The economy has everyone from Wall Street to Main Street on edge these days and Utah’s credit unions are no different. But credit union leaders say their community-focused structure has proven successful for their members during these hard times. Our industry experts discussed residential and commercial lending, including mortgage fraud. They also discussed the pros and cons of government regulation, advances in technology and economic forecasts for 2010.
We’d like to give a special thank you to Scott Simpson, president of the Utah League of Credit Unions, for moderating the discussion, and to Holland & Hart for hosting the event.
Tyler Dabo, Utah Business;
Darrell Kirby, Deseret First Credit Union;
Nathan Anderson, Mountain America Credit Union;
Carl Barton, Holland & Hart;
Kent W. Moore, Family First Credit Union;
John B. Lund, America First Credit Union
Brad Barber, Members First Credit Union;
Lynn Kuehne, Granite Federal Credit Union;
Shelley B. Clarke, Goldenwest Credit Union;
Scott Simpson, Utah League of Credit Unions;
James Hofeling, Jordan Federal Credit Union
The economy has impacted nearly every industry, especially financial institutions. Discuss how the economy has affected credit unions differently than other financial institutions.
HOFELING: I like to use the car crash analogy when discussing the economy. We had enough information coming, since Utah lags behind national trends, that we could see what was going to come and we knew it was coming. And then when it hit, Utahns started panicking, saying, “What just happened?” It was almost as if Utahns thought that the state wasn’t going to have the recession happen here. I think we kind of got shocked after the fact.
MOORE: I think many Utahns were lulled into sleep a little bit. The economy had been so good for so long that people said, “I want to start taking advantage of the appreciated value in the real estate market.” So people were starting to stretch themselves possibly a little bit beyond what would have been prudent in normal terms. And then we hit this crash and everything came tumbling down. All of a sudden, people were finding themselves overextended—in a position that they really couldn’t deal with. Hard decisions had to be made and some people had to say, “I maybe just need to walk away from this.”
HOFELING: I agree. I think most of us in the financial world, including our associates in the banking world, knew the [recession] was coming to Utah. It was just this prolonged wait—but we knew it was going to hit us.
MOORE: The economy was positive for so long, everyone felt like they could make it one more cycle to one more cycle. They thought, “I can turn one more house and I can make some more money.” And then the economy caught up with everyone.
LUND: I was surprised at how fast [the recession] hit. It’s almost like things were fine, and then all of a sudden it was just bad. People were losing jobs and delinquency rates were going up. When it finally hit us, it hit us very quickly and hard.
ANDERSON: As far as the unemployment side of things—we have so many customers who were employed by the housing sector and they were hit hard. Even though those people didn’t necessarily become unemployed, they become under-employed because all of a sudden they were making a third of what they used to make. And that caused a need for them to default on their loans.
HOFELING: The thing that really surprised me is how many people were running for cover, blaming their troubles on somebody else. We heard, “It’s not my fault. It’s not my fault. They told me this. They told me it was going to be good. Yes, I fudged on the application, but that’s because they told me to.” It was always somebody else’s fault. That was disappointing to hear. I expected people to stand up and say, “I was wrong.” But I heard very little of that and a whole lot of, “somebody else told me to.” That disappointed me more than anything else that happened.
How many of you experienced mortgage fraud activity?
KUEHNE: More than straw borrowers or outright fraud, we saw people who built their dream home, hoping that they would sell their home. Now, they’re stuck with both homes.
MOORE: There were people always betting on the economy, hoping that the economy was going to be good. They thought, “I’m going to get that big raise, the house is going to appreciate in value, I’m going to build this house and sell it and make lots of money.” Then the economy just tanked out. People need to realize that usually the odds are not in your favor. You have to measure and monitor risk. Those who didn’t manage risk as closely as others have probably taken bigger hits. We are in the risk business, but we have to manage the risk.
