U.S. credit unions experienced one of the strongest recent quarters of loan growth, with used-car loans returning as a major force.
New data released by the National Credit Union Administration showed that total loans outstanding increased by 11.7% year over year, to $1.30 trillion, by the end of the first quarter. Used-auto loans rose 13.4% year over year, to $272.9 billion in the first quarter, and new auto loans rose $5.0 billion, or 3.6%, to $145.0 billion.
It’s a stark contrast to the early months of the pandemic, when chip shortages, economic uncertainty and supply-chain issues combined to reduce demand for car purchases.
But as those pressures eased, Arkansas Federal Credit Union in Little Rock, for example, saw used-vehicle loans rise 26% year over year, to about $631 million in the first quarter. The $1.9 billion-asset credit union continued to focus on lending even through the darkest periods of the pandemic, and that strategy is paying off now, according to Arkansas FCU Chief Financial Officer Eric Mangham.
“We knew we needed to stick to our bread and butter,” he said. “Internally we have a posture to make loans instead of making investments.”
And while auto lending is strong, Mangham said one thing worth watching will be how difficult it might be for the credit union to recoup the value on large SUVs and trucks that it might be forced to repossess if the economy struggles. The skyrocketing price of gas will make it hard to find buyers for vehicles that are not as fuel efficient, he said.
“Inflationary matters are going to hurt the lower end of the economic spectrum the most. Food prices are up, gas prices are up and there are going to be fewer buyers that need a truck,” he said.
Auto lending was not the only lending line to show strength in the first quarter.
Industrywide, credit card balances rose 9.8% to $64.4 billion year over year in the first quarter, according to the NCUA.
Mangham said home equity lines of credit are also hot. “A lot of people are doing more home renovations — swimming pools or putting in back decks — because they’re staying put due to the pandemic,” he said.
But the rising tide of lending did not necessarily lift all boats.
At Nutmeg State Financial Credit Union in Rocky Hill, Connecticut, for example, loan growth was relatively flat at about 0.4% year over year in the first quarter, increasing its total loans to $373 million.
Loan growth at the $532 million-asset Nutmeg was nominal primarily because the credit union produced an abundance of Paycheck Protection Program loans — in excess of $24 million during the last few years — that have since been paid off, according to John Holt, Nutmeg’s president and CEO.
“I suspect that if other credit unions didn’t do PPP loans or the payoff period for PPP loan forgiveness was timed differently, that makes the difference,” he said.
Used-vehicle loans were up about 2% year over year at the end of the first quarter for Nutmeg, and Holt said that’s an area the credit union will emphasize.
“Our focus for 2022 to date has been auto and home products because these products are meaningful to the membership and our local community,” he said.
The credit union has also started to measure its success on “new business income” that is in part supported by new loan production and interchange revenue from credit and debit cards, Holt said.
The strategy places the focus on areas where the company has greater control in the short term and on overall profit and quality of the loans, not just on balances generated, Holt said.
Credit unions continue to experience solid membership growth, which often translates into loans, according to Jim Adkins, managing partner for the consultant Artisan Advisors. And loan growth from existing membership is growing as well.
Most of the growth is due to mortgage and consumer lending, Adkins said.
“Credit unions continue to exploit their strength with consumers. However, business loan growth is also tracking higher as more [credit unions] enter the space — a trend that will continue at higher and higher levels as credit unions ramp up their own commercial originations and continue their community bank buying spree,” Adkins said.
Banks also saw strong loan growth in the first quarter, although it was only about half of what credit unions experienced on a percentage basis.
According to the Federal Reserve, U.S. banks’ loans and leases totaled $10.96 trillion at the end of the first quarter, up 6% from a year earlier and up 1% from the prior quarter.
The Fed’s periodic surveys of bankers show that lending activity accelerated through early June. For the week that ended June 1, banks’ loan books were up nearly 9% from a year earlier, led by commercial lending momentum.
Loan demand “remains quite strong” despite “heavy macro uncertainty” ignited by soaring inflation and rapidly rising interest rates, Piper Sandler analyst Scott Siefers said.
Laurie Stewart, president and CEO of the $959 million-asset Sound Financial Bancorp in Seattle, said banks are closely monitoring the potential impacts of soaring costs and higher rates. Mortgage refinance demand has dropped, as expected, in the face of rising rates.
But at this stage in the second quarter, she said, businesses and consumers otherwise continue to borrow across most other categories.
“On the commercial side, the pipeline continues to be fairly robust” and the “consumer side is pretty steady,” Stewart said in an interview. “We’ve had solid loan growth quarter to date, and we continue to be modestly optimistic about growth for the balance of the year.”
At the same time, she said, borrowers are in solid shape and repaying loans as expected. “Our credit quality is really strong,” Stewart said. “Charge-offs are nonexistent.”