Credit union commercial lending could surge in the wake of coronavirus
The coronavirus crisis could open up opportunities for credit unions to gain members and eventually market share.
Credit unions, in general, tend to be more risk-averse than other lenders, which puts them in a good position to continue making loans when a crisis strikes. That was seen roughly a decade ago after the Great Recession, and the industry was able to pick up business in areas such as mortgages.
Now the pandemic has wreaked havoc on much of the U.S. economy. A record number of Americans have applied for unemployment benefits, and small businesses have sought out financial institutions for loans to help them stay afloat. Credit unions could seize on this, especially in commercial lending.
“A good chunk of consumers are anxious and concerned about their financial health and what will happen,” said Mary Beth Sullivan, managing partner at consulting firm Capital Performance Group. “Price-based offers are still important, but need to be executed around a real game plan of, ‘We are here to help you.’ Those are the messages that resonate right now.”
Two factors helped position credit unions for success in the years following the housing collapse. Not only did banks take the brunt of the blame for causing the crisis, but the entire industry’s reputation suffered a significant hit that took banks years to recover from.
On top of that, credit unions were better positioned to help consumers in those post-recession years since they entered the crisis with stronger loan portfolios. At the peak of the last recession, commercial bank delinquencies reached 4.85% while this rate for credit unions was just 1.84%, according to Meridian Economics.
The delinquency rate for credit unions was 0.71% at the end of 2019, better than the 0.93% recorded in December 2007, according to data from the National Credit Union Administration.
“When things go bad, credit unions aren’t nearly as adversely affected as everyone else because they have a lower risk profile going into it,” said Bill Hampel, a credit union consultant and economist. “Their need to react to stem losses is much lower.”
As a result, credit unions gained market share in key areas. For instance, mortgage originations for the industry were less than 2% of the overall total in 2007 but had jumped to 8.7% by mid-2018, according to the Credit Union National Association.
Credit union consumer loans have grown by 117% since 2011, compared with overall consumer loan growth of 52%, according to data from Meridian Economics. That means the industry has increased its market share from 8.1% to 11.5%, according to the firm.
However, the coronavirus crisis will be different, experts said. For one, banks’ reputations have improved in the years since the recession. Last fall the American Customer Satisfaction Index found banks had a higher overall score than credit unions — the first time that has happened since the company started tracking CUs in 2008.
The situation now also isn’t related to the financial system. Instead, the economic pain is from officials closing businesses and issuing stay-at-home orders in an attempt to stop the spread of a global pandemic. Because of that, all financial institutions, including banks, entered the crisis in a healthier position. That means there is less chance for credit unions to pick up market share.
Still, there are opportunities in areas such as lending to small businesses, many of which have taken a hit as customers slowed their spending. Many businesses have scrambled to find funding through initiatives such as the Small Business Administration’s Paycheck Protection Program to stay solvent.
Credit unions have lobbied Congress to temporarily lift the cap on member business lending, though it appears only a handful of institutions are at risk of hitting it.
“The one place I think there will be opportunity for gains is in business lending,” Hampel said. “A dozen years ago, credit unions were sort of just getting into it. … Credit unions have since ramped up operations and are now able to expand their business lending. That’s the one sector that is likely to be hurt the most this time around on the credit side.”
Desert Financial in Phoenix, Ariz., is working to meet the needs of local businesses by partnering with the city of Tempe, Ariz., to provide up to $1 million in emergency microloans, priced at 4% with individual loan amounts ranging from $5,000 to $20,000.
Though the loans are guaranteed by the city, the $5.4 billion-asset institution is charged with administering the program. Management expects to break even, if “things go perfectly,” said Jeff Meshey, president and CEO.
Instead of viewing the program as a way to make money, Desert Financial is looking to help business owners when they need it most, with the hope that they will become loyal members in the long run.
“The bonus is gaining the relationship,” Meshey said. “It’s getting the personal business of the owner if we didn’t have it before. They are telling their family and friends about us, and that’s the best advertising.”
Right now small-business owners face a tremendous amount of stress, so anything an institution can do to help provide some relief will go a long way in building loyalty, Sullivan said.
Derek Saidak, chief lending officer at ORNL Federal Credit Union in Oak Ridge, Tenn., has heard from some business owners who were frustrated with how other institutions were handling their PPP loan applications. The $2.4 billion-asset credit union partnered with a third-party vendor to improve its own PPP application process.
“I was in the banking world in ’08 and I saw how banks were taking care of clients,” Saidak added. “It wasn’t as friendly as the credit union space, and I would think the same would hold true again.”
This same strategy of emphasizing a desire to help can work on the consumer side as well, Sullivan said. For instance, providing targeted messaging and offers around products that aid members during this difficult time is one way to go. That could include highlighting tools members can use to help save or manage their money, working on debt consolidation or helping consumers refinance high-interest auto loans to lower their monthly payments.
“People are worried about their physical and financial health,” Sullivan said. “Community matters right now. People are turning to help their local communities, which can include credit unions and community banks.”
ORNL has launched a special refinancing program specifically for first responders and health care workers. The credit union is waiving origination fees, usually about 1% of the loan total, for mortgage refinancing and home equity lines of credit. Consumers can also get a discount for refinancing a boat, RV or auto loan.
The program was developed as a way to recognize “folks that have gone beyond the call of duty,” Saidak said. But it also hits upon the theme of community while building stronger relationships with current members and even reaching new consumers.
“From a relationship standpoint, we are hoping that it entrenches our existing members and their feelings for ORNL,” Saidak said. “Likewise, if they don’t currently bank with us, maybe it gets us a new relationship to work with.”