Fueled by a surge in auto, credit card and other unsecured loans, credit unions added $10.2 billion in loans in June, which reflects a 10.9% year-over-year increase — the fastest growth in history, according to CUNA Mutual Group.
While not all credit unions are sharing in that wealth, which skews toward larger organizations, that’s great news for the movement on the whole, and for consumers whose confidence in the economy and their personal finances continues to swell.
But as CFOs know all too well, not all loan growth is created equal, especially at a time when interest rates seem destined to climb. The Federal Reserve Board stayed the course on the federal-funds rate at its September meeting, extending a seven-year run of near-zero rates, but futures managers are betting on an increase either in October or December.
Whenever that swing toward historical norms occurs, many financial institutions will feel the crunch of interest-rate risk (IRR), having brought on too many long-term, low-yield assets during the easy money years following the financial crisis.
Generally speaking, credit unions would be well-served to measure and manage their portfolios based on return on equity (ROE) because it’s a better indicator of sustainable growth than return on assets, the Filene Research Institute advises in its white paper “Credit Union Strategic Growth and Budgeting.”
ROE, according to Filene, can only improve with disciplined management of operational expenses, superior underwriting, and, most important, a focus on top-line revenue growth — goals that can be achieved with members’ best interests in mind.
How can your credit union promote measured, sustained lending growth within your asset-liability management (ALM) plan while avoiding undue scrutiny by examiners who’ve been instructed to harp on IRR, monitor concentration risk, and scrutinize compliance operations?
Take stock in these five strategic investments your lending team can’t live without:
1. Credit cards. Americans have renewed their love affair with plastic, and that spells opportunity for you. By year’s end, the average indebted household will carry a balance of $7,813, the highest amount during the recovery, according to Card Hub. And that figure, which equates to $900 billion nationally, includes people who pay off their bills monthly; households with revolving balances carry approximately twice that amount. Many of these consumers (some of them likely to be your members) use cards with high or even punitive interest rates. Offer this group your branded cards with reasonable rates, providing them a pathway out of debt while bolstering your bottom line.
2. Auto loans. This represents an area of continued massive growth for credit unions — a 15.4% year-over-year increase through the first six months of 2015, according to Callahan & Associates. Because of pent-up demand for vehicles from consumers who held on to their old wheels throughout the financial crisis when money was tight, industry observers expect vehicle sales to continue to surge through at least 2018. Auto lending continues to be a reliable investment, because people rely so heavily on their credit cards. With proper risk-based lending, based on the member’s ability to repay rather than loan-to-value, auto lending becomes an even better bet.
3. Prepaid cards. General purpose, reloadable prepaid cards have become a staple for nearly 23 million Americans — including many who have bank or credit union accounts, according to Pew Charitable Trusts research. Prepaid card use increased 50% between 2012 and 2014. This is a growing market, especially among consumers who use them as a budgeting tool to hedge their spend-happy habits. If you don’t offer prepaid cards, competitors are stealing interest and fee income from you.
4. Commercial real estate/construction. Banks have re-entered this sector at levels not seen since 2007, before the recession. That’s a sure sign even these formerly stringent institutions recognize the opportunity presented by CRE, which as of the second quarter in 2015 boasts a delinquency rate of just 1.28% — within a stone’s throw of the 20-year-lows experienced in 2006.
5. CUOLI. Often referred to by the acronyms COLI and BOLI, credit union-owned life insurance offsets some of the costs of employee and executive benefit programs by generating higher yields through previously impermissible investments. The side benefit is that CUOLI mitigates interest rate risk because the assets’ gains and losses are spread over the duration of the asset, customarily 5 to 7 years.