundamentals
Focus on fundamentals
Auto lending, first mortgages, and business lending will be key success areas for TopLine Federal Credit Union, Maple Grove, Minn., says Tom Smith, senior vice president/chief lending officer of the $325 million asset credit union.
“We haven’t put a lot of emphasis on business loans the past few years, but we see an opportunity as the economy slowly improves,” he says. “Businesses will look to expand and, as they gain confidence, it will roll over to consumers.”
TopLine Federal’s primary strategy—and one Smith recommends for other credit unions—is to focus on fundamentals. There’s no quick fix for 2013, he cautions.
“Especially for credit unions, it’s about superior member service, efficiency, and taking advantage of technology.
“Service” might be a buzzword, Smith admits, but it’s critical for success. “Our CEO created the ‘Redbook’—a service standards guide that lays out expectations for employees. It has served us well over the years as a high standard of service expectations.”
He believes first mortgages will continue to be strong in 2013 and that demand for home purchases will increase.
“The HARP II [Home Affordable Refinance Program] has been extended through 2013. This gives members opportunities to refinance even though they might not have the equity. These loans made up about 25% of our 2012 refinances.
“We’ve prepared ourselves,” Smith adds. “We have a new front-end origination and Internet application-processing vendor that allows us to be more efficient and seamless. We’ve also partnered with a realtor group and have opened a mortgage loan office in its facility.”
The credit union sells about 95% of its first mortgages to Fannie Mae to avoid keeping low-interest loans in portfolio.
“As we move into a rising-rate environment, we want to have shorter-term loans on our books, allowing us to re-price our portfolio more quickly,” says Smith. “Accordingly, we’ll focus on products like vehicle loans and will be very selective about putting long-term mortgages in our portfolio.”
He believes second mortgages and home equity lines of credit will continue to suffer this year.
“With the low rates, people are looking at refinancing first mortgages, even for home improvements, rather than higher-rate second mortgages. I predict a slight uptick, but nowhere near pre-recession levels.”
After two years of heavy losses and an accompanying focus on risk management, Smith believes the credit card market has stabilized. “We began marketing aggressively late last year via multiple channels and we expect to see some growth.”
He has budgeted for modest overall loan growth, driven by auto loans and first mortgages. At 5.8%, Minnesota’s unemployment rate is well below the national average, and Smith is seeing improved borrower credit quality.
“One reason we’re seeing increased credit quality is that consumers are saving more, spending less, and paying down debt,” he says. “Many homeowners have reduced their monthly payments and are saving thousands in interest, which puts money in their wallets.”
NEXT: Accept more risk
Accept more risk
SAFE Federal Credit Union, Sumter, S.C., is reaching out to the newly credit-impaired and is prepared to take on additional risk to meet members’ needs.
“We’ll continue to reach out to members whenever we have a loan promotion,” says Penny Pratt, senior vice president of lending and sales for the $806 million asset credit union.
“We tell them how much money they can save by moving loans to us,” she explains. “Periodically we have special low rates on car loans, and we preapprove members. It’s working extremely well: In only one month, we did $1.5 million in auto loans.”
Savings continue to flow in, and the credit union usually pays members bonus dividends and interest rebates.
“Now we’re giving back to members in the form of low loan rates,” says Pratt. “Last December, we offered 2.99% on consumer loans. We usually use risk-based lending, but for this one-month promotion we approved everyone who qualified at the base rate.”
Auto loans promise to remain strong in 2013.
“There’s pent-up demand, and Hurricane Sandy could be a factor, too,” says Pratt. “Mortgages also continue to do well, and we’re seeing more purchases while refinances taper off slightly.”
Personal loans will struggle a bit more.
“People are still in the mode of paying down debt,” Pratt says.
SAFE Federal’s delinquency and charge-off rates compare well to those of peer credit unions, Pratt notes.
“We’re a military-based, middle-market credit union with a conservative membership. We saw borrowers’ credit ratings remain steady through the recession and they’re starting to improve as the economy strengthens,” says Pratt.
She expects the credit union to have 7% or 8% loan growth in 2013.
“We made around $10 million in 2012 loan income, which was fantastic, and we hope it will be in the same ballpark this year.”
SAFE Federal’s members are very loyal, Pratt says, which enables the credit union to accept added credit risk.
“This gives us the chance to help the newly credit-impaired. I think a lot of credit unions could do the same,” Pratt says.