I also think our neighboring states had an impact on Utah. The migration from California, Arizona and even Nevada into Southern Utah definitely hurt us.
KIRBY: I agree, especially in the St. George area, where it’s crept up from Nevada. We’ve seen the impact in the St. George area because St. George is more closely tied to what’s going on in Las Vegas than in Northern Utah. So, we’ve certainly seen the housing impact in that area. Obviously, though, the impact has been scattered throughout the state.
What do you predict happening in 2010? Do you think Utah’s economy will continue trending downward or are we headed out of the recession?
KUEHNE: Normal, everyday folks are going to really start being affected. We’ve observed that some of our members are choosing to not pay their mortgage and are still keeping other things current. In the past, I think most of us assumed that they would pay for their home loan and let their car go or let their credit card go. But they’re hanging onto those things and letting the house go. I don’t know if all these programs have an impact there—that people are starting to think they’re going to get something handed to them eventually. Otherwise, it’s a little nonsensical to let your house go. But we’re seeing it.
LUND: I read that there is a tidal wave of foreclosures that will hit after the first of the year—that many mortgage companies and financial institutions have been holding off, hoping that something will turn. But it just doesn’t look like it’s going to happen. During the first part of next year, I think there will be even more foreclosures. I don’t think we’re at the bottom. There are some positive signs that some things are turning, but as far as the overall economy, I don’t think it’s going to be coming back very quickly.
ANDERSON: You also have the issue of not only those that have held off foreclosures, but you have a lot more ARMs that are scheduled to reset during the first of the year. Part of the problem is that a lot of people who would love to refinance can’t because they are upside down in their homes. They’re not able to refinance. We’re going to see a lot more of those people go into foreclosure as well.
HOFELING: I think we were all a little naive to be surprised there were and are so many people who are willing to walk away from their homes. If you’re upside down in a house, and it’s your first house, and you’ve been raised in an economy where everybody is taking out bankruptcy, why wouldn’t you decide to file for bankruptcy? Some of the older customers grew up with the ethics that bankruptcy was a bad thing. But, we’ve taken that out of society now. Today bankruptcy is not a bad thing. Check with anyone from the younger generations—bankruptcy isn’t a bad thing, it’s a pretty cool thing. There needs to be a stronger punishment for bankruptcies. If there is only an upside, and no downside, then people will keep filing for bankruptcy. It’s like gambling—if I can guarantee a win every time, why would I not play?
CLARKE: I think the big issue that we’re trying to struggle through is: Where is the real value out there? As you look at our inventory, where is the real value on the existing property? There’s a lot of inventory to reevaluate and determine what the price truly is in this market.
How is commercial real estate affecting your credit unions?
LUND: I think as consumers have felt the pinch, they feel less wealthy. The value of their home has gone down, they may have lost their job or reduced the amount of their income, so they spend less. Businesses, then, become impacted in a severe way. So it’s definitely a ripple effect and it’s causing a lot of the businesses to really struggle. Businesses are starting to have a cash flow issue. They just don’t have the cash flow anymore because people aren’t spending.
MOORE: The whole credit market has tightened up on the commercial side. This is pushing credit unions out of the market. It’s left us fewer players in the market which I think is going to make it more difficult for everyone to deal in that market, especially for a borrower to come out. Everyone’s going to have fewer players to deal with.
ANDERSON: I think it also goes back to what Shelley [Clarke] was saying on the residential side. It’s supply and demand. When you have more businesses going under, you have more space available. That causes rent prices to go down, which means more landlords have issues trying to fill their space, which means they can’t make their payments. So you have the same thinking in commercial that you do in residential currently. You’re going to see a lot more supply than there is demand.
CLARKE: From a different perspective, we’re struggling with trying to fulfill our member business loans—just the demand that we have. Our members are being turned away from commercial banking and as they’ve come forward, we have tried to work with them. However, we have caps that prohibit what we can do. And those caps are really limiting how we can serve our member businesses. There are a number of good businesses that can really use our help right now.
