Steady Growth

Staff Writer
Columbus CEO

As national news reports drone on about banks' tightfisted lending practices, eyebrow-raising investments and record profits, credit unions are more quietly aiming to meet members' financial needs.

"We consider ourselves to be the best-kept secret in banking, but we don't want to be," says Patrick Harris, Ohio Credit Union League (OCUL) spokesman.

"We as an industry need to do a better job of educating people, the younger generations in particular, about what credit unions of today offer and the benefits they provide," says James Johnson, president and CEO of Hopewell Federal Credit Union (FCU) in Heath.

"Too many people still believe they need a secret handshake to join a credit union," says Mark Decello, executive vice president and chief operating officer at KEMBA Financial Credit Union.

Consumers may think banks and credits unions are the same. They're not. Shareholders own commercial banks, while credit unions are owned by their customers, or members. Banks return profits to their shareholders. Credit unions, as not-for-profit cooperatives, return profits to members through lower fees, discounted loan rates and higher deposit rates. The National Credit Union Administration (NCUA) regulates federal credit unions. The Ohio Department of Commerce's Division of Financial Institutions oversees state-chartered credit unions.

Banks and credit unions compete for the same customers. While cash is just as green at either institution, area credit union leaders say there are fundamental differences that impact members.

Membership Growth

Ohio's credit union membership increased from 2.68 million in 2010 to 2.69 million in 2011, according to the OCUL.

"We had strong membership growth in 2011, and this year we've picked up where we left off. We're on pace to grow 8 to 10 percent," Decello says. KEMBA has 63,000 members and more than $700 million in assets.

"Most of us have experienced some membership growth from fed-up bank customers. We've benefitted from that with membership growth over the past four consecutive years," says Mike Shafer, president and CEO of Powerco. The $65 million credit union has 8,100 members.

Who can join a credit union is determined by its charter, which delineates the field of membership, or the common bonds, that members must share.

Members of community-chartered credit unions must live, work, worship or attend school within specified boundaries. Single sponsor credit unions serve one employee group or association. Those with a trade, industry and profession designation, or TIP, can serve multiple employers within the same industry. Multiple sponsor credit unions serve employees of different companies. Known as select employee groups (SEGs), each company is its own common bond. A federal credit union serves either SEGs or a community. State credit unions can serve both.

"We have 150 employee groups, but our two biggest are Kroger employees and Mount Carmel employees," Decello says. "We've made a commitment to our SEGs. I get more exposure with them and I can help their associates financially as they help our cooperative grow."

KEMBA positions itself as a free employee benefit. "Our marketing agreement with our SEGs allows us to get in front of their employees. We participate in employee orientations and conduct on-site financial sessions," Decello says.

The State Highway Patrol Federal Credit Union serves current Ohio state troopers, retired troopers and their immediate families. "This year there are two, and possibly three, classes at the training academy. Each class has 60 to 100 cadets, and we put $5 in an account for each of them. We tell them their career is set and now their financial future is set, too," says CEO Becky Landis. The $61 million, 5,500-member credit union operates independently of the Ohio State Highway Patrol.

Telhio Credit Union is reaching out to residents of Hispanic descent. "We have a lot of Spanish-speaking consumers in our market and we think they're underserved. We've met with representatives from the Latino community on how to reach them," says Karen Daniels, senior vice president of member services. "Staff members are training to speak Spanish, and we're working with a firm to interpret for us and convert our literature and documents to Spanish," Daniels says of the initiative that will debut later this year.

Gathering Deposits

Total shares, or deposits, at Ohio's credit unions were $19.42 billion in 2011 compared with $18.33 billion in 2010. The NCUA insures deposits up to $250,000 for federal and participating state credit unions through the National Credit Union Share Insurance Fund.

"We're seeing our money market account balances grow. It's a flight to safety, I think. Members are moving money into the credit union as they look for a liquid, but safe, place where they won't lose principal," says Bill Allender, president and CEO of BMI Federal Credit Union. It has $379 million in assets and 27,000 members.

"We are seeing share growth and are on pace for annualized deposit growth of 16 percent. The volatility of the stock market is part of it," Decello says.

Some credit unions offer specialty accounts to attract members, such as Hopewell FCU's Rebound Checking Account. "It's a second chance account with a service charge. We review the account annually. If they've maintained it without any troubles, we move them to a checking account without a service charge," Johnson says. The $75 million asset credit union has 8,000 members.

More than 21,000 KEMBA members benefit from its Advantage Member account. "If they use their checking account at least 15 times a month, have direct deposit and electronic statements, we give them an additional rate increase and a deeper discount on loans. The more you contribute to your credit union, you should get a better rate than the members who only have a Christmas Club with us," Decello says.

Today's low interest rate environment affects the credit union as much as it does individual members. "Credit unions only invest in government-insured investments, because regulations limit what we can invest in. Because of low interest rates, we're earning essentially next to nothing like everyone else," says Bill Butler, president and CEO of Ohio Healthcare Federal Credit Union. It has $50 million in assets and more than 8,000 members.

Making Loans

The more shares credit unions gather, the more loans they want to make. Credit unions use the loan-to-share ratio as a yardstick to compare loan volume with deposits. Loans are more profitable than investment income earned on customer deposits, so institutions with higher ratios tend to be better performers.

"The low interest rates we get on our investments significantly impact on our bottom line, and that's why lending is so critical. The key to growth is finding ways to get good loans out the door," Butler says.

