Everything's bigger in Texas, except for the credit scores that is.
"In South Texas, we have the worst FICO scores in the country," says Gerry Morrow, the chief lending officer of Navy Army Community Credit Union, a $2.1 billion institution headquartered in Corpus Christi, TX.
In 2013, an Experian listing named Harlingen — a city that NavyArmy began serving when it switched from a federal to state charter in 2011 — as having one of the worst average credit scores in the country. The credit union's home city did not fare much better, with Corpus Christi coming in only three spots above Harlingen in the listing.
Fortunately for residents within its eight-county footprint, NavyArmy views these scores as the beginning of a discussion on creditworthiness, not the end of one.
"There's a big difference between bad credit and sloppy credit," Morrow says. "A low FICO score does not mean these are bad people."
There's a big difference between bad credit and sloppy credit. A low FICO score does not mean these are bad people.
In addition to credit-quality issues, NavyArmy must also wrangle with complications that derive from the region's prevalent off-the-grid commerce and emphasis on cash transactions — which can create difficulties proving income — as well as a general distrust of financial institutions.
Being a community-oriented, not-for-profit lender in this environment is not easy, but NavyArmy has proven it is up to the task.
As of midyear 2014, the credit union's average member relationship was $27,737 versus $15,505 among all credit unions in Texas, according to Peer-to-Peer Analytics by Callahan & Associates. Likewise, its 12-month member growth was 10.7%, nearly triple the state-level norm.
"We fit a need that is not met in our market by anyone else," says Dana Sisk, the credit union's chief operations officer. "There are very few lenders here who go after low B, C, and upper D credit tiers." According to Morrow, the credit union funded $800 million in gross loans last year, a significant injection of capital that has helped members buy houses and cars and contributed greatly to the area's local economy.
"The people we deal with can't go into a Wells Fargo or a Bank of America and get a consumer product," Morrow says. "We take great pride in fulfilling our social mission."
5 Steps To Make A Loan Decision
NavyArmy believes in supporting a culture of "yes" even when others say "no." To that effect, its 70 loan officers review each application on a case-by-case basis — without any automatic or centralized decisioning.
During this process, the lender weighs five key considerations, each of which could count for or against the borrower. They are:
Ability To Repay
Is the borrower asking for more credit than they can afford to pay back?
How long has the member been employed at their current job? If the borrower defaults, can the credit union find them?
What has been happening in the past 24 months of the borrower's life? Do they have a history of skipping or making late payments? If yes, is this recent history? What is the cause?
Is the borrower an established member? Do they have direct deposit? Do they handle their other financial products well?
What will the member lose if they default? Transportation to work? A roof over their head?
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This process helps NavyArmy consider a member's situation in ways no auto-decisioning tool could replicate while removing emotion from the process.
When it comes to granting loan amounts, the credit union uses a tiered system that extablishes lending parameters across four categoeies. From there, loan officers attain lending authority based on their experience and performance on an in-house skills assessment.
For example, midlevel loan officers can grant consumer loans up to $20,000 secured or $2,500 unsecured while top-level lending employees can make secured loans of $45,000 or more and unsecured loans of $7,500 or more.
There is a separate four-level threshold for real estate lending.
A Basic Consumer Portfolio
Weighing the relationship component of the credit union's five-step analysis can be tricky in a new market without established members. That's why NavyArmy is rolling out select products such as indirect auto loans and deposit products in its newest market — the Rio Grande valley (RGV) — rather than offering everything all at once.
Even generally, however, NavyArmy focuses on "pretty basic consumer loans," Morrow says, including mortgage, auto, and unsecured loans. It also makes member business loans, "but that's another world," he adds.
By category, 20.17% of its current loan portfolio consists of new auto, 27.48% is in used auto, and 45.06% is in first mortgage. A full 37.04% of its total loans are through the indirect channel. That is 10 percentage points lower than the average for all Texas credit unions.
As of midyear 2014, 34.42% of NavyArmy members held an auto loan with the credit union versus the 21.27% average for Texas credit unions.