LUND: Small business is extremely important to our economy. If we add small businesses all together, they employ more people than any other segment. We have lots of members who own or operate their own business. And they do need services. And we should be there to try to help them. Our niche, as credit unions, is smaller business. Our business, for the most part, is not the huge development-type businesses that are worth millions of dollars. It’s the smaller, sole proprietorships and small businesses that run stores on the corner and gas stations and restaurants and those smaller entities that really do need our help.
BARTON: I just closed a million dollar loan for a federally-chartered credit union and the borrower was ecstatic. They were ecstatic because they were turned down by a bunch of the traditional sources that they were used to accessing and had a long relationship with. We were able to be much more flexible in not just getting the loan done, but in making decisions that banks would never have agreed to make. So I believe there’s definitely opportunity out there. Credit unions, with our size and assets, definitely have opportunity.
Let’s discuss small business a little more. Some of you have been fairly active in SBA lending. What’s your forecast in the SBA world?
HOFELING: We’re not after the big businesses. It’s the smaller people that can’t get the loans who are coming to us. And we do the same with SBA. Most of our business loans are SBA guaranteed. We’ve found that a great niche because it’s a lot easier than it used to be to get an SBA loan. They’re very simplistic and they’re well managed. And they fit credit unions well. They give us the government backing and there are support mechanisms out there. Our members are very, very happy with SBA loans. Once they try an SBA loan, they find out it’s not so bad to do all the paperwork, then they’re happy to have the loan. They’ll come back time and time again. We have the demand out there. And we have people who are getting loans day in and day out. It’s just going through trying to help them do the right loan. And if it’s not the right loan, we’ll tell them. We’re not afraid to say, “No. This really isn’t something that we think you’ve thought out well.”
KIRBY: So often you hear the term “conservative” associated with credit unions. Even though we may be perhaps looked at now more increasingly as an alternative for business loans for small businesses, the credit unions still have to maintain the principles that have enabled them to remain relatively stable all along. And that is, not just distributing loans to anyone, as some of the other types of financial institutions have done over the last several years. Even though credit unions may be seen as an alternative lender, we can be more flexible than other financial institutions. At the same time, we have to hold true to our principles so that we don’t end up in the dire straights that other institutions have experienced over the last year. And like you said, if that means saying, “No, this isn’t right for you,” or “You’re not right for this,” then so be it. I think we need to still hold true to our values and our principles so that we don’t end up where other places have gone in the past year and a half.
BARTON: There are a lot of businesses that just can’t get loans and they’re such a good bet and such a good credit risk, that in some respects lending institutions have less risk if they do the appropriate due diligence to make prudent loans now than they did five years ago. There is this pool of businesses out there that are very credit worthy and no one will give them a nickel.
What about technology? What’s happening with technology now and what do you see in the future?
ANDERSON: I see more and more of our technology dollars being spent on regulation. I think it’s an unfortunate reality. Technology is enhancing what we can do, but when you deliver these products to the member, you now have to make sure you’re complying. So, a lot of your technology dollars will be spent on keeping up with new, more onerous regulations.
CLARKE: We’ve always looked at technology as an expense. We have just changed our strategy in that we’re investing in the future. We realize that we’ve got to ease those burdens that will continue to challenge us, from that perspective. We also believe that it’s going to help us as we look 10 years down the road. So overall, technology is more of an investment versus an expense.
LUND: Staying up to date with technology is extremely important. For example, the youth are so adept at using mobile devices—they’re always using things like Twitter and Facebook—they want access 24/7, wherever they are. So I think it’s important that credit unions continue to focus on technology.
