With an annual loan growth of 4.2%, membership growth of 3.5%, and a 9% growth in its average member relationship as of 4Q13, Hope Credit Union's ($186.7M, Jackson, MS) recent success may seem a little like alchemy. This is especially true when you consider that this institution aggressively seeks out and serves low-income and unbanked members not just in its local community, but all across the southern Delta region.
Hope is a profitable, stable institution, so how does it get gold from the tasks that others just aren't willing to take on? It all comes down to letting your values truly inform decisions both on and off the balance sheet … and a little bit of faith never hurts either.
Reason #1 — Hope Stays Nimble
"From a dollar perspective, we've grown our balance sheet by a thousand times over the last 14 years," says Richard Campbell, Hope's CFO. But as Campbell — who also serves as the credit union's head of IT and HR — can readily attest, Hope has grown monumentally in its operational scope as well.
The entire Hope organization, which also includes the CDFI Hope Enterprise Corporation, currently employs roughly 145 individuals, but only about 100 work exclusively for the credit union. The rest split their time between the two organizations according to need.
The institution's rather impressive footprint includes 16 branches (with two more planned) spread across four states. However, because it serves nearly 30,000 members, many of whom live far away from the brick and mortar hubs the credit union has been able to establish, coverage gaps can be an issue.
"The members we want to serve are harder to reach and more expensive to reach than your average consumer," Campbell says. As of 4Q13, the credit union's operating expense per member is about $12 higher than average for its peer group. Yet through some ingenious decisions, the credit union has been able to keep its efficiency ratio just below average for institutions of its size (the vast majority of which serve a more geographically unified market footprint).
A shared branching relationship that includes retail options like Wal-Mart and area drugstores has been a valuable tool in addressing this issue, but moving forward, Hope is also placing an increased emphasis on technology.
The credit union already offers online mortgage applications and is in the process of adding consumer loan application options as well. However, Hope is also well aware that Mississippi and Arkansas have the highest number of wireless-only households in the country, as lower-income individuals are increasingly abandoning having both a phone and home Internet connection in favor of one device that serves both needs.
To better address these member preferences, Hope released a new mobile app in 2012, complete with billpay and remote deposit capture. The coming months will also see significant mobile enhancements such as Person-to-Person (P2P) payments and a personal financial management tool that uses color-coding and other visualizations to help teach budgeting best practices.
According to Hope's Vice President of Marketing and Communications Scot Slay, the number of mobile users more than tripled in the past 12 months as a result of this new offering. Still, other challenges remain, particularly in regards to the institution's focus on loan production.
Source: Callahan & Associates' Peer-to-Peer Analytics
"It can be very tough to do loan apps on mobile but we're challenging our developers to do just that," Campbell says. "They keep falling back on the use of tablets, but that's not where our members are right now, so it's a bit of a standoff."
Along the same vein, technology is changing many other aspects of Hope's operation, all the way up to how its leaders are selected and stay connected.
"Diversity has always been a strength of our board, which is black, white, male, female, old, young, and of many different backgrounds," says Robert Gibbs, Hope's Chairman of the Board. "But as we grew into other states, we also needed to make sure our board members were diverse as far as their location, so we could have those new markets fully represented."
Today, the board typically still meets in person in Jackson, but those who can't travel are easily able to use teleconferencing and online presentations to stay in the loop.
According to Alan Branson, Hope's COO, the credit union has also begun experimenting with a new cashless micro-branch model which ranges from between 10% to 20% of the upfront cost of a traditional location — and that's not even taking into account the ongoing operational cost savings.
"With a typical branch, we'd expect to attract around 500 members within the first year, but in more rural communities that's not always possible, so we needed a smaller model to deliver there," he says. "At the same time, these alternative branches also work very well in high-traffic areas."
One such branch is already in use at a business incubator at the University of Arkansas at Pine Bluff — which is staffed by students and uses technology such as a 24-hour ATM to emphasize interactions for relationship building and self service for transactions. Hope also plans to make use of a similar model for a planned in-store location at the newly reopened Circle Foods Store in New Orleans.
