By the time Pierre Cardenas took the helm of Capitol Credit Union in January, Capitol had posted negative loan growth each of the previous four quarters, bottoming out at -16.2% in third quarter 2014.
“The credit union was losing loans like crazy,” he says.
From fourth quarter 2012 to fourth quarter 2013, however, loan growth had been strong. Why? And what happened?
Capitol relied on its indirect lending channel to pump up loan and income growth. But just as quickly as the growth came, things started to turn south.
“Smaller credit unions have a harder time competing in the indirect lending space,” Cardenas says. “They get a lot of trash, the bottom drawer deals. And when a credit unions get desperate, it ends up buying those high-risk indirect deals.”
Capitol’s delinquency ratio, which had been as low as 0.09% as of second quarter 2013, spiked at 0.80% in the third quarter of 2014.
Capitol’s income growth bottomed out at -21.9% in the previous quarter and ROA remained negative for five consecutive quarters starting in first quarter 2014.
The most obvious solution to stop Capitol’s downward spiral was to reconsider its indirect strategy.
Today, Capitol no longer allocates resources to chase indirect loans, but it will review and accept loans sent in from dealerships. Still, even those loans must make sense from a risk perspective, Cardenas says.
Under Cardenas’ stewardship, Capitol has undertaken a three-year plan to attract members and loans.
To do this, the credit centralized its lending operations and streamlined staff. Now, instead of eight lenders across three branches averaging $1.5 million to $1.7 million in monthly loan production, Capitol has two lenders producing $5 million, Cardenas says.
Capitol also invested in an experienced underwriter and reduced its underwriting staff from 2.5 to one. By putting more focus on underwriting, the credit union is able to balance policy with sound decision-making. For example, loyal members with an explainable financial hit are no longer automatically turned down for failing to meet policy guidelines. That, along with a new loan origination system with electronic signature capacity and more efficient processes “makes it easy for a member to have a wonderful experience,” Cardenas says.
With new policies, procedures, and operations in place, Cardenas moved into step two: retaining and deepening member relationships. Before Cardenas joined the credit union, loan balances averaged $8,400. As of first quarter 2016, averages were a tick above $11,000.
Capitol started deepening relationships by focusing entirely on its current members with a checking account or a direct deposit.
“Those with checking accounts or direct deposit see us as their primary financial institution,” Cardenas says.
Unfortunately, not many of those folks had a loan with Capitol. So the credit union worked to refinance existing members’ auto loans and even adjusted policies to accommodate the higher loan-to-value ratios associated with refinancing.
Refinancing current members is less risky than refinancing non-members because the credit union is already well informed on the creditworthiness of a member. Plus, the funds a member uses to pay down the loan already reside at the credit union in their checking account.
Capitol’s refinancing activity is bearing fruit. After posting negative loan growth for five consecutive quarters, Capitol has posted gains in the past four quarters — with the past three being spectacular. In third quarter 2015, Capitol posted a 24.41% growth in its auto loan portfolio. In the first quarter of 2016, Capitol posted 39.59% growth.
Used autos loans are driving that performance. They grew 45.15% in first quarter 2016, compared with 30.20% for new auto loans.
Despite the gains Capitol has made in its loan performance over the past year, its member growth remains negative — as it has been for past seven consecutive quarters.
Fortunately, Cardenas believes things have “plateaued at this point,” and the next step for the credit union is to shift into an acquisition strategy starting in 2017. To do that, Capitol has already streamlined policies, procedures, and personnel — including the changes made to underwriters and originators — to handle the growth, fund more loans, and keep acquisition costs down. Before those were streamlined, Cardenas felt it would have been irresponsible to try to acquire now members. The credit union simply wasn’t ready.
“Look at our numbers in the past,” Cardenas says. “We had a gaping hole in the boat. What were we going to do, put more people in the boat?”
Cardenas aims to post positive member growth of 5% over the course of 2017 by attracting the 5,000-6,000 lawmakers, aids, and other leaders who will descend on the state capitol when the Texas legislature begins its session in January.
“We want more checking accounts with direct deposit,” he says. “That’s where our relationships are focused.”