The recession has created opportunities for financial institutions to add members and grow their balance sheets. And Central Ohio credit unions are taking advantage of those openings.

“Today’s economy and the current anti-bank, and in particular anti-big bank, sentiment has opened consumers’ eyes to credit unions. They’re looking for community-based solutions for their financial relationships. Credit unions fit the bill,” says Patrick Harris, media relations director for the Ohio Credit Union League (OCUL).

“I think the magic word is ‘local,’ ” says Jerry Guy, president and CEO of KEMBA Financial Credit Union, a $585 million state-chartered institution. “The recession has actually given credit unions more opportunities. We’re seeing growth in members, loans and assets.”

Through 2009, OCUL says the nation’s 7,710 credit unions had more than 91 million members and assets (capital and deposits) totaling almost $897 billion. Ohio’s 393 credit unions had more than $20.3 billion in assets. With 2.65 million members, nearly one in four Ohioans is a credit union member. (See “Snapshot of Ohio’s Credit Unions”)

“Consumers are looking at all of their options and often choose a credit union
for their straightforward products and no gotchas in the fine print,” says Jim Riederer, president and CEO of the $195 million CME Federal Credit Union.

At first glance, credit unions and commercial banks may seem interchangeable as financial institutions. However, the two are structured very differently and operate under different sets of regulations. Is a credit union the right financial choice for your family or business? Central Ohio credit union executives discuss their approach, growth and how they’re helping their members ride out the recession.

Common Bonds

Congress created credit unions with the Federal Credit Union Act of 1934 “to make more available to all people of small means credit for provident purposes.”

Credit unions are not-for-profit cooperatives owned by their customers, or members. Earnings are re-invested in the credit union or returned to members in the form of higher deposit interest rates, lower loan rates and lower fees. Commercial banks, on the other hand, pay their owners and stockholders dividends from the profit they earn.

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. NCUA insures deposits for federal and participating state credit unions through the National Credit Union Share Insurance Fund.

Prospective members must belong to what’s known as an affinity group. A credit union’s charter determines its field of membership. Single sponsor credit unions serve an association or an employee group. They may choose a trade, industry and profession (TIP) designation to serve multiple employers within the same industry. Multiple sponsor credit unions serve employees of more than one company. Known as select employee groups (SEGs), each company is its own common bond. Community credit unions are open to those who live, work, attend school or worship within defined community boundaries—often an entire county.

A federal credit union serves either SEGs or a community. State credit unions can serve both.

“Almost everyone can join a credit union. Members find we offer pretty much all of the same products and services as other financial institutions, but the philosophy of the movement centers on the relationship we have with our members,” says Greg Kidwell, treasurer and CEO of Members First Federal Credit Union, a $48 million institution.

“Our members trust us. They feel safe doing business here and they like the way we treat them. The credit union motto is, ‘People helping people.’ We really believe that and work toward it every day,” says Jodi Henricks, CEO of Franklin County School Employees Federal Credit Union, which has $32 million in assets.

Membership Growth

The recession created what credit unions call a “flight to safety” among their members, some of whom sought relief from banks that faltered as a result of bad investments.

“Credit unions are limited in the types of things we can invest in. Our cooperative structure prevents us from getting involved in risky ventures like those that led to the economic crisis. It’s a built-in safety valve, so we didn’t suffer the same kinds of losses as other institutions,” Kidwell says. “It is a challenge? Absolutely, but we don’t have that added burden.”

“Credit unions are very conservative. Being conservative, in the financial sense, was looked down upon eight to 10 years ago. Now it’s in and turned out to be the right approach given the financial downturn the country has experienced over the last two years,” says Bill Butler, president and CEO of Ohio HealthCare Federal Credit Union (OHCFCU), a $44 million institution.

That conservative nature now is attracting members. “Credit unions have always promoted thriftiness, so we’re a natural
fit with the new mindset,” Butler says. OHCFCU experienced membership growth of about 3 percent last year.

Membership at Members First grew less than 1 percent in 2009, but this year Kidwell expects a bump of 2 percent on an annualized basis. “I believe it also has a lot to do with our community involvement in Grandview,” he says.

Through May, CME added more than 1,000 new members and KEMBA added more than 2,300. New members bring new relationships to the credit union, even as existing members add to their deposit accounts.

CME’s deposits are running 7 percent ahead of 2009. “Savings account balances are increasing more than checking or money market accounts. More people are signing up for payroll deduction to their savings, so they have something to fall back on,” Riederer says.

Uneven Loan Activity

It’s not uncommon today for deposits to outpace loans. In 2009, Members First increased assets by 11 percent. “Ideally in normal times we lend that money out, but these aren’t normal times,” Kidwell says.

Assets at OHCFCU grew by 17 percent, but Butler notes, “It’s harder to grow the loan portfolio at a 17 percent clip.”

“More deposits are coming in than loan applications,” says Sharon Custer, president and CEO of the $344 million BMI Federal Credit Union. “We’re experiencing a hesitation to borrow, but we do have money to lend given the amount of deposits we’re getting.”

Mortgage loans are an exception. “Today’s incredibly low rates are encouraging some members to refinance. It’s a real growth area for us,” Custer says.