Efficiency improvements continue on the employee side as well, as the use of a SaaS server package on the back end and Microsoft's SharePoint portal on the front end increase efficiency by breaking down several departmental silos. Together, this setup essentially provides an effective workaround to connect the different SQL-based, stand-alone systems used outside of the core by the business lending and mortgage departments.
"Before, if I wanted to know how many commercial loans we had in the commitment stage or the progress of a certain loan, I'd have to go find someone in that department and we would have to add the numbers up," Campbell says.
Reason #2 — Hope is Not Afraid To Be Different
Consumer loans may be the staple of many credit union portfolios, but at Hope they are actually a much smaller portion of the portfolio. One key reason for this was the institution's strategic move away from indirect auto lending back in 2011.
"We'd gotten involved in indirect in the opposite way of most credit unions, as we were seeking to improve the quality of our paper," Campbell says. Most direct loans at Hope were C and D grade, and although the credit union was able to attract more A and B paper through indirect, these loans didn't perform markedly better than the lower paper grades and pricing for them ended up being so low that it really wasn't worth it.
Replacing that inflow with direct auto growth has been especially challenging, yet autos remain a continued focus due to the essential nature of this business for Hope members. Given the lack of public transportation in rural areas of the Deep South, no car essentially equals a recipe for unemployment.
"Obviously we can't compete with new car dealerships offering 0% but we do see opportunity in used autos moving forward," says Bill Bynum, CEO of Hope Credit Union and Hope Enterprise Corporation.
According to Slay, it is not uncommon for borrowers in the area to turn to predatory lenders for even large-scale purchases like autos, so being able to refinancing these loans with Hope has saved individuals $14,000 or more over the life of their loan.
"That's a significant number for a lot of people, but especially someone who's low income or on a fixed-income," he says.
Despite the challenges that auto presents, Hope has several bright spots on the consumer portfolio that are performing especially well.
Source: Callahan & Associates' Peer-to-Peer Analytics
These include short-term unsecured options such as a stretch pay loan, which runs at 18% or less compared to rates of approximately 500% that individuals may pay elsewhere for a payday loan, as well as the credit union's debt consolidation offering, which allows those caught in a debt cycle to finally break that chain for good, Slay says.
As of 4Q13, credit card balances are up 8.5% annually, and the cooperative credits much of this growth with a simple strategy.
Today, every consumer loan application that comes in the door is evaluated for a credit card at the time of underwriting, Branson says. "It's presented to the member during the same visit and if they want to take advantage of it immediately they can."
Reason #3 — Homes Are Where Hope's Heart Is
Mortgages make up an overwhelming portion of the credit union's current portfolio and while it may require some extra effort to make regulators comfortable with this concentration, this activity has been driven as much by community need as by organizational preference.
Hope Enterprise Corporation had previously been involved in the purchase of mortgages from other financial institutions, but it was the 2002 partnership with Hope Credit Union that truly solidified that activity. As of 4Q13, fixed firsts are up 8.4% annually at the credit union, with adjustable first up 7.8% over the same timeframe.
The need for affordable housing was something we saw an important part of building a community infrastructure, as it would also help us attract the companies and management needed to drive economic development.
"The need for affordable housing was something we saw as an important part of building a community infrastructure, as it would also help us attract the companies and management needed to drive economic development," Bynum says.
Home ownership also plays a vital role in breaking the cycle of poverty and building wealth among families in the region. For example, average mortgage applicants at Hope have a credit score of 657 — though the credit union also works with non-traditional credit histories to be able to lend to those without an established credit score — and an average income of around $40,000. A full 86% of the mortgages made here go to first-time home buyers.
Today, the mortgage department has around a dozen employees, including two underwriters, one of who specializes in FHA loans. This skillset is especially important because 41.4% of the mortgages closed last year were government backed, consisting of FHA, VA or rural housing loans, according to Shirley Bowen, senior vice president of mortgage lending. About 67% of mortgage loans were held in the portfolio last year, including some FHA loans.
Source: Callahan & Associates' Peer-to-Peer Analytics
The use of an unusually thorough manual underwriting approach, combined with a more holistic suite of products for non-traditional borrowers, has significantly helped put Hope on the radar of home buyers as well as area realtors and non-profits in the last few years.
