During the past few years of extended soft loan demand, Pennsylvania-based Members 1st Federal Credit Union has consistently posted strong loan growth. From June to June, the credit union added more than $170 million to its loan portfolio, growing it nearly 12%. It posted double-digit growth in unsecured credit cards (14.67%), other unsecured loans (28.94%), used auto (12.76%), and fixed as well as adjustable mortgages (17.47% and 20.72%, respectively).
Consumers across the country have taken advantage of record-low interest rates over the past four years, refinancing existing mortgages at better rates. Increased real estate balances on the credit union loan portfolio reflect this trend. Members 1st, however, is taking a different approach to growing loans. The credit union is managing its balance sheet by diversifying its product lines. Consequently, its total real estate loan concentration decreased from 2008 levels. Its first mortgage loan concentration increased from 20.3% to 25.5% while other real estate loan concentration declined 7.4 percentage points to 27.7%. Also in contrast to national trends, Members 1st increased its auto loan concentration, mainly because of its used auto lending. And student loans, first reported in 2011, are a small but growing segment of the credit union’s balance sheet.
The credit union’s enviable performance is partly the result of a diversified portfolio that 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 $2.2 billion institution to build a mix of products based solidly on “home runs” and “solid singles,” says Fred Ryerse, senior vice president of lending. The credit union’s willingness to provide what its community needs when the community needs it has endeared it to 218,000 plus members and hundreds of local businesses.
“With today’s economy and with the reduced consumer lending, we’ve had our challenges,” says Bob Marquette, president/CEO of Members 1st. “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. Until that point the credit union participated in what Mark Ritter, vice president of business lending, calls “invisible business lending.” These are the loans in which a member uses a personal loan for business purposes. The credit union didn’t offer services, loans, or deposits for small business owners; but it wanted to change that.
“Back in 2002, the concept of going to your credit union for a loan was virtually unheard of in Pennsylvania,” Ritter says. “So our No. 1 goal was to make a credit union a choice and then to make Members 1st the choice for businesses.”
MIND THE CAP
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.
“When we had a core of happy business members it was easier to go out in the community,” Ritter says. “We could put a sign on their businesses that said ‘Financed by Members 1st.’ Then people started taking notice and we slowly expanded from there.”
Now, the credit union’s core consists of more complex, middle-market businesses, for example a $30 million manufacturing company. Still, competition is tough.
“90% of our businesses are within a one-hour radius,” Ritter says. “It’s difficult to be a niche lender in this area, so we focus on being diversified in what I call our ‘small operating businesses.’ They make something; they sell something; they distribute something.”
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 program this year that allows it to offer indirect lending for other goods and services.
“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 approximately $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.
Offer variety, use existing resources, and practice consistent underwriting.
“We’ve found these loans are popular in medical areas where health insurance doesn’t cover costs,” says Ed Lehman, vice president of consumer lending. “Elective surgeries, braces, dental work. Things like that.”
The option is also popular for home improvement projects, such as installing a heating or cooling system.
“Today, with the drop in home values, I might be an A+ member who just simply doesn’t have any equity,” Lehman says. “It’s a perfect product for something like that.”
Members 1st has learned several lessons over the past year. For example, when it launched merchant lending the credit union thought offering a zero percent interest product would be popular. The credit union soon discovered merchants were not keen on paying the fee associated with that offer; however, pricing and rates need to take into account the fact the loans are higher risk. So the credit union is now promoting its deferred interest loan as a solution for merchants that want to offer a desirable rate for customers without taking a chunk out of their own bottom line to do it.
The merchant lending program includes four repayment options that come with their own interest rate and merchant fee: 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. Merchants can offer any combination of the options to their customers.
“It is challenging to get a one-size-fits-all program,” Lehman says. “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 to a minimum the cost of bringing it to market. And now the credit union has a system in place where it can offer business hours decisioning in 15 minutes or less, according to sales officer Jeff Gillis.
“The process of getting on board was quick and easy,” says Bernie Thomas, of Appleby Systems, Inc., a York, PA,-based company that manufactures and installs energy efficient windows. “Within a week we were able to put through applications. And we appreciate being able to get our customers what they need faster.”
And finally, the credit union has 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 lenders build better relationships with local business owners who want to know they can depend on their primary source of customer financing from month to month. 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.
