Niche Loans That Meet Members' Needs

Pennsylvania’s Members 1st Credit Union offers merchant and member business lending as part of its diverse loan suite.


Members 1st Federal Credit Union ($2.6B, Mechanicsburg, PA) has consistently posted strong loan growth. During 2013, the credit union added $167 million to its loan portfolio, growing it nearly 10%. In 2013, it posted double-digit growth in first mortgages, 17.2%, and other unsecured loans, 12.0%. That's higher than the growth reported nationally by credit unions with more than $1 billion in assets. Members 1st also posted 7.9% growth in credit card loans, 7.6% growth in other real estate loans, and 5.6% growth in auto loans.

Consumers across the country have taken advantage of record-low interest rates over the past few years and have refinanced mortgages at better rates. Now that rates are rising, however, there is a subsequent slowdown in refinancings that was apparent in the second half of 2013. Credit unions originated at least $30 billion in real estate loans every quarter from 2Q 2012 through 3Q 2013. In 4Q 2013, however, credit unions originated $23.5 billion, marking the lowest quarter recorded since 3Q 2011.

In the midst of this uncertain interest rate environment, Members 1st has taken a different approach than many financial institutions in its efforst to grow loans and manage its balance sheet — it has diversified its product lines. Consequently, its loan portfolio has shifted since the refi boom began in 2008. Its first mortgage loan concentration has increased from 20.5% to 28.6%; however, that is significantly lower than its national peer group average of 41.7%. Other real estate loan concentration has declined 8.4 percentage points to 25.6%. Its auto loan concentration has increased from five years ago, as has its student loan concentration. Student loans are a small but rapidly growing segment of Members 1st’s balance sheet, and the credit union increased those balance 26.9% over 2012.

The credit union’s move to embrace a more diversified portfolio reflects its philosophy to offer great rates and consistent service while developing solutions that fit the needs of today’s members. This outlook has allowed the $2.6 billion institution to build a solid mix of products and has endeared it to its more than 250,000 members and hundreds of local businesses.

“With today’s economy and with the reduced consumer lending, we’ve had our challenges,” Bob Marquette, president/CEO of Members 1st, told Credit Union Strategy & Performance for a 2012 article. “But my management team has stepped up to the plate. We have achieved impressive loan growth by coming up with some unique programs and promotions.

Member Business Lending

Members 1st ventured into member business lending in 2002. Up until that point, the credit union offered personal loans it knew members used for business purposes, but it didn’t offer services, loans, or deposits for small business owners. And even though in 2002, going to a credit union for a business loan was virtually unheard of in Pennsylvania, Members 1st wanted to change that. In fact, its No. 1 goal was to make Members 1st the first choice for businesses.

cuspbestpractice_icon Best Practice

Manage the lending cap to ensure continued service to the local community. Members 1st strives to stay $20 to $25 million below the cap at all times.

Initially, the credit union focused on members who had small businesses and residential real estate investments. Building on this core of satisfied members, the credit union then expanded into commercial real estate investors and community partners such as non-profit groups, clubs, school districts, and local government services. Now, the credit union’s core consists of more complex, middle-market businesses, such as manufacturing companies.

Merchant Lending

Its member business lending services makes Members 1st a resource for community business, and to take that one step further, it also offers a way to help businesses help their customers. The credit union, which participates in indirect lending in the auto market, launched a point of sale lending program for other types of merchants in 2012.

“Merchant lending provides another avenue to not only book more loans but book a higher-yielding loan product,” Marquette says.

Currently the credit union is booking more than $100,000 a month in merchant financing. That might seem like a low sum when compared to other forms of indirect lending, namely auto, but merchant loans typically have smaller average balances, $5,000 to $6,000, than what an automobile might require. These loans cater to certain industries, such as the medical field, and are helpful for consumers that need financial assistance paying for things such as elective surgeries, braces, dental work. The option is also popular for home improvement projects, such as installing a heating or cooling system.

cuspbestpractice_icon Best Practice

Offer variety but practice consistent underwriting.

Members 1st learned several lessons when it launched its merchant lending program. For example, it initially thought offering a 0% interest product would be popular but soon discovered merchants were not keen on paying the associated fee. The credit union, however, must price the loan in a way that takes into account the fact the loans are higher risk, so it promoted deferred interest as a solution for merchants that wanted to offer a desirable rate for customers without taking a chunk out of their own bottom line to do it.

Merchants can offer any combination of the four repayment options Members 1st provides, and each option comes with its own interest rate and merchant fee, including:

  • Straight financing, in which payments and interest begin immediately
  • No payments, no interest for three months
  • no payments, no interest for six months
  • no payments for three months, no interest for 12 months

“It is challenging to get a one-size-fits-all program,” says Ed Lehman, vice president of consumer lending. “We have different products to offer some choices.”

Another lesson the credit union learned is to capitalize on its existing resources. Instead of working with a third-party partner to launch a web portal for a merchant lending program, the credit union instead customized a portion of its existing member-facing site to allow merchants to enter and track loan applications. With creative thinking like that, the credit union was able to keep the cost of bringing it to market to a minimum. And now the credit union has a system in place where it can offer business hours decisioning in 15 minutes or less.

“The process of getting on board was quick and easy,” Bernie Thomas, a finance manager at the window manufacturing and instillation company Appleby Systems, told Credit Union Strategy & Performance for a 2012 article. “Within a week we were able to put through applications.”

And finally, the credit union learned to strive for consistency in its underwriting. This is a standard across all the credit union’s lending programs but is especially important in merchant lending. Consistent, dependable lenders build better relationships with local business owners. Members 1st does not approve every loan one month only to turn around and use stricter underwriting standards the next. This ensures the credit union can be there for its merchants now and in the future.