"Our loan-to-share ratio is important, because it measures the deposits we take in and what we lend out. The net is our retained earnings. That's how we make money-on that difference," Decello says.

"The only way we can get capital is through current earnings. Credit unions can't issue stock or rely on venture capital, so we build capital through lending," Allender says.

The OCUL reports that Ohio's credit unions loaned $12.92 billion in 2011, up from $12.44 billion in 2010. Central Ohio credit unions, too, are seeing an uptick.

"Our loans have grown over the last six months. It started when Ohio's economy started to turn around, and we're seeing that improvement at the credit union," the State Highway Patrol FCU's Landis says.

"In 2011, Powerco grew our loan portfolio by 20 percent. So far in 2012, we're on track for 10 percent annualized loan growth," Shafer says.

Historically, credit unions have done well making auto loans to customers-often at rates several percentage points below what dealers could offer. Now, that business has slowed. "Today's dealer incentives have turned the tables, and we're not seeing much of that business right now," says Hopewell's Johnson.

Credit card demand has tapered off, too, as members closely watch their debt levels.

"Consumer lending is still a bit of a struggle. The demand just isn't there yet," says Greg Kidwell, treasurer and CEO of Members First Credit Union. The $52 million asset credit union has more than 7,000 members.

Consumer loans may be weak, but mortgage loan business is booming. "It's been phenomenal since the first of this year. Initially it was refinancing activity, but now we're also seeing the home purchase market emerge. First-time home buyers are out there and FHA lending is strong," Johnson says. "We've not seen new construction rebound yet."

"We're having record-breaking originations. Members are taking advantage of historically low mortgage rates to refinance or buy a new home. Our home equity loan demand is strong, too," Allender says.

Credit unions closely monitor charge-off and delinquency rates, which drag down financial performance.

"We have less than one-half of 1 percent in delinquent loans. We don't believe in growth for growth's sake. We follow prudent lending guidelines and don't want to harm members with badly structured loans or loans they can't afford to repay," Decello says.

Prudent lending practices haven't shielded credit union members from tough times, though. Members First has noted a change in credit quality. "We used to approve about 75 percent of the applications we received. Now it's closer to 60 percent, and that's been pretty consistent over the last four years," Kidwell says.

Credit unions do strive to assist their financially struggling members. "I can help members with lower credit scores and help them get back on track. It feels good, and it's great to see their faces when we tell them we can help. They're so grateful," Landis says.

"We work a little harder at times to find solutions. That's what differentiates us. Credit unions can take a long-term focus rather than focusing on quarterly earnings for investors," Allender says.

"The public is struggling, so it's harder to make loans to consumers whose credit has taken a hit," Butler says. "The benefit we've had is that we serve health-care workers across Ohio, and they've weathered the economic storm better than most individuals."

Financially struggling consumers can take advantage of free financial literacy classes such as those offered by Telhio. "They learn about savings, budgeting and things like that. We've trained employees to conduct the classes. We partner with churches and civic groups, and members and non-members are welcome. When they get back on their feet, we want them to think of us as their financial partner," Daniels says.

KEMBA provides free financial education through Accel Members Financial Counseling. "About 250 members use it each month," Decello says.

In addition to consumer financial products, some credit unions offer small business loans. "We think the small business market is underserviced, so commercial lending is at the forefront for us," Decello says.

"Our small business division is reaching out in the community and letting business owners know we have competitive rates and good service. We're out there making loans," Daniels says. Telhio has $450 million in assets and 47,000 members.

Adding Convenience

Shared branching and technology increase access and convenience for credit union members. Consider it credit unions' solution to having fewer branches and ATMs than national and regional banks.

"Shared branching is one of the coolest things credit unions do," Harris says. "It's a national network of participating credit unions that share facilities. Members can transact business at thousands of office locations. It's the fourth-largest branch network in Ohio and fifth-largest in the nation. Shared branching levels the playing field for credit unions and big banks."

Credit unions also have a national network of fee-free ATMs.

"We're leveraging shared branching, especially in Northeast Ohio where our members have access to 58 shared branches and 140 surcharge-free ATMs," Butler says.

For credit unions with one location, such as the State Highway Patrol FCU, online technology is especially important. "It's hard to find a better way to meet members' needs and increase convenience than through technology. We can offer a lot of the same convenience of the larger banks through technology," Landis says.

Some credit unions are adding functionality to their online banking system. BMI has an online account opening system that automatically opens the account, authenticates the member's identification and funds the account remotely. So does Ohio Healthcare FCU. "Last year, membership growth was pretty flat. Through the first five months of 2012, we're on track for a 5 percent increase in members. A lot of that is because of online account opening," Butler says.

BMI also has an Anywhere Loan. "A member can sign their loan documents electronically from a computer," Allender says. "We did the first one last year. We closed a car loan in real time for a member in Hawaii. I thought, 'Now that's cool.' "

Mobile banking applications via smartphones are increasingly popular among credit unions, as is use of Facebook and Twitter. "Social media is an important communication tool to increase awareness and engagement. We've had good experiences with it," Butler says.

"I believe use of social media for traditional financial institutions is in its infancy. It's simple to set up and use. The risk of not having a social media presence is greater than if you do. It says something about your business when someone searches for you and you're not on Facebook," Allender says.

Lisa Hooker is a freelance writer.

Reprinted from the August 2012 issue of Columbus C.E.O. Copyright © Columbus C.E.O.