Loan balances rose sharply during the past year, and while a lending slowdown seems inevitable, many credit unions still expect steady loan growth in 2023.
Over the 12 months ended Nov. 30, total credit union loan balances rose a hefty 19.3%, far above the 7.2% average during the past 25 years, according to a new report from CUNA Mutual Group.
And while 2023 will likely revert closer to the norm, it should still be a good year for lending.
"We expect overall credit union loan growth to rise to 8% in 2023," said Steve Rick, chief economist for CUNA Mutual, an insurance and financial services company that monitors the credit union industry.
REV Federal Credit Union was one of the institutions that experienced very strong loan growth last year.
The $1.1 billion-asset Rev had $979 million in total loans at the end of 2022, a 30% jump from a year earlier that was fueled by an increase in auto loans and commercial lending.
But President and CEO Jason Lee said the Summerville, South Carolina-based REV is projecting a slowdown this year with no more than 5% loan growth for 2023.
"That's primarily due to fierce competition for deposits, which is impacting the industry overall," Lee said. Credit unions need deposits to fund loan growth. "REV is forecasting another strong year in commercial lending and equity lending. Real estate lending is still slower in comparison."
Michael Wettrich, president and CEO of Education First Credit Union in Columbus, Ohio, predicts that even as most economic data point to a possible recession, loan demand will continue to be "robust" in 2023, given that unemployment remains extremely low.
The $146 million-asset Education First had $92 million in total loans at the end of 2022, a 4% increase from a year earlier.
"The 2022 loan increases for Education First, and probably the industry, continued due to a pent-up demand on the heels of the pandemic," Wettrich said. "But lending will always be one of our main focuses."
Rick of CUNA Mutual said the U.S. economy could experience a "mild" recession in the second half of 2023 as consumers' excess savings are used up by increased spending on higher-priced goods and services come the summer.
Industry observers predict loan demand will be strongest for non-real-estate lending lines.
Vincent Hui, managing director at Cornerstone Advisors, said 2023’s loan activity will trail last year’s in part because many credit unions are close to being lent out on member business loans and/or are worried about concentration risk.
Under current law, credit unions are restricted from lending more than 12.25% of total assets to member businesses.
"Demand should be good, but whether credit unions can take advantage will be driven by their current balance sheet situation," Hui said. "Mortgage will re-trench, although home equity seems to be doing well and will likely continue to do so."
Wettrich from Education First said a few years ago the credit union's loan-to-share ratio was above 94%, so it has a history of strong lending growth to lean on.
In 2022, new- and used-auto loans from both direct and indirect channels and its home equity portfolio were the standout categories. First mortgages decreased, as expected, as the challenge of rapidly increasing home prices was quickly followed by surging interest rates that impacted demand.
"As we launch our digital lending channel, we believe our overall loan growth will be low to mid single digits for 2023," Wettrich said. "From what we are seeing, consumer [lending] has probably another one or two years of solid demand before some discernible contraction in borrowing activities."
With respect to mortgages, Wettrich said the demand will always be there for purchase money, but not as strong as in the previous few years, as the prime rate has priced some first-time homebuyers out of the market for the near term.
Refinance activity will also be "very slow," he said, but if the Federal Reserve begins to lower rates in 2025, there should be some constrained demand for those borrowers waiting on the sidelines.
Some credit union executives are
Michael Shafer, CEO of Pathways Financial Credit Union in Columbus, Ohio, said in an interview in January that the credit union was projecting a 10% to 12% reduction in net income in 2023 compared with last year.
A big factor is anticipation that the volume of lending activity will likely drop sharply this year for the $601 million-asset institution. "Most credit unions rely heavily on new loan growth to sustain future profitability," Shafer said.
Banks, too, are anticipating
