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financial

Credit unions grow membership, revenue

Like many other industries, credit unions in Arizona are bouncing back from the economic downturn.

Credit unions, which are similar to banks in the products and services that they offer except at a slightly lower cost, are taking advantage of consumer disenchantment with big banks to attract new members. According to a recent National Credit Union Administration report, through the first quarter of 2012, credit unions around the country combined for a record 92.5 million members.

“As local, member-owned financial institutions, credit unions are simply doing what they have always been good at,” said Scott Earl, CEO of Mountain West Credit Union Association, a trade organization of credit unions across Arizona, Colorado and Wyoming. “They have a long history and reputation for providing excellent member service, financial education and a wide variety of financial services to fit their members needs. The recent increased recognition of these qualities and the progress credit unions have made is establishing their success as an industry.”

Nationally, credit unions generated $2.1 billion in profits and added 667,000 new members in the first quarter of 2012, a 25 percent spike in profits compared with a year earlier. Most large Arizona credit unions — including Desert Schools, TruWest, Arizona State, Credit Union West and Arizona Federal — saw profits roughly double in the first quarter of 2012, compared with earnings from a year earlier.

“The word ‘profit’ is a bit of a misnomer,” said Paul Stull, senior vice president of strategy and brand for Arizona State Credit Union. “Credit unions do have net income. However, all credit unions are not-for-profit cooperatives. The net income or funds available after expenses are paid become part of a credit union’s capital or are used to build new branches, purchase new technology or offer additional services.”

Something that Arizona State Credit Union added recently were construction loans to its home loan portfolio in anticipation of an improving economy, as evidenced by the 27 percent growth of new home sales in the first quarter, compared to the prior year.

The construction loan program allows members the opportunity to lock in their mortgage rate early and avoid the possibility of fluctuating rates during the construction phase. Additional perks to this all-in-one loan include needing to only qualify once, signing one set of loan documents and paying one set of loan fees for both the construction-phase financing and permanent mortgage.

“As a local financial cooperative, the Credit Union is proud to offer low rates and flexible terms on a product that few financial institutions are offering,” said David E. Doss, president and CEO of Arizona State Credit Union. “We are excited to add construction loans to our home loan options as it is one more way we can assist members residing in the Arizona communities we serve.”

A J.D. Power and Associates study this year showed that consumer backlash against fees and the perception of poor customer service from some of the bigger banks have caused some consumers to switch to credit unions, whichunlike banks, which are run as private businesses seeking profits, operate as nonprofit entities and are technically owned by their members.

“Generally credit unions offer lower fees and better interest rates than banks,” Stull said. “This is one reason consumers may come to a credit union. We also see many people that switch because they want to do business with a local financial institution that is based in Arizona. Our deposits are returned to the community in the form of loans than in turn grow jobs and economic development in the communities we serve. Many consumers have made a choice to support local businesses, and credit unions are a great example of that.”

While credit unions never issue subprime mortgages, which many experts blame for helping lead the nation into the recession, credit unions did get hit with the impact of the failing economy. One lesson Earl said they learned: Innovation.

“Learning to manage resources while providing increased quality of services through the recession has challenged the way credit unions approach problems,” he said. “Increased creativity and credit union technology are some of more positive lessons for the long term.”
In addition to lower fees and increasing efficiency that is resulting from lessons learned in the wake of the recession, Stull said credit unions offer free financial counseling, will help members create a budget to manage their funds, and Arizona State Credit Union’s Home Affordable Refinance Program has allowed homeowners who owe more than the house is worth to refinance and reduce their payments.

“Choosing a credit union is a win-win situation for consumers,” Stull said. “They can get a better rate or lower fees to help them stretch their budgets, and they can benefit their community by doing business with a local financial cooperative that helps create jobs and grow the local economy. You get a good deal and you can feel good about helping your community, too.”

Credit Unions Big Boose to Small Business - AZ Business Magazine September/October 2011

Credit Unions Could Be A Big Boost To Small Business

Every week while driving to work I notice an increasing number of empty store fronts. A local restaurant, boutique or consulting firm that was there last week, is no longer there today. It makes me wonder how many of those local small businesses could have survived had they applied and been approved for a small business loan at credit unions.

According to the Arizona Small Business Association, there were just about 381,000 small businesses in Arizona in 2008. Think about how many more small businesses there could be if Arizona’s 49 credit unions had the ability to increase their business lending and offer new business loans.

Think about how many jobs that could create. Now think about the potential positive impact that could have on our economy.

Eighteen Arizona credit unions, about a third in the state, provide member business loans.

However, the current statutory cap is set at 12.25 percent of assets.

Many credit unions have refrained from entering the business lending arena because the 12.25 percent cap prevents them from earning sufficient income to cover the cost of starting up and maintaining a business lending portfolio.

Legislation in the Senate, S 509, has been introduced by Sens. Mark Udall  (D-Colo.), Olympia Snowe (R-Maine) and Charles Schumer (D-N.Y.);  and on the House side, HR 1418 introduced by Reps. Ed Royce (R-Calif.) and Carolyn McCarthy (D-N.Y.). If passed, both bills would increase the business lending cap to 27.5 percent of current assets.

If enacted, legislation raising the current statutory cap of credit union small business lending (from the current 12.25 percent of assets to 27.5 percent of assets) could result in $13 billion in new lending and 140,000 new jobs in just the first year nationwide and $144 million in new lending and 1,600 new jobs in Arizona, according to Credit Union National Association estimates.

“We hear from business owners all the time that have solid plans and want to grow, but the big banks won’t even talk to them,” says Paul B. Stull, senior vice president Strategy & Brand for Arizona State Credit Union. “Increasing credit unions ability to lend to these businesses is needed now more than ever. We can get the economy moving again, but the current economic gridlock is holding us back.

“Local financial institutions, like credit unions, know our markets very well. We understand Arizona and we know how to make Arizona loans for Arizona people.”

The unique benefit to this legislation is no U.S. taxpayer dollars would be needed; nor would any new government programs need to be created.

When other lenders pulled back during the financial crisis, credit unions stepped up to the plate and continued to lend. And even though credit unions are the only financial institution imposed with a statutory cap, member business loans have grown 3 percent in Arizona over the past year, compared with other financial institutions which have decreased an average of 7 percent. Many credit unions, however, may soon be approaching the statutory cap of 12.25 percent of current assets.

The average credit union small business loan in Arizona is $220,000; these are indeed loans to small businesses. With so many local small businesses struggling, these loans are increasingly necessary to support our local economy so it can once again thrive.

With less than 2 percent of the market, it’s important to note that credit unions pose no threat to commercial banks. Small businesses are often turned away from commercial banks because they are too small. This is where credit unions have the ability to fill in the gap.

Credit unions have a long history and good track record with their members of making small business loans, and making them prudently.

Since 1997 the net charge off rate for credit union small business loans in Arizona has been roughly one-fourth the average of other financial institutions (0.23 percent vs. 0.93 percent), and in 2011 averaged 70 percent of other financial institutions (0.91 percent vs. 1.29 percent).

Treasury, Obama Administration and our federal regulator, the National Credit Union Administration, are all in favor of this legislation.  Those standing in the way are only impeding a path to sustain the growth of local economies by supporting small businesses and the jobs that they bring to our communities.

“Arizona needs jobs, businesses need loans to grow and now is the time for Congress to increase credit unions ability to meet those needs,” Stull says. “This is a quick fix to create jobs at no cost to the taxpayer. We are asking Congress to prove their commitment to growing jobs and this is one piece of legislation that does just that.”

For more information about credit unions, visit www.azstcu.org.

 

Arizona Business Magazine September/October 2011