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Jun 20 2018

Consumer Lending: Leave No Stone Unturned

Guest Article

Written by Taleen Ericksen

4 min read

Today’s competitive landscape requires many different loan-growth strategies that range from squeezing a little more from indirect auto channels, to a plan to increase higher-yielding consumer loans. Today’s lenders are always working toward that optimum balance of yield and risk, seeking growth through tighter member relationships, and better market penetration.

In a perfect world, we hope to achieve loan portfolio “nirvana” with high loan deployment, solid loan growth, high loan products per member, increasing market share, and the best mix of products to maximize interest margin and risk. As you pursue your version of loan portfolio nirvana, don’t forget the opportunity and importance of personal, unsecured consumer loans.

A clear path to optimizing your loan portfolio

Good old-fashioned unsecured personal loans were the foundation of the early credit union movement. Access to personal and unsecured loans was our niche, and we exploited the hell out of it. Members were served, lives improved, and credit union capital was built. I believe there is still plenty of opportunity for credit unions to pursue personal unsecured loans to fill an important consumer need (that is in line with most of our mission statements), and to fill a small, but important niche in our loan mix: higher yield loans that increase members’ relationships with their credit union. If you believe that an injection of higher-yielding consumer loans would help the overall yield of your portfolio and improve deeper member relationships, read on.

The following are some consumer loan insights to consider, reported in the 2018 Alternative Financial Services Lending Trends Report by Clarity Services, a part of Experian.

Consumer need and demand

Online installment lending has continued its growth in both number and funded loan volume, while growth has slowed in both categories for the online single pay market. Not only have average installment loan amounts increased, but consumers are also opening more loans per year. The overall funded loan volume growth from 2013 to 2017 was nearly 500 percent.
Online installment borrowers have remained active in the market, and have used more credit each year. Between 2016 and 2017, the average credit utilization per borrower (average loan amount times average number of loans) increased from $1,861 to $2,163. This data clearly demonstrates a high need and growing demand for personal, unsecured consumer loans.

Credit quality for online installment loans continues to improve year-over-year. Installment borrower incomes are significantly higher than single pay, and have been increasing over the past five years. Overall, borrowers leveraging online channels for loans tend to be younger than storefront borrowers. Surprisingly, Generation X is the largest user group in the online channel, leading Millennials by a full 7 percent.

Take a closer look

If your loan portfolio could benefit from a higher-yielding pool of consumer loans, here are a few things to consider:

Look at more opportunities. Millions of Americans lack the credit histories to secure a loan in the prime credit market. Subprime consumers are often viewed as a single, uniform segment of the population, even though the circumstances, behaviors and intentions behind their use of credit are vastly different. For each consumer, we must consider what led to their poor credit status. Is the consumer a young person without sufficient credit history to properly qualify for a traditional loan? An otherwise creditworthy consumer who encountered a destabilizing financial event like a job loss or unexpected medical issue? Affordable consumer installment loans are crucial to many of these consumers to help them manage monthly expenses through periods of financially destabilizing events, and income volatility.
Use alternative credit data to take a closer look. In the near prime and subprime market, consumer stability is directly linked to future loan performance. Frequent changes to a consumer’s mobile phone number, bank account, or home address are often associated with increased risk. In 2017, consumer stability remained consistent, with little change to key attributes often associated with risk. Consider using alternative data, such as Clarity Services, a part of Experian, to identify more eligible borrowers and
more accurately evaluate risk. The use of alternative credit data provides a more holistic view of a consumer’s credit history, allowing for a more informed credit decision.
Leverage online lending channel. Besides using alternative credit data to qualify more borrowers, optimize member convenience and the profitability of these loans through online lending channels. You don’t want to give away too much of the higher-interest margin on expensive manual processes. As pointed out in the 2018 Alternative Financial Services Lending Trends Report, the demand and use for personal consumer loans is clearly via online.

Why it matters

For many of us, allocating another 5 percent or more of our loan portfolio to higher-yielding consumer installment loans would have a measurable impact on net income, and is likely to increase the number of loans per member through cross-sells. Credit unions can book these loans at higher rates (there is lower price sensitivity), which are still considerably less than the rates at predatory providers. These loans can also be a significant contributor to the health and diversity of your portfolio. With alternative financial credit data, you can ensure your terms are competitive while more effectively managing risk.

In their effort to leave no stone unturned, it makes sense for credit union marketers and lenders to consider alternative credit data sources to find good borrowers who are flying under the radar – first, before anyone else. Market opportunities are ideal for credit unions to recapture some of the consumer lending that has been lost over the years to non-traditional lenders.

Scott Butterfield
Scott is the Principal of Your Credit Union Partner, PLLC.
www.yourcupartner.org

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Jan 14 2021

Five Top Credit Union Topics For 2021

As we move into 2021, the following topics might be worth discussing and considering with your management team.

Earnings

During the first half of 2020, net interest margins came under substantial pressure as market interest rates were shocked dramatically downward. Net interest margins are expected to remain under downward pressure throughout 2021 as investment portfolios continue to reprice lower and share growth continues.

One of the easiest and quickest responses to declining interest income is to address the cost of funds. Many credit unions still have room to decrease their cost of funds, as shown in the September 2020 ending period graph below.

Source: NCUA

Delinquency

Based on the September 2020 call report data, loan delinquencies and net charge-offs remained low and were below September 2019 delinquencies. Loan forbearance and other assistance programs in place through the entirety of 2020 may have helped delinquencies. Also, certain sectors of the economy are not as impacted as others. The unemployment rate is expected to continue drifting lower in 2021. However, as the assistance programs are lifted, delinquencies and charge-offs are expected to increase as unemployment remains substantially above the years leading up to the pandemic.