"We are the largest financer of automobiles in this area," Morrow says. "We are known for auto loans."
According to Roman Escobar, the organization's vice president of real estate, the credit union is also the largest mortgage originator in Nueces County. First mortgage penetration among members at NavyArmy is 5.65% versus 1.83% for Texas credit unions. And Escobar sees renewed potential in the area's booming housing market.
"Our average real state loan, including home equity loans and home improvement loans is $144,000," he says. "At the end of last year we were looking at an average loan of approximately $117,000. We've seen some appreciation in the past six months that we haven't seen since 2005."
This bump in home prices is largely the result of activity surrounding the Eagle Ford Shale oil and gas development. The 400-mile-long play has become a cornerstone of the area's economy, and the extra jobs and commerce that have resulted from it are brightening economic attitudes among area residents.
"It's given them the motivation to buy vehicles and homes," Escobar says. "Those are our two large-ticket items here, so it's healthy for us."
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B-Grade Is A-Okay
NavyArmy's membership is largely blue collar. In Corpus Christi, for example, the median household income is $47,000.
And although it does also have its share of well-off members, the credit union is not averse to diving down into B, C, or D paper, particularly when it comes to auto and consumer loans.
Top-tier borrowers at NavyArmy are those with a FICO score of 660 or higher. That would warrant B or C grade rates at most credit unions. Yet it's in this tier that the organization frequently finds loyal members who need the opportunity to prove they are a good risk.
"Our audience is sub-prime borrowers," Morrow says. "They are good members that didn't have a chance someplace else."
Although 44.1% of its consumer loan portfolio was composed of borrowers with a credit score of 660 or higher as of June 2014, there is still plenty of room for borrowers who fall short of that threshold. In fact, 37.2% of its consumer portfolio included borrowers with a credit score that fell between 590 and 659.
NavyArmy converted to a start charter at the end of 2011 and can now serve anyone who lives, works, worships, or attends school in Aransas, Bee, Cameron, Hidalgo, Jim Wells, Kleberg, Nueces, and San Patricio counties.
With the potential to pick up more than 1 million new members as a result of its expansion into the RGV, which includes Cameron and Hidalgo counties, NavyArmy is primed for growth. Yet the organization is also cognizant of what runaway growth in the loan portfolio might mean later down the line, particularly when making loans in riskier or less-familiar markets.
"We thought we knew the Valley but you never know until you get in there," Morrow says. "We wanted to make an impact, especially on the dealer side. So we went to the board and said we were going to be aggressive. We knew we were going to take some hits, but we were going to reserve for it."
According to Morrow, it can take up to 18 months to identify a loan that is going bad, which means NavyArmy is currently experiencing the growing pains it anticipated two years ago.
Paper Grades At Navy Army Community CREDIT UNION
NavyArmy’s consumer loan portfolio contains a mix of all credit scores. It is willing to take a chance on lower-tier borrowers but caps its concentration of C and D paper at 32%.
D 589 and lower
Source: Navy Army Community Credit Union
The organization's 1.02% delinquency rate at midyear 2014 was notably higher than the 0.69% experienced among Texas credit unions over the same time frame. Likewise, its charge-off ratio was at 0.98% versus the 0.50% average for all Texas credit unions. However, those elevated numbers mask the historical performance of the credit union's portfolio.
"In 2012, our biggest year, we had $297,000 in real estate charge-offs," Escobar says. That's a reasonable amount for an institution with a real estate portfolio of $660 million.
"Our delinquency and losses moved up, but it wasn't a surprise to us," Morrow says. "We'd already had the conversation about what we were going to do."
To prepare for that bump, the credit union increased its provision for loan losses and as of midyear 2014, that metric was up 44.41% year-over-year. However, revenue was also up 6.76% year-over-year and ROA was 1.43%.
"In any kind of consumer lending, you are going to get skinned up," Morrow says. "It's a numbers game. We have a high tolerance for risk, but we price for it and we reserve for it. Then we open our doors to these borrowers."