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Overall demand should be up, but net interest income will still be tough to get.
Despite 365 pretty good days called 2021, credit unions approach lending in 2022 still nursing a wound called 2020. That wound was created by an environment of low rates, high liquidity, tepid loan demand and few delinquencies.
Income suffered, but credit quality improved in 2021. Delinquencies and charge-offs at credit unions hit historic lows, reports Karin Brown-Purtell, EVP of Lending Solutions Consulting Inc., Arlington Heights, Illinois. All the forbearance, mitigation and stimulus programs from credit unions and the government have kept delinquencies at bay, she notes, but that will probably change in 2022.
“Now is a perfect time,” she says, “to prepare for the next cycle of credit challenges—to tweak policies, buy software and train people.”
When it comes to lending, CUs are always trying to keep their footing on shifting ground, responding to the economy, focusing on both profitability and service, and rebalancing their portfolios.
Lending Profitably
Lending success in 2022 is critical for many credit unions because low rates have sapped loans’ profitability. The sore spot for credit unions in 2021 was weak net interest income due to low yields on most assets, notes economic consultant Bill Conerly, based in Lake Oswego, Oregon. The bright spot has been a wave of fee income from members refinancing loans, capitalizing on the steep fall in mortgage interest rates. This bright spot may fade; the sore spot may get worse without more loans and better yields.
Credit unions will benefit some from a projected 3.5% growth in overall loans in 2022, says Micheal Herman, president of CUESolutions provider AdvantEdge Digital, a business line of Cuna Mutual Group, Madison, Wisconsin. That should push return on assets up to 0.6% in 2022, still below the 0.8% it was before COVID-19.
Ent Credit Union, Colorado Springs, is still highly liquid, reports CUES member Bill Vogeney, chief revenue officer of the $8.3 billion institution. The current loan-to-share ratio of 88% is down from almost 100% pre-COVID, and the credit union is feeling the income pinch as its larger-than-usual investment portfolio yields close to nothing and interest income from refinanced mortgages is down.
“We’ve felt a real impact on average asset yields,” he says. “With our big stake in home mortgages—35% of our portfolio—the refis hurt our net income. We got some fee income from selling some mortgages, but that was a one-time boost and not enough, in the long run, to offset the lower yield on the ones we kept.”
Without strong interest income, $290 million PAHO/WHO Federal Credit Union, Washington, D.C., is reducing costs by skipping in-person conferences and moving communication to digital ads and email, explains CUES member Derek Fuzzell, chief financial and chief strategy officer. Capital will not be under pressure as deposits start to drop and excessive allocations to loan loss reserves are recovered.
The 2022 outlook for increased lending is affecting the financial strategy of $1.72 billion Northern Credit Union, Sault Ste. Marie, Ontario, reports CUES member Tammy Buchanan, SVP/CFO. She’s eager to see the credit union’s high liquidity recede. She’s cautiously encouraged by an economic recovery that could have members saving less, spending more and starting to borrow. However, recent economic surveys she’s seen predict members will spend at slightly higher rates than in 2021 and savings will remain at higher levels than what they were before the onset of the pandemic.
Even before COVID-19, Northern CU was addressing profitability, Buchanan says, with a 2019 return on assets of 0% due to investing in the organization’s infrastructure.
“With 31 branches and 270 employees represented by three labor unions, we have a high-cost model,” she points out, “so we’re sensitive to net interest margin. We want to find higher-yielding assets, which means loans.” COVID-19 didn’t help much. ROA increased slightly to 0.1% in 2020 and has come back to 0.35% in the first half of 2021.
The Next Wave of Mortgages
Mortgage lending should reward credit unions in 2022, says Steve Hewins, SVP of CUESolutions provider CU Members Mortgage, Dallas, Texas. Credit unions will capitalize on the situation if they can adeptly move from the last wave to the next one. Refinancing loans has been a great line of business, he says, but likely will fade from 71% of originations in mid-2021 to just 20% or 30% in 2022.
The next wave will be for home purchases, and credit unions need to pivot to a planned, aggressive move to loans to support buyers, Hewins advises. It will be a good but tight market as inventory stays low into 2022 with some supply chain shortages persisting, but there will be solid demand for mortgages in the $350,000 to $400,000 range, with plenty of members able to qualify, he predicts.