Source: MHSI Online Peer Analysis Module through September 2020

Credit Union Philosophy

Serving the underserved has always been a hallmark of credit unions, and now more than ever, there is an opportunity to do this for many credit union members. As these times have been challenging, credit unions can continue to evaluate and prioritize how to best serve members in the coming year, especially those under financial stress. Exploring how to provide service to those that are underbanked might be an opportunity. One option may include evaluating risk-based lending policies and programs, especially given the robust liquidity on most credit union balance sheets. New and alternative avenues to bolster income should continue to be explored.

Digital and Technology

As the pandemic shifts and prolongs, credit unions should evaluate if their electronic delivery channels meet members and potential members’ needs. Moving to or improving digital delivery channels should be accelerated and prioritized. Digital delivery should include evaluating loan origination and servicing channels to maximize new loan volumes. Online and remote financial services will continue to grow and may be the preferred way members access and manage their financial activities.

Balance Sheet Growth

Before the pandemic, many experts anticipated credit union loan growth to taper off but remain positive. After the first quarter of 2021, loan production became unpredictable, however, by the end of the third quarter, annualized loan growth was 6.34%. Real estate lending, driven by the abruptly lower interest rate environment, helped with the growth. Experts anticipate loan growth to be around 6.0% to 6.5% over the next 12 months as the economy recovers.

The first few months of 2021 may see strong share growth as the second round of government assistance and stimulus takes hold, and households remain reluctant to spend until signs of COVID easing and warmer weather occur. Share growth last year increased at an annualized rate of over 18% and is expected to be approximately 8.0% to 10.0% in the coming year. If double-digit growth continues, earnings sufficient enough to sustain capital will be critical. If economic conditions improve and overall consumer activity increases, loan growth and increasing long-term interest rates could counter some of the anticipated income pressures. Fortunately, the credit union industry is very well capitalized and able to ride out the adverse conditions and absorb some more growth, even if earnings are reduced.

Nov 04 2020

The Bottom of the Frog Market

Several years back, I went to Mexico for a vacation. While there, I found a ceramic hand-painted frog-shaped planter that I wanted. My husband loves the hunt, and his quest began. Every time we saw a frog-planter, he would start negotiating with the vendor to get the lowest possible price. We searched for several days and would stop in different towns and check the markets while enjoying our vacation and exploring. When we found a frog, he would inquire about the price and negotiate for further discounts. After a few days and no success at getting the cost of the frog below a certain point, my husband declared, “we have hit the bottom of the frog market.”

…

The Bottom of the Frog MarketRead More »

Sep 30 2020

Economic Uncertainties and Interest Rate Certainties – Asset Allocation Assessments and Considerations

Future GDP Projections

In September, the Federal Reserve Chairman spoke publicly on several occasions and reiterated that the central bank is committed to helping the economy “for as long as it takes.” He noted continued improvements in the economy, but also acknowledged a highly uncertain path ahead. The September FOMC (Federal Open Market Committee) projections are now projecting a full-year GDP decline of 3.7%. This is substantially better than their previous expectation of a 6.5% decline. However, they lowered their 2021 outlook from 5.0% to 4.0% and their 2022 outlook from 3.5% to 3.0%. Their 2023 outlook is at 2.50%.

Interest Rates and Economic Uncertainties

The FOMC also indicated that they would allow inflation to run above 2.0% on a sustained basis before any federal funds rate increases. As such, most individual members of the Committee indicated that the federal funds rate could remain close to zero through 2023. Some economists and analysts even think that we may not see an increase in the federal funds rate until 2024 or 2025. They believe that it will take up to five years for the global economy to fully recover to pre-pandemic levels.

The risks to the FOMC economic growth projections are high. Even the Chairman of the FOMC acknowledged the economic uncertainty of the path ahead. Following the sharp rebound in many economic data measures and drop in the unemployment rate, some recent measures have disappointed compared to expectations and some are indicating a recovery that is stalling. At the current time of this article, the nature of further fiscal stimulus continues to be negotiated in congress and some are not expecting a resolution until after the presidential election. Of course this only adds to the current economic uncertainty.

What is highly certain over the short to medium term timeframe is that interest rates will not likely be increasing more than just relatively minor fluctuations in the medium to long end of the U.S. Treasury yield curve. It is more likely that potential risks on the horizon could drive medium and longer-term U.S. Treasury yields even lower.

Reassessing Balance Sheet Strategy

Given the above outlook, it would certainly seem that some credit union balance sheet strategies of recent years should be reevaluated for the foreseeable future. Reassessing asset allocation strategies is possibly more relevant at the current time than at any time in the past several years. For example, the credit union may want to ask itself how much should we be redeploying assets into two to three year investment CDs given current interest rates on those maturities. If the answer is less than previous years, then what are the alternatives we can explore.

Priorities Going Forward

In exploring alternatives, the first priority for credit unions is of course serving members. Assessments and considerations could include expanding the types of loans offered, reevaluating risk based lending allocations, increasing real estate concentrations, debt consolidation programs, and loan payment support alternatives to name just a few. Secondary to the first priority are considerations such as allocations to loan participations and alternative investments. For example, should the credit union assess CUSO or similar investment possibilities. What are all of the possibilities for these type of investments that may be available to the credit union? After all, an alternative of earning five basis points at the corporate credit union with too much of assets is not likely to accomplish any priorities or goals for the credit union.

The present time and foreseeable future is a great time for credit unions to really show how they can serve and support members during these challenging times. Being there for your members is for sure the highest purpose for the credit union and always assessing ways to provide service and assistance to them will always be the credit union’s first priority. In addition and secondarily, now more than any time in recent years it may make sense to really take a deep dive into the above asset allocation assessments, considerations, and possibilities. Ideally, the best answers going forward would combine the first priority with the second to optimize balance sheet performance while best serving members.