“In the past few years, half our lenders went under or stopped lending or changed their criteria so we were not able to continue to use them,” says Appleby’s Deborah Hulshizer. “We’ve heard complaints from other home improvement companies as well.” For Members 1st, the credit union is now picking up approximately 1,000 new members a month through all its indirect channels. That’s the value in consistency.
Unsecured Line Of Credit
When property values dropped, members who might have opted for a home equity loan to finance a major purchase, renovations, or a child’s college education no longer had that option. To address this need, Members 1st developed a large — up to $75,000 — unsecured line of credit.
Before the product, the credit union capped unsecured loans at five years. After looking at TransUnion data and conducting a retrospective study on how well credit performance measured defaults, the credit union concluded it could offer a long-term signature loan with a rate bump to cover the risk of having no collateral.
“That’s risky, ok, but we’re strong enough to assume that risk,” Marquette says. “And it was a way to help a member who needed the money get the money.”
It also provided another tool for loan officers to use during decisoning conversations with members. For those members that had great credit but no equity, the unsecured line of credit provided an alternative to the traditional refinance.
The product launched in spring 2011, and even though the credit union has not advertised the option, its unsecured signature loan portfolio has increased 35% on a portfolio of $55 million in the past 12 months.
“That’s significant growth,” Ryerse says.
Sometimes, just being aware of what’s going on in the market provides the needed inspiration for the next big product. Home prices in Mechanicsburg and the surrounding area didn’t inflate the way other markets did during the run-up to the real estate bubble burst. As such, property values didn’t suffer a steep decline, either. After attending a conference, CEO Bob Marquette brought back the idea to offer an easy way for members to tap into their home’s equity.
The solution: A great rate for a first position home equity loan.
“Rather than go through the traditional, longer first mortgage process that has stricter regulatory issues, we offered a discounted rate for our home equity product and made it easy for our members to go through the process,” Ryerse says.
The product, which the credit union holds in its first mortgage portfolio, offered a 10-year term at a fixed rate of 4.25%. It required a loan-to-value of 80% and an A or A+ applicant credit. The option resonated with members whose mortgage rates hovered in the realm of 5% to 6% and were looking for a way to reduce rate, term, or both and still have an affordable monthly payment. The credit union launched the product in mid-2011 and booked nearly $50 million in less than eight months. It’s winding down, but the product was, according to Ryerse, a “blow-out.”
“It was a home run because the membership was looking for an easy way make it through a mortgage refinance process that is inherently complex,” Ryerse says.
Low-Rate Balance Transfer
If it didn’t embrace a trial-and-error approach, Members 1st might not be enjoying the success of its low-rate balance transfer for its Visa credit card. To encourage members to move to a new card product, the credit union launched a cash back initiative on balance transfers.
“We’re trying to migrate people to a variable rate product that will re-price as the interest rate environment changes,” Marquette says.
KEEP IT SIMPLE
Straightforward products are easy for tellers to explain and members to understand. It's a win-win.
The cash back promotion failed to catch on, so the credit union quickly revamped its card offering and re-released it in early 2011. Now, the credit union offers 1.9% on balance transfers and as low as 8.25% (prime plus 5%) on purchases. No teasers. No gimmicks. Just a simple, easy- to-understand product.
“It’s on billboards,” Ryerse says. “It’s on advertising. It’s at the forefront of our branches.
Private Student Lending
Despite the availability of scholarships and federally backed student loans, Members 1st has identified the need among its members for a student loan option that makes repayment the responsibility of both the parent and the child.
“I’m after those members who have a parent and a child, and the parent wants their child to be responsible for the student debt,” Ryerse says. “In the federal program, you can’t do that. The Stafford Loan is to the student; the Parent PLUS Loan is to the parent.”
DON'T REINVENT THE WHEEL
Don't overlook the value of turnkey solutions. Members 1st had ventured into student lending in the past but found greater success in partnering with a third party.
Four years ago, Members 1st teamed up with the credit union service organization Credit Union Student Choice to offer private student loans. With these loans, the parent and child co-sign for the loan but the parent can drop off after the loan is in repayment. At that point, the student assumes the loan.
“The student and the parent are in it together,” Ryerse says. “That the student is on the loan the whole time is a big selling point of the program.”
In June 2012, an off-month for student loans, the credit union grew its student lending portfolio by $175,000. The credit union booked nearly $6 million in private student loans last year, and its total private student loan portfolio is at $23 million.
“That’s $6 million in loans that we wouldn’t have gotten had we not chosen to participate in that program,” Ryerse says. “That’s $23 million from almost a zero-dollar portfolio.”