To thrive in such a market, credit unions need to get friendly with real estate agents. “Agents want to get the deal across the finish line,” Hewins observes, “and will favor lenders that meet all the deadlines so they can close on schedule.”
Start with agents who are also members, Hewins suggests. Face-to-face assistance is still important for purchase mortgages, but automating paperwork will be an important selling point. That includes streamlining the process by using e-documents wherever possible, he explains.
Mortgages may help a little in 2022, agrees Fuzzell. Thirty-year-fixed home loans will be the primary product, and rates might rise as much as 50 basis points by 2022. Purchase loans will predominate as refis level off after a great run for credit unions in 2020 and 2021. Some formerly unemployed members will show up at the branches looking to refinance once they can qualify, he predicts.
Mortgage rates continued to defy gravity in late 2021 because of an irrationally low 10-year-Treasury-bond rate, Vogeney says. If T-bonds rebound above 2%, demand for refinancing mortgages will dry up, he predicts. If rates stay low, 2022 should be a good year for credit union mortgage lending, but not quite as good as 2020 and 2021.
“We’re on track to exceed our 2021 targets for mortgages,” Buchanan notes. That might taper off in 2022, especially for refinancings if rates start to rise. Northern CU’s geographic market has seen a mini-boom of members buying cottages, sometimes as second homes or rental properties.
Second-home mortgages present a particularly ripe opportunity for credit unions in 2022, Hewins points out, because they have portfolio flexibility that some of their competitors lack. The secondary market for such mortgages is thin, with strict limits on what Fannie Mae and Freddie Mac can accept and scant securitization programs for second-home mortgages.
“By their charters, credit unions can originate and hold second-home mortgages,” he explains. “They can capture business in that higher-yield niche by providing a portfolio home for these mortgages, consistent with their risk tolerance.”
The Bouncing Auto Loan Market
2022 should offer good but select opportunities for credit union automobile lending, predicts Bob Child, COO of CUES Supplier member CU Direct, Ontario, California, and the company’s Origence brand, which specializes in supporting credit union auto lending through its CUDL lending system.
The auto lending market has bounced quite a bit in recent times. After fairly predictable 5% to 6% annual growth in auto loan portfolios, COVID-19 brought a deep dive of 40% less growth, Child reports, then a bounce to 17% annualized growth in the first half of 2021.
Growth is coming mostly in used car financing, he notes, which makes up 74% of credit union auto loans industrywide. Low inventory and 0% financing from automakers have shut the door on most new car loans. In 2022, used car lending will still be rewarding for CUs that do it well.
Even once supply chain kinks are worked out and auto sales rise, auto lending will still be a challenge for credit unions going into 2022, Herman says. Why? Because CUs are losing ground in the competitive battle for those loans.
“Auto loans make up just over 32% of CUs’ loan portfolios,” Herman points out, “which is the lowest share in six years. Their share of overall vehicle financing has fallen from 20% to 17% in three years. The new, high-tech players are taking market share away from credit unions.”
A Deloitte study has found that a lot of people still prefer to buy cars at dealerships, Herman reports.
“That’s a big win for the finance captives,” but it’s also an opportunity for credit unions as buyers move away from that model to digital transactions. “That’s where the fintechs and autotechs like Carvana are killing it,” he observes, “and it’s where credit unions can play and work their way back into a bigger share in the auto loan market.” Electric cars provide special opportunities.
Zero-percent financing effectively blocks credit unions out of much of the new-car market, Vogeney agrees. “It’s strange to push incentives when there’s a shortage of cars, but the finance captives are still trying to recover market share they lost in the Great Recession,” he says. “Low rates give them a cheap way to do it.” Intense competition will make it hard to gain share and make money with indirect auto lending, he adds.
Auto loans won’t help Fuzzell’s credit union in 2022, he laments. “Rates are too low to make a profit. We’ll make those loans to accommodate members, but it’s not an asset class we’re targeting.”
Borrowers Currently More Creditworthy
The pandemic has brought less interest income and fewer delinquencies than expected. Consumers are sitting on a stunning $2.6 trillion of excess savings, says Anirban Basu, chief economist of Sage Policy Group, Baltimore. This has deflated credit card balances and delinquencies considerably despite millions of lost jobs. But that will change, he predicts.
