Credit Unions: The Growth of Financial Cooperatives

 
Even in an era filled with bright economic statistics, the mid-year report from the Credit Union League of Nevada stood out.

The industry group reported that credit union deposits in Southern Nevada rose by 8 percent year-over-year while total loans were up 10 percent. In booming Northern Nevada, mid-year deposits rose 12 percent over year-earlier numbers and loans were up by 16 percent.

Recovery and Growth

“We’re beyond the recovery phase,” said Dennis Flannigan, a director of the Credit Union League and chief executive officer of Reno-based Great Basin Federal Credit Union. “We’re stronger than we’ve ever been.”

While the growth figures are eye-catching, so are the total amounts of financial activity they represent. Nevada credit unions hold nearly $4.2 billion in deposits ($2.8 billion in Southern Nevada and $1.36 billion in Northern Nevada. Their loans, meanwhile, approach nearly $2.75 billion ($1.75 billion in Southern Nevada, $941 million in the Northern Nevada).

Just to put this into context, FDIC reports show commercial banks in Nevada held $67.3 billion in deposits at the end of last year — 16 times more than the combined total for credit unions.

But unlike commercial banks, which are largely focused on business accounts, credit unions draw most of their business from consumers. Rising consumer confidence is driving strong growth, credit union executives explained.

“People are feeling much more comfortable about their jobs,” said Rick Schmidt, president and chief executive officer of $168 million (total assets) WestStar Credit Union, headquartered in Las Vegas. “Tourism is back. Construction has improved. The state is back.”

It’s the same story in Northern Nevada, where exceptionally strong increases in jobs and population provide the fuel for growth in credit unions, said Flannigan.

As credit union members feel better about their jobs, they’re stashing more into their savings accounts. Membership growth in Southern Nevada in the first half of this year, for instance, was 2 percent year-over-year. However, deposits grew four times more quickly. Ditto for Northern Nevada, where deposits grew at twice the pace of the 6 percent increase in credit-union membership.

Increase in Loans

At the same time that Nevada consumers are feeling better, they also need to catch up with investment that they deferred through the recession, Schmidt said. Pent-up demand for new vehicles and home improvement projects supports stronger-than-expected lending in both sectors.
“This is the best lending year we’ve had since 2007,” Schmidt added.

Most credit unions aggressively court new-vehicle loans, working directly with their members and indirectly through dealers whose finance departments offer credit-union financing.

That lending segment has been recovering quickly. New-auto loans on the books of Southern Nevada credit unions midway through this year totaled $171 million, the Credit Union League said. While that’s a long shout from the peak of $486 million in auto loans reached in 2006, it’s more than triple the low of $52 million reported by Southern Nevada credit unions in 2014.

In Northern Nevada, the Credit Union League said credit unions held $118 million in new-car loans at mid-year. That’s a level that hasn’t been reached since 2010 and it’s 84 percent higher than the low of $64 million in auto loans held by credit unions as recently as 2013.

Used-car lending, meanwhile, is up 16 percent at credit unions on both ends of the state, setting new records in the process. In Southern Nevada, used-car loans have reached a record $490 million. In Northern Nevada markets, they total $279 million.

Flannigan noted, however, that automotive lending in Northern Nevada has cooled just the tiniest bit, apparently because consumers are keeping cars longer and trading less often.

However, credit unions are finding all sorts of opportunities in the automotive sector.
One sweet spot for Silver State Schools Credit Union, for instance, has been running targeted campaigns to refinance high-rate auto loans with lower-rate credit union financing, said Scott Arkills, the president and chief executive officer of the $732 million (total assets) organization in Las Vegas.

Growth in real estate lending has been much more measured, although it’s picking up steam in the Reno-Sparks market. That’s not surprising for credit unions that were knocked to their knees by the collapse of the Nevada real estate market during the recession.

First mortgages accounted for $876 million of the loan portfolios of Southern Nevada credit unions at mid-year. That’s a 3 percent increase over year-earlier figures, but the Credit Union League noted that the pipeline of new first mortgages at Las Vegas credit unions on June 30 was down by 2 percent from a year earlier.

In the booming residential markets around Reno and Sparks, credit unions’ first mortgages totaled $309 million at mid-year — the highest ever — and originations in the pipeline were 215 percent ahead of the previous year.

Home-equity lending, meanwhile, shows the same split between Las Vegas and Reno markets.

At $84 million, the home-equity lines of credit on the books at Las Vegas-area credit unions in June were the lowest since 2002. Some relief was promised by a pipeline of new loans that was 34 percent over year-earlier figures.

But, in Reno, the $62 million in home-equity loans that were outstanding in June marked the highest level since 2011 and was approaching the all-time record of $84 million on the onset of the recession in 2009.

New Business Ventures

While car loans and mortgage are the bread-and-butter of credit unions’ lending, some institutions are beginning to venture into business lending as well.

