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Solid Growth Throughout the Downturn

After rolling up customers and assets during the worst of the financial crisis, Alabama credit unions navigate further Dodd-Frank implementation with a slight advantage on banks.

Dodd-Frank regulations can be a blessing in disguise to credit unions, according to Alabama Credit Union CEO Steve Swofford.

Dodd-Frank regulations can be a blessing in disguise to credit unions, according to Alabama Credit Union CEO Steve Swofford.

After adding 40,000 newcomers in 2013, Alabama’s credit unions now have 1.9 million members — more than they’ve ever had. Since 2008, during some of the worst years for financial institutions in U.S. history, Alabama credit unions have added 150,000 members and grown assets from $13 billion to $18.3 billion, according to the League of Southeastern Credit Unions (LSCU).

So how is it that Alabama’s 120 credit unions — tiny compared with the state banking industry — continue growing? How can these little guys survive with total assets that are roughly 10 percent of those at the state’s two largest banks?

It’s a combination of factors, credit union leaders say, that includes a surprise twist from the Dodd-Frank regulations, dialed-in grassroots marketing efforts and creating income through innovation and increased technology.

Dodd-Frank applies to credit unions as well as banks, but the legislation’s Durbin Amendment impacted banks more than credit unions, according to Steve Swofford, president and CEO of Tuscaloosa-based Alabama Credit Union and board chair-elect of the LSCU. “The Durbin Amendment changed how financial institutions are paid when (debit) cards are swiped, and that affects credit unions to a lesser extent than it does banks,” Swofford says.

“As the banks’ income was reduced on the (debit card) exchange, they ultimately had to increase fees on checking accounts and other things, which might have made their products less attractive. Changes in the banking industry — mergers, consolidations and a lot of the new rules that have impacted them maybe a little bit more than credit unions — caused consumers to look around for options. As they look around, more and more of them realize they can join a credit union.”

Swofford says the very structure of member-owned credit unions and their customer service are crucial to success. “Our customers are owners of the credit union, and that’s a big, big deal,” he says. “And at most credit unions, I think great customer service is still a huge deal. I think personal service is a differentiating factor between us and banks.”

While credit unions are allowed to recruit more members than in the past, their markets are still defined by a limited geographic area. That provides strong opportunities for community-based initiatives that help enhance the credit unions’ reputation in their local markets.

In March, for example, the Auburn and Alabama baseball teams met at Montgomery’s Riverwalk Stadium for the MAX Capital Classic, a regular season, non-conference game between the two schools. For the sixth year in a row, the game was presented by Montgomery-based MAX Credit Union.

Alabama won this year’s game 4-3, but MAX Credit Union also notched a victory by virtue of its association with the popular event. MAX Credit Union and others throughout the state are involved with programs that raise money for cancer, college scholarships, feeding programs for needy school children, financial education and any number of other activities aimed at improving lives in local communities. 

League of Southeastern Credit Unions  CEO Patrick La Pine says small business lending is a key credit union niche.

Photo courtesy of LSCU

Jim Mitchell, president and CEO of Army Aviation Center Federal Credit Union (AACFCU) in Daleville, says that developing community relations programs, especially those aimed at students, has been the biggest innovation at his credit union since 2008. “AACFCU believes in our youth and giving back to our community has substantially helped our continued growth year-after-year,” Mitchell says.

Some credit unions also have grown through increased commercial lending. MAX Credit Union, for example, didn’t do commercial lending a generation ago but now has a $118 million commercial-loan portfolio, more than 20 percent of its loan total.

According to LSCU President and CEO Patrick La Pine, “Credit unions are doing more commercial lending because there is a niche there to be filled. Our loans are truly for small businesses, under $250,000 and often under $50,000. There’s really a niche in there for us, because the banks don’t want to make a loan under $1 million. There’s a lot of room for us to help those small business owners.”

Merrill Mann, president and CEO of APCO Employees Credit Union in Birmingham, says that using technology has been a major plus for his members. Other credit union leaders concur.

