Community Lenders For The 21st Century

The recession has been a test for cooperatives, and now the movement transitions toward a positive future.


Credit unions are in the midst of transition. Transitions in the economy, the financial services industry and leadership positions across the credit union system are setting the stage for a new era in 2011. The economy is growing again, though the trends are uneven as consumers emerge cautiously from the downturn. The financial services industry experienced perhaps the most significant structural changes of any industry during the Great Recession and remains a central point of discussion in Washington. Credit union leaders are stepping aside and a new generation is taking hold of the industry’s reins.

These transitions are coming at a pivotal time for credit unions. The value of the cooperative financial institution charter was evident during the economic downturn, with credit union assets rising 24% since year-end 2007. By contrast, thrift assets declined 32% over the same period, partially due to the collapse of institutions such as Countrywide and Washington Mutual. Credit union growth comes not from being smarter than the competition but from having a fundamentally different focus than their competitors. Credit unions’ sole objective is to deliver value to their member owners.

Member value is why consumers are increasingly turning to credit unions for checking accounts, credit cards, student loans and mortgage loans. The credit union difference has become clearer over the past few years and credit unions have become more significant players in the communities – however broadly or narrowly that is defined – that they serve.

As their significance and scale increases, the $952 billion credit union system is on the cusp of eclipsing the assets of the $1.2 trillion thrift industry in the near future to become the second largest depository system in the U.S.  While the #2 asset ranking is still to come, in many ways credit unions have already surpassed the community lending role that the thrifts held. Through direct and indirect means, credit unions are supporting 900,000 jobs. The industry has tripled its share of the first mortgage market in just three years. It holds over $1 billion in student loans. Once epitomized by George Bailey and the Bailey Building and Loan Association in the movie It’s a Wonderful Life, the 1,121 thrift institutions active today have lost their distinctive role in the marketplace. One indication of this is that the Office of Thrift Supervision (OTS) will soon be merged into the Office of the Comptroller of the Currency (OCC) as part of the post-recession regulatory structure.

As credit unions transition to being the leading community lenders for the 21st century, the ability to maintain their unique member focus will be the critical factor in their long-term success. New leaders emerging across the system have the opportunity to move the industry forward in ways that would have been difficult to imagine a generation ago. How they lead the way will be as important as what they achieve.

The U.S. economy grew 1.8% in the first quarter of 2011, up only marginally from the 1.7% growth rate posted a year ago. Credit union loan originations, however, jumped 12.7% in the first three months of the year versus the first quarter of 2010. Origination activity picked up in first mortgage, consumer and member business lending as total loan volume topped $58 billion. That amount is on par with first quarter 2007 and 2008 levels, though below the mortgage refinance-driven 2009 results, in what is typically the industry’s slowest lending quarter.

Although it cannot be quantified through the call report data, it is likely that a significant portion of the loan volume is tied to refinancing. The Mortgage Bankers Association estimates that refinancing accounted for 65% of the quarter’s first mortgage activity. Many credit unions are using a mortgage refinancing as a first step in demonstrating to members the savings that can be achieved by borrowing from their credit union rather than another lender. One example a credit union shared with Callahan is of a woman who had refinanced her mortgage from another institution. The member service representative asked her if the credit union might be able to help her save on any other monthly loan payments. She said she had an auto loan with a 22.9% interest rate and wondered if the credit union could offer her a lower rate. Could they?! The 3.5% loan that the credit union refinanced will save her over $5,000 in interest payments over the life of the loan.

Credit unions such as Educators ($1.4B, Racine, WI) have made saving their members money an organizational goal. Educators’ “Fast Lane Financing” program saved their members over $17 million in interest payments on loans between 2008 and 2010 by helping members identify opportunities for savings through one-on-one meetings with credit union staff. In 2011, their goal is to save members $15 million in interest by refinancing loans through ECU.  Through May, they have saved them nearly $8.8 million and are on track to once again exceed their annual goal. The credit union has built awareness of the program’s value not only through its own marketing efforts but also by incenting members to share their successes on their website. The results are incredible and position the credit union as a unique financial services partner in their market.

Lending activity is coming not solely from refinancing however. The Federal Reserve has reported an increase in consumer credit outstanding in seven consecutive months through April. Moreover, April 2011 marked the first year-over-year increase in consumer credit in over two years. The increase is being driven by non-revolving credit such as auto and student loans while revolving credit, primarily credit cards, continues to contract on a national basis.

Despite the increase in loan originations, credit union loans outstanding are down 1.1% over the past year to $567.4 billion. The balance sheet results mask the activity that is occurring across the system though, in part due to active asset liability management that is leading to a high volume of first mortgages sales to the secondary market.

Loan growth is the top priority for credit unions in 2011. Although there is a lot of focus on non-interest income sources recently given the Durbin amendment and changes to Reg E, lending remains the driver of credit union revenue. Net interest income exceeds non-interest income by a three to one margin in credit unions today. If the industry is to continue its success, lending must be the foundation.

Read the rest of Jay's analysis in the 1Q11 edition of CUSP.