“This is a great time for lenders to be a little more aggressive with credit card programs, because borrowers are more creditworthy than usual,” he points out. Again, it’s cyclical, and delinquencies will start to rise, probably in 2022. But borrowers were stress-tested by the events of 2020, and many came through with flying colors—so credit unions can lend with greater confidence than usual, he asserts.
However, there’s some evidence that consumers are reluctant to run up their card balances again post-COVID, and that is creating new opportunities for personal loans that get paid off on schedule, according to Vogeney. Consumers are using personal loans as well as excess cash to pay down credit card debt, he reports.
Fintechs have grasped this opportunity and are pushing digitally generated personal loans, letting automation technology remove most of the overhead. They are scoring wins with small, short-term “buy now, pay later” plans that appeal to consumers who want loans for specific purchases with specific repayment plans that get paid off and not mixed into the credit card stew, Vogeney reports.
Personal loans are nothing new for Ent CU. “We’ve been focused on personal lending for 10 years,” Vogeney says, “and our balances are up 18 times over that decade, starting from a fairly small base. The Ent personal loans are unsecured closed-end loans for four or five years. Members apply online or by mobile. We put the money in their account as soon as they electronically sign the document. It takes a good user interface and mobile banking app. It has to be simple, with quick, automated decisions and fast funding.”
The personal loan market is competitive thanks to fintech automation, but Ent CU can provide lower rates than fintechs, especially for borrowers in the 600-680 FICO range, he says.
Northern CU is hoping personal lending rebounds in 2022 after a dip during the pandemic.
“We hope to see increases as consumers go through accumulated savings and turn to credit,” Buchanan reports. Those loans promise decent yields, but competition is fierce because almost all financial services businesses are excessively liquid and driven to find higher-yielding assets, she explains. With government support still flowing to consumers in Canada, it’s hard to gauge just how solid members’ finances are, and risk is a real constraint.
“Personal loans are not an area where we want to take more risk,” she concludes. “Our regulator is looking more closely at risk management practices. So far, it’s been consultative, but rules may be coming.”
HELOCs Likely a Good Option
For one of the best lending products in 2022, credit unions may need to dust off the home equity line of credit. With home values rising 15% to 16% annually, HELOCs are a bright spot that will strengthen moving into 2022, predicts Steve Rick, chief economist of CUESolutions provider Cuna Mutual Group, Madison, Wisconsin.
“People will use HELOCs to finance RVs, boats and other high-end consumer durables,” he says. With alert CUs already offering 1% for the first year, “it’s a no-brainer to use the HELOC instead of a boat loan or RV loan.” Other than HELOC pricing, he doesn’t expect much product innovation in the near future.
HELOCs are “the next great growth opportunity for credit unions,” Vogeney declares. “Banks have largely abandoned them. Bank portfolios never returned to the level of home equity lending they had prior to the Great Recession, and during COVID, many shut down their modest HELOC programs in favor of PPP (Paycheck Protection Program) loans. They’ve been slow to reenter this market.”
It’s already a rewarding market for Ent CU. “In 2021, we are having our best year ever in home equity lending,” Vogeney reports.
With home equity rising and refinancing losing its appeal, home equity credit will become popular, Hewins agrees. “People will want to touch the cash without touching the mortgage,” which will give CUs a valuable product in 2022.
Fuzzell offers caution about HELOCs. Home equity lines of credit are floating rate, and most members will be looking for fixed. Even for home improvement projects, HELOCs may not be the best option. Anecdotally, he reports that his father-in-law investigated the options and found that it was cheaper to refinance his home and that, with current low rates, he could recapture the closing costs in four months.
In all, expect 2022 to be a year of adjustments when it comes to lending, Basu suggests. While constantly changing is hard, the silver lining is that the shifting gives credit unions a special opportunity to bond with borrowers.
“When the financial ground is shifting,” Basu notes, “people like to go where they belong and deal with people they trust.” What a wonderful opportunity for member-owned financial institutions with a reputation for personal service. cues icon
Richard H. Gamble writes from Grand Junction, Colorado.