But I also think technology is a double-edged sword. Everyone needs to be aware that it’s through technology that most of the fraud, most of the crime that can really hurt your company and reputation can occur. It’s very important that we do our due diligence with making sure that the systems are safe. It’s also important that we educate our members on how to keep their accounts and their records safe as well. There is going to be more and more responsibility to make sure that we’ve done all that we can in dealing with whatever vendor we deal with—we need to make sure that we’ve checked their systems out, and that they’re safe and secure. While the technology we have can really help us, we need to make sure we’ve covered the security bases.
KIRBY: Credit unions should promote their technology, whether it’s mobile banking or other things that may come along in the coming years, because technology is vital to being competitive. Technology appeals to the younger market, and it’s amazing to see how much communication, how much interaction, how much everything is going toward technology.
HOFELING: Understanding technology and how it relates to fraud is important. I really think that’s one area where credit unions have a leg up. Credit unions have always promoted fraud protection to its customers. In other industries, fraud is a huge problem and they’re just now trying to inform their customers about it. We’ve been proactive warning our customers about fraud for years, telling them to “watch out for this and watch out for that.” I think our members always looked at us as protection against any racquet that’s going out there. And they expect us to tell them, where the other shops are now just trying to find a media way to let people know they’re out there trying to help.
What about social media? Are any of you using social media platforms, like Twitter or Facebook, to reach your customers?
KIRBY: There are some credit unions across the state that are using Facebook and Twitter. What’s difficult about social media is figuring out exactly what you hope to accomplish using it. We could have a Facebook page, but what do we put on there? Who are we trying to attract? Are we just trying to chat with our customers? Are we trying to sell things? What are we trying to do? Some credit unions are farther along in that than others. But I don’t think most of us have a full grasp of exactly what the purpose of social media is and what we can and should do with it.
CLARKE: Another aspect of social media is that it’s all anonymous now. There is no accountability back to who puts what in. And from our perspective, that’s a little frightening.
KUEHNE: I agree. Until there is accountability, from our perspective, why would we jump into that?
BARBER: The whole anonymity of everything has emboldened those who are going to take advantage of those means for improper purposes. We spend a lot of time and a lot of articles trying to convince people of very basic stuff, yet, on a constant and regular basis, people are getting picked off right and left.
A recent situation was people were getting messages telling them that their debit had been shut off. They were told to call a specific number to have it reinstated. When the customer calls the number, it’s an automated message telling them to enter their account number, their current four-digit PIN and a new four-digit PIN. It just floors me the volumes of people that have fallen for this scam. Situations like this make using technology difficult until there’s more accountability and understanding of what’s involved.
LUND: This highlights why we have a responsibility to help educate our members. I think we do a fairly good job of educating them. We tell them to never give their PIN to anybody, for example. I think that the technology, while it has its risks, is a way we have to keep our eyes open because it is a way to connect with that younger generation. And I think it’s a way that the younger generation will check out and validate services that are being offered. Whether we like it or not, it’s there. And where it ultimately ends up, nobody for sure knows. But I don’t think it’s going away.
MOORE: I think we all agree on the importance of technology and what it plays on the financial side of our credit union. I remember when we were first looking at the Internet, there was this feeling that the high-tech Internet platform would mean that we would start eliminating or quit building branches.
I think what we’ve realized is we’re in this transitional state with technology. The consumer loves technology and we have to invest in technology, but consumers still want to see brick and mortar—the stability of the institution by branches. I don’t think you’ll see any institution reducing the number of branches that they have because of technology. Obviously, there have been some companies, some startups that have not had any branches. But those that have branches are not reducing them. Regardless of technological advances, we still have to deal with the people who want to walk in and consummate their loan by signing a piece paper. But we also need to learn to deal with the rising generation that is comfortable with Facebook, Twitter and text messaging. That doesn’t mean that everything is going to go paperless, though it’s been well over five years ago when we closed the first paperless mortgage. But people are still not comfortable with a complete paperless society, or a complete technology society. They like it for aspects of it, but not the completeness of it.