The mid-year report by the Credit Union League found that business loans at Northern Nevada institutions totaled $27 million, while Southern Nevada credit unions were carrying $16.6 million in business loans in their portfolios. Those figures don’t include any loans for business real estate.

Some of the increased business lending by credit unions is a response to the void left by the closure of more than a dozen traditional community banks in Nevada during the recession, explained Flannigan.

“Credit unions have stepped in to become the new community banks,” he said.

Some institutions also view business lending as a natural outgrowth of credit unions’ relationships with their members.

Silver State Schools Credit Union, for instance, is gearing up to begin offering business-banking services with an expected launch in late 2018. Among other factors drawing the organization’s interest, Arkill said, is the number of business owners who are married to the credit union’s historic core membership of teachers and school administrators.

Credit cards, accounting for about $86 million in combined loans at Las Vegas and Reno-area institutions, provide another bit of diversification for credit union loan portfolios, but that sector has been growing at an anemic 3 percent pace in the past year.

Evolving Services

As consumers increasingly move to digital and mobile tools to manage their financial relationships, credit unions consistently invest in new technology.

“In the past year, we have enhanced our online banking and chat feature for members,” said Danny DeLaRosa, Nevada market vice president for United Federal Credit Union. “We’ve also added person-to-person payments and mobile check deposit. We will continue to invest in technology so we can serve our members no matter where they are.”

Although, credit unions are preparing to meet the needs of the future with steps that look distinctly old-school.

Silver State School Credit Union, for instance, will open a new full-service branch at Cactus and Valley View in Las Vegas in mid-2018 and it’s expanding its full-service Serene Branch on South Eastern Avenue.

In Northern Nevada, United Federal Credit Union has added five branches in Reno, Sparks and Carson City since 2014, and DeLaRosa said he expects the credit union’s footprint to grow along with its membership.

Credit union’s new locations don’t always look like branch offices of old.

While the common wisdom holds that today’s financial customers — particularly millennials — want to handle all of their financial relationships on their phones, Arkill said his credit union sees strong traffic from millennials and others in its eight full-service physical branch offices.

At the same time, however, Silver State School Credit Union is outfitting all those branch locations with tablet computers that customers can use to start loan applications or handle other paperwork before they visit with a staff member.

Two new locations opened by WestStar Credit Union in Las Vegas, meanwhile, are teller-less but not employee-less. Employees in the offices that are dubbed “service centers” rather than “branches” help customers open new accounts or begin the paperwork for a loan, but traditional services are handled at ATMs.

“There is still a place in the world for the branch,” said Schmidt. “There is still a significant share of our members who want to connect with a person.”

The double-barreled approach that combines technology with lots of human contact is manifested behind the scenes as well.

Silver State Schools Credit Union is beefing up its data-heavy business-intelligence unit to support better customer-relations initiatives. At the same time, it’s teaching employees to do wide-ranging needs-based assessments for their customers to replace the transactional philosophy of the past, said Arkills.

With roughly 1,000 employees on either end of the state, credit unions have been growing their workforces at about the same pace as the 2.5 percent job growth statewide.

Executives see few clouds on the horizon.

Although the national economic recovery already is among the longest in U.S. history, Arkill said the leaders of Silver State Schools Credit Union expect only a mild recession in Nevada and they believe that it’s more likely in 2019 or 2020 than next year.

In part, that reflects the state’s late arrival to the recovery. The slow restart now delays any overheating that would bring the good times to an end, he explained.

No matter when the expansion cools, Schmidt added credit unions are far better positioned to weather the storm than they were before the recession.

WestStar, rocked by real estate lending that went bad during the recession, has reduced its exposure to long-term realty loans and more closely aligned shorter-term deposits with shorter-term lending.

“We did it the right way and we came out healthy,” said Schmidt.

Still, he is mildly unnerved that talk among economists about the possibility of an economic slowdown might become a self-fulfilling prophecy if consumers become skittish.

At United Federal, DeLaRosa said the strong ties between the credit union and its members allow the organization to thrive in good times and bad.

“We are our members’ partners who help them navigate their financial decisions. We do what’s best for our membership and that way we can continue to serve them with consistency no matter the economic situation,” he said.

Regulations

While a solid Nevada economy buoys strong loan and deposit growth, credit union executives keep a close eye on the potential implications of legislative and regulatory developments in Washington, D.C.

Their biggest concern stems from the efforts of commercial bankers to remove the tax-exempt status enjoyed by credit unions. Bankers contend the tax break gives credit unions an unfair advantage in pricing loans and setting interest rates on savings. Credit unions respond, however, that their organizations’ operation as member-owned not-for-profit institutions justifies the exemption, which has been in place since 1934.

Consumer Finance Protection Bureau rule-making to protect consumers from rapacious financial institutions also keeps credit union executives up at night.

Generally, like in the recent debate over payday-lending rules, the credit union argument has been simple: “We’re different.”

WestStar’s Schmidt explained, “Credit unions in general tend to be so focused on serving their members that the regulators don’t have a problem. We’re already trying to do the right thing.”