"With all of our loans, if someone doesn't fit traditional underwriting criteria, we look to see if there are less significant items like a phone bill or a subscription that hasn't been paid and is causing issues," Bowen says. "We then push those minor items aside and instead look to see how they were paying their rent and their auto payment. If those did lapse, was it due to a temporary setback beyond their control, like medical bills?"
The credit union also uses the VA method of residual income — which looks at the money left over after paying monthly debts and obligations, and varies according to region — to help more individuals get a foot in the door in terms of establishing ability to repay.
The credit union even has an affordable housing product — which sometimes uses a grant to lower the LTV ratio and allows borrowers to go as high as 100% financing — that is held on its own books. But before these loans are granted, borrowers must go through a comprehensive educational process that includes credit counseling.
As technology continues to transform the credit union's operational performance, Bowen sees big potential out on the horizon for her department as well.
"We get a lot of our applications through our website, but my dream is that one day we'd be able to put a kiosk in every branch where the member could video chat with us during the loan application," she says. "For something as big as a mortgage, you really need the comfort of seeing a real person's face and be able to fully interact with them just as you would in person."
Reason #4 — Hope Means Business
Business loans are up 16.4% annually at Hope and make up roughly 36% of the credit union's total loan portfolio as of 4Q13, compared to just 5% at similar-sized institutions.
This loan category can quickly mire inexperienced lenders, but for Hope, business lending has been an essential part of its operation right from the start.
"As Hope Enterprise Corporation, we probably spent the first five years of our existence just doing asset-based lending for manufacturing firms," says Greg Wineland, senior vice president of lending.
"Back then, most of our lending was asset-based, which entailed securitization by accounts receivable, inventory, and cash accounts."
Since the two groups joined forces, most loans at Hope are now secured by fixed assets and primarily consist of commercial and residential rental real estate as well as some equipment financing.
"The permanent financing associated with multi-family developments has probably been one of our greater concentrations," Wineland says. "It's been a very good fit for us in terms of our affordable housing mission, but also in terms of our ability to fit that product into existing regulatory constraints."
The credit union also does SBA loans (which make up about 8.9% of the MBL portfolio) as well as some USDA lending.
The MBL department itself has swelled to 22 individuals over the past decade, including seven loan officers spread across the branch footprint, a four-person credit analysis staff, a four-person loan administration team, and a special assets department consisting of commercial auditors and consumer collectors.
The credit analysis team plays a particularly valuable role when it comes to business loan packaging, opening up the floodgates for new opportunities that may have slipped through the cracks due to fixable issues.
"This department dates back to Hope Enterprise Corporation, because in the first few months we realized the difficulty in terms of gathering standard loan packaging information, particularly for those who were just a few years in business or who had gone through a growth spurt and cut some corners along the way," Wineland says. "We've relied heavily on these extra resources to help assimilate and produce the information we needed, financial or otherwise."
All together, the organization is expecting to generate around $200 million in MBL loans this year, including some new relationships initially incubated through Hope Enterprise Corporation until they mature out of their riskier stages.
"Deals beget other deals, but it doesn't always come from the entrepreneur we financed before, it's about the larger network of people that saw that financing and the benefits it has provided that business," Wineland says.
All staff across the organization are incentivized for loan production, but the credit union has also made a focused effort on using joint calls and onsite visits by both retail and business lending staff to secure cross business referrals and more holistic relationships with business clients' employees.
"If an employee has financial stress at home, they are less focused, will be absent more, and you'll have more turnover, so we think one of the best things we can do for our business members is to make sure their employees have a way to get their needs met," Branson says. But the holistic support that Hope provides to local businesses doesn't stop there.
Examples of above-and-beyond tasks include reviewing leases and organizational documents, helping someone become properly licensed, creating mechanisms for proper payroll and income tax, brokering, marketing, and legal support, and other technical assistance.
"We had one individual who had already bought his manufacturing extension equipment and it was laid out by the vendor, but it turned out their building wasn't big enough to accommodate the line as they had drawn it out," Wineland says. "So we had an engineering outfit that worked through a local university come out to help him reconfigure his plant's layout and reconfigure his building to accommodate the new production line."