Deposits that aren’t loaned out are invested, but returns are a challenge given today’s low interest rates. “Earnings are not growing as they had been. Right now 75 percent of our share deposits are loaned out and 25 percent are in low-yielding investments,” Butler says. “That’s still strong, but from a margin perspective we’d get more return if a higher percentage of our deposits were loaned out at a higher rate.”

“Our earnings are positive, but not where we want them to be. In the past, it wasn’t unusual to earn a 1 percent spread. Today, 0.25 to 0.5 percent is more realistic,” Riederer says.

Not all credit union members are reluctant to borrow. CME is seeing more used car and small business loans. “There’s also interest in mortgage refinancing. We’re not seeing as much interest in new home purchases, but it’s better than last year,” Riederer says.

Consumer lending is picking up at Members First. “Our loans were up in April and May, and there’s growth in our small business lending, too,” Kidwell says.

Through March 31, KEMBA’s loans grew at an annualized pace of 11 percent over first quarter 2009. “It’s balanced between auto loans, but more used cars than new, and the various mortgage products we offer,” Guy says. Credit card balances also increased from $36 million in 2009 to $40.5 million through May.

OCUL unveiled an additional lending opportunity in May: the collaboration of 11 credit unions offering $150 million in private student loans through the new Ohio Student Choice program. Central Ohio participating credit unions are BMI, KEMBA and MidState Educators Credit Union.

Even at the most conservative credit unions, not every loan is repaid in full. Charge-offs (debts deemed uncollectible by the lender) and delinquencies are a cost of doing business. CME’s delinquency rate is less than 0.5 percent. KEMBA’s charge-offs dropped 5 percent from 2008 to 2009, and is down a similar amount through May.

The effects of Ohio’s high unemployment rate have played a role in those statistics. “Consumer loan delinquencies are staying lower—not low, but lower than we thought they would,” Custer says. “BMI is very proactive. We contact employers who are laying workers off, so we can assist our members who are facing income reductions.”

Franklin County School Employees FCU recently tightened its lending policy to address unsecured credit cards and bill consolidation loans. It has also modified a handful of mortgages. “We helped our members avoid bankruptcy or losing their home. When we do that, we’re also protecting all of our members. We know there’s a fine line between helping the membership as whole and managing our bottom line while helping our members who are struggling,” Henricks says.

Kidwell says Members First has been fortunate. “Loan losses are a little higher. But when unemployment is this high, good people lose their jobs and can’t meet their obligations,” he says. “We’ve only done a few mortgage modifications and we’ve had a little higher than normal credit losses, but not a huge spike.”

Small Business Lending

In addition to individuals and families, small businesses also are turning to their local credit union for financial services.

Rather than build their own infrastructure for a business lending unit, 48 credit unions in four states contract with Cooperative Business Services (CBS) for analysis, underwriting, pricing, documentation preparation and loan servicing.

The for-profit company is cooperatively owned by the OCUL Service Corp.
and eight Ohio credit unions, including KEMBA. CME, First Service Federal Credit Union, Members First, OHCFCU and Western Credit Union Inc. all subscribe to CBS’s services.

“It’s an opportunity for credit unions to participate in the small business lending arena, no matter what their asset size. Our client credit unions also can spread the risk and offer other credit unions the opportunity to participate in those loans,” says Keith Reed, CBS president and CEO.

CBS manages 350 active credits, or loans, and has $210 million in assets under management. The loans range from $10,000 to $7.5 million, but the typical range of activity is $250,000 to $2 million. About 80 percent of the loans are commercial real estate; the rest are lines of credit, term loans and U.S. Small Business Administration loans.

“In the past six to nine months, we’ve seen an increase in opportunities to look at certain credits. That’s due in part, I think, to banks pulling back for a variety of reasons,” Reed says. “Many of these are good credits from longtime clients of the banks, but they’ve been asked to find a new lender or have gone in search of a new lender.”

Count Paul Wright among them. In September 2008, he needed to refinance the commercial mortgage for his Grandview Heights business, Village Trophy Company. “It couldn’t have been a worse time, because it was just as the economy was tanking,” Wright says.

He says the bank that held the commercial mortgage “dropped the ball.” Another bank he’d done business with for 40 years wasn’t making commercial loans at that time. A third bank sought a higher interest rate than he was willing to pay. So he gave Members First a shot. “I was not a member of the credit union and had never dealt with them. I went to them because they’re local and active in the Grandview community,” Wright says.

The same week Wright contacted the credit union, Kidwell and a colleague paid a visit to Village Trophy. “They were here for two-and-half hours and asked a lot of questions. I was impressed they came here and proud to show my business to them,” Wright says. “Before they left, I had a verbal commitment from them that day to refinance. Since then, they’ve been a good business partner for me.”

Members First is an active small business lender through CBS. However, by law credit unions can only lend up to 12.25 percent of their assets to small businesses. “That cap is starting to become a concern to us. In April of 2009, we had 7.84 percent business loans to total assets. In April 2010, it was 9.85 percent,” Kidwell says.

Reed isn’t surprised by the growing loan volume. “We see tremendous opportunity and are well-positioned to see loan growth in the next three to five years. Small business owners who have found us are pleasantly surprised and see us as a positive change,” he says.

Lisa Hooker is a freelance writer.