If 2009 was the year of the bailout – when corporations and industries looked to the government to stabilize the pillars of the economy – then 2010 is the year of the consumer. The political agenda is packed with items addressing consumer policies and consumer protection as well as unemployment stabilization and benefits.
On the horizon are programs and recovery efforts geared toward improving the consumer condition; credit unions cannot afford to rest on their laurels. Now is the time to initiate programs in lending. Albeit, January and February are slow months, but with smarter and more efficient efforts, credit unions can lead the lending market.
“This is an unprecedented time for credit unions in terms of opportunities,” says Cathie Tierney, CEO of Community First Credit Union ($1.3B, Appleton, WI). And Tierney knows about seizing opportunity. Two years ago, Community First took advantage of the Federal Reserve’s drop in interest rates by offering a four-day loan sale with rates up to .50 basis points (bp) lower than the Fed’s. The rate applied to any secured loan, real estate and refis included, and the sale was, to put it mildly, a success. Three thousand people applied for more than $150 million in loans. Community First ultimately wrote $149 million in loans; slightly more than $104 million, 70%, was new money. Nearly 1,000 of the applicants were new members who, in turn, opened 696 new direct-deposit checking accounts (a condition of the loan).
“We were processing 100 to 130 loans a day,” Tierney said in a first quarter 2008 Credit Union Strategy & Performance article. The sale, which began on January 31, launched the credit union into October in terms of progress toward its yearly growth goal. Community First ended the year with a loan growth of 25%. Although 2009 was not a banner year – “we started to see the economic downturn hit home,” Tierney says – the credit union still originated $137 million in mortgage loans through June.
Growing loan portfolios early in the year is a smart strategy for several reasons. Primarily, though, there is the issue of interest income.
“The earlier you get the loans on the book,” Tierney says, “the more opportunities you have to earn interest income.”
But today’s lending environment contains two aspects that amplify the urgency to increase loan-growth efforts. Those two aspects are historically low interest rates and competition returning to the marketplace.
Goodbye Low Rates
Rates are at an all-time low and are projected to remain there through the end of 2011. Credit unions will fare better lending money to their members than investing it through other traditional channels. With no expectation for an increase in short-term rates, credit unions cannot rely on earning a return from investments. Converting that would-be investment into a member loan makes more sense in a low-rate environment.
But credit unions must act now. Whether it’s a new loan product – such as small business loan push or a first time homebuyer initiative – or a focus on increasing refinances or member penetration, at some point rates will start to climb. And with a climbing rate comes a narrowing of the gap between loan and market investments.
Cautious banks have contributed to a slow-down of lending, but this trend is abating. Although fewer consumers are actively seeking new loans, leaders in the political community are pushing banks to be more proactive in finding those people and businesses that do need loans. In an environment where lending is on the decline, banks are competing fiercely with one another for new loans, especially in areas such as mortgage lending.
So how can credit unions combat competition? Tried and true methods, such as loan recapture and loan participation, are one way. Another way is through innovative programs. Local Government Federal Credit Union ($969.2M, Raleigh, NC) parlayed its local ties into an opportunity to become an integral financial partner of community business. In 2008, LGFCU launched an initiative that allows it to lend directly to North Carolina’s local governments. From that initiative, it has originated more than 85 loans that have gone toward the purchase of necessities such as fire trucks and ambulances.