“Since we are a relatively small financial institution ($2.5 billion in assets) compared to some of the big banks, we’re using technology to help level the playing field and remove barriers to doing business with us,” Mann says. “And we’re using social media to communicate and get our message out more effectively.

“The most innovative thing we have done in the past five years is to introduce online mortgage lending. What used to be a burdensome application process can now be completed in 20 minutes or less. You can now apply from the comfort of your home, and your disclosures are provided electronically. It’s simple for everyone. Our members have embraced the online lending channel, and our loans are growing.”

Adds Greg McClellan, CEO of MAX Credit Union in Montgomery: “We upgraded our online banking system last year, and one of the reasons we did that was to gain more access to mobile banking. We have that; we have remote deposit capture for both the consumer and commercial side. Mobile is definitely the way of the future. We’re at the point now where the consumer is going to dictate how they do business with you, and if they want to do it electronically, that’s what they’re going to do. If you don’t provide that service, you’re going to be left behind.”

Staying abreast of the latest in mobile payment systems also is a must. “Mobile payment systems will be more and more of a concern moving forward, because, especially with younger people, they don’t care if they go through a bank or Amazon as long as they get the transaction done and get whatever goods they purchased,” McClellan says. “So it’s going to be challenging and possibly will impact the revenue of financial institutions in the future.”

Members at America’s First Federal Credit Union in Birmingham have rapidly adopted smart phone technologies, according to Bill Connor, president and CEO there. “We added mobile banking several years ago and introduced mobile check deposit to our membership last year,” Connor says. “We have seen steady growth in the adoption of both of these offerings and continue to study the marketplace as it relates to mobile payments and digital wallets so we can introduce services and technologies relevant to our membership.”

Merrill Mann, president and CEO of APCO Employees Credit Union in Birmingham, says his members have embraced new technology.

Mann says that APCO Employees Credit Union is “aware of mobile payment developments in the past five years, and we realize there will be fierce competition with the big boys (such as Apple and Google). Consumers will declare the winner in how the multibillion-dollar payment systems will go. We plan to grow our checking accounts, where items will continue to clear, and partner with whoever the winner(s) are in this competitive field,” he says.

Although credit unions caught a break with the Durbin Amendment, they have still been inundated with regulations stemming from the recession. Moving forward, they have more than enough to be concerned about. “Only about half of the Dodd-Frank regulations have been implemented, so there’s still a lot to come down the pike,” LSCU’s La Pine says.

Of particular concern is a National Credit Union Administration proposal that would increase required capital levels. “In my opinion, that’s the biggest issue facing credit unions at this time,” Mann says. “Since credit unions are only able to increase capital by retaining earnings, this could be a real challenge for most credit unions and their members should this proposal become a regulation.”

“It’s ill-timed to come out with a tighter, stricter standard for capital that even exceeds what is required of banks,” Swofford says.  “I’m concerned that it will have an impact on our ability to grow at a time when consumers are looking to us as a viable option to the for-profit sector. If we have to build capital to a higher level, we either have to pay fewer dividends to share accounts, raise fees or interest on loans or just stop our growth for a while so capital can build up to the level that’s required. That’s just the wrong thing right now.”

The comment period on the NCUA proposal expires in late May, and the NCUA board will conduct “listening sessions” this summer to solicit input from credit unions. Mann expects a final regulation will come out this fall and become effective at some point down the road. Says Swofford: “I think something is going to wind up in place; I’m just hoping it won’t be burdensome.”

On top of higher capital levels, credit unions are dealing with data security issues with other financial institutions and retailers, and they’re grappling with time-consuming new regulations on mortgage lending. And last but not least, there’s the never-ending feud with banks.

So, can we also expect banks to continue lobbying to repeal the credit unions’ tax-exempt status? 

“Oh, absolutely,” Swofford says. “Absolutely. And if we were to ever lose our tax-exempt status that would have a devastating impact on the credit union movement.”

Charlie Ingram is a freelance writer for Business Alabama. He lives in Birmingham.

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