Follow these tips suitable for credit unions of all sizes.
When it comes to loan growth, it’s a challenging time for credit unions—perhaps even more challenging than the years following the 2008 financial crisis.
Why? First of all, virtually all financial institutions have seen incredible growth in deposits from the series of COVID-19-related stimulus payments, an influx that is putting extreme pressure on the balance sheet. Making loans will help credit unions put all these deposited dollars to work.
In addition, consumers are paying down credit card and other non-mortgage debt at a pace not seen in 40 years. Plus, a massive refinancing of mortgage debt is taking place. In all, credit unions need to worry not only about making more loans but also about finding a way to generate substantially more income through higher yields on other loans.
While I’ve been working on this for Ent Credit Union’s benefit, I also have been thinking about ideas any credit union can use. My longtime friend and former employee Genice DeCorte, CEO of HealthShare Credit Union in North Carolina and a member of the Carolinas Credit Union League small credit union peer group, recently asked me to do a session for the group on loan growth. While my ideas are suitable for credit unions big or small, here are some of my recommendations I recently shared with this group of credit unions under $100 million:
Be Bold About Making Personal Loans
When considering consumer demand and the growth in competition, the action is in the personal loan market. Personal loans are hot, and fintechs are driving a lot of the consumer demand. Whether the loan is for consolidation, home improvements or paying off a specific account like a private student loan, personal loans are becoming increasingly popular with consumers. The growth in personal loans is also negatively impacting growth in credit card portfolios across the country.
To be competitive in this market, your credit union can’t be afraid of making larger personal loans. From experience, I know that consumers with mid-600 FICO scores are getting loans in the $20,000 range assuming they have higher incomes and can afford the payment. In essence, fintechs are trying to do what many credit unions have been doing for decades: lend to great people with not-so-great credit.
Sharpen Your Pricing Pencil
Credit unions historically lag the market in adjusting to rate shifts up or down. Given the alternative to lending is investments and rates are in a word, pitiful, we have a lot of room to move rates and generate additional income from lending.
While your credit union is likely seeing some seemingly irrational pricing in the marketplace, your competitors may not be as crazy as you think. There’s a lot of liquidity in the system that is driving this extreme level of competition. Now is the time to evaluate your pricing models and make sure you’re competitive enough to earn your members’ business.
Recognize That Repayments and Pre-payments Are Half the Problem!
When rates have dropped in the past, we quickly experienced a mortgage refinance boom. Increasingly, when rates drop, consumers are looking to refinance everything. Whether it’s a car loan, credit cards via a personal loan and now personal loans previously used to consolidate debt, you can expect to generate a lot of loan volume if you’re ready to capitalize on the refi opportunity.
The problem is that you have members looking to do the same thing with your loans, and they’re going to other lenders to do it. Loan growth is a function of two factors: loan volume and repayments. When rates fall, repayments explode.
Whether your member requests a payoff via the phone or home/mobile banking, you can’t afford to have these inquiries fall into the lending equivalent of a black hole. Controlling repayments by having a process to follow up on member payoff requests and offering to keep the member’s loan at the credit union are critical. Time is of the essence; refi offers must be made almost immediately to make sure your drive to generate more loan volume actually leads to loan balance growth.
Improve Your Mindset
It’s easy to write-off a tough year for loan growth due to the economic climate. COVID-19, lockdowns, stimulus payments and low interest rates are all great excuses. Winners, whether they’re businesses or athletes, tend to be winners because they have a track record of overcoming adversity. Having the right mindset—that your credit union will overcome the economy—is a big part of generating loan volume and growth.
The ‘3’ Most Important Factors to Loan Growth
To have the right mindset, it helps to have a strategy to back it up. Like the old saying about the three most impact factors in real estate (location, location, location), ultimately the three most important factors to loan growth are preparation, preparation, preparation. It helps to have a plan to generate loan growth, regardless of the direction of interest rates and the economy in general.
If rates are falling, think refinance! Refinance every piece of debt you can for your member. Make sure you’re not lagging in moving your rates. Have a plan to control faster prepayments and your members taking their credit union loans elsewhere. Just as importantly, how is your bench strength? If loan volume increases, do you have the additional personnel trained and ready to step into a lending role?
If rates are rising, you might not have the mortgage volume you used to have, but consumers will always have the need to access cash from the equity in their homes, so consumer demand will shift to home equity loans instead. In addition, consolidation loans and personal loans will still be popular as credit card balances, which carry variable rates, will go up as the prime rate rises.
Over the next few months, I’ll get deeper into the details on a few of the recommendations to my friends in the Carolinas League. If you aren’t prepared for the demands of generating more loan growth now, you will be soon!
Bill Vogeney is the chief revenue officer and self-professed lending geek at $7.9 billion Ent Credit Union in Colorado Springs.