ANDERSON: I think we’re talking about two different things. Technology and social networking are very, very different. On the social networking side of Facebook and Twitter, I think you run the risk of your customers saying, “Get out of here. I come here for socializing. I see you on the TV. I hear you on the radio. I see you on the billboard. I don’t want you here.” If you’re too eager beaver and trying to get into everything, it becomes offensive to some. You have to make sure that you run the balance. And, you’ve got to be able to do your homework first before you use social networking to reach your customers.
KIRBY: We’ve asked ourselves the question: “Why would you go to a social networking site for a financial institution?” And that’s a question we haven’t gotten a definitive answer on. Why would someone go to a credit union’s Facebook page?
ANDERSON: I don’t think someone typically would visit a credit union’s social networking page. Is that the answer
KIRBY: Yes. That’s typically the answer. When we ask that question it’s more in a negative tone of why would you go to this credit union’s Website. We haven’t found a good answer really. Maybe somewhere there is, but we haven’t discovered it yet.
Regulation is a major issue that credit unions face. What’s happened to the regulatory environment over the last few years and what impact does it have on your ability to make loans?
KUEHNE: Regulations are difficult, but almost more intruding in our shop are the suggestions that go beyond the regulations. I think most of us get used to the regulations and comply with them, because we have to. But when the examiners come in and start putting their own personal opinions on how the credit union ought to be run or the limits that ought to be placed on this type of loan or that type of loan, even though you’re well within regulatory limits, it’s very frustrating. I can accept regulation on a different level because it’s come down and been stamped with somebody’s approval. But these other opinions are pretty exasperating, quite frankly, to deal with every time we have an examination.
CLARKE: We’ve come out of a prosperous economy. And now, in this most recent crisis, our industry as a whole is looking at this to make sure it never happens again. So, regulators are encouraging expansion and growth. They’re saying, “We’re not only going to regulate, we’re going to re-regulate.” Some of the flexibility that they’ve given us in the past is gone. Regulators are going to go back and close that gap.
MOORE: The challenge we have is that Congress has chosen to paint the issue with a very broad brush. And there are a lot of unintended consequences that are going to impact consumers. Congress hasn’t realized that this is going to have a negative impact on consumers. When they needed to deal with a specific problem, they didn’t deal with it. Instead, they dealt with the industry when there were those of us who were taking good care of our consumers and members. Despite taking care of our members, we’re going to change the way we do business to comply with new regulations. Congress really did not do a good job of identifying the issue and dealing specifically with it.
KUEHNE: Some of that is not regulation, it’s more control. If you look at the innovations that were done years ago, they were done outside the normal banking stream, money market accounts, etc. They were done because people had flexibility. And what I understand from the new Consumer Financial Protection Agency is that they’re going to determine what products we can offer and how we offer those products. Do you think that’s going to stifle innovation or will Congress become the innovator? That’s where the “control” word comes into play in my mind. And that’s more frightening and more exasperating than regulations are actually.
BARTON: I can tell you that consistent with everything that’s been said, law firms like Holland and Hart all around the country now have new practice groups that do nothing but deal with stimulus bills and all of these new proposed agencies and regulations. It’s just going to add another layer of cost and complexity.
HOFELING: The thing I laugh a little bit at is that we act like this is new. When there’s a problem, we’re immediately going to have another agency created because that’s our political machine. If someone’s going to have a head on the chopping block, there’s got to be another agency to find that head. So we create another level. Every time I hear the word “accountability” back in D.C., I expect another agency will be created.
ANDERSON: The tendency is to regulate to the most recent crisis; therefore, creating the next crisis.
Talk about capital formation today. How long will it take to restore capital back to what you had just two years ago?
HOFELING: The only way credit unions are going to get capital back is to earn it. We can’t go out and get it. We’re going to be conservative, like we’ve always been. We’re going to take the same kind of approach to helping our members, but we’re going to see our capital slowly go up. We’re not going to be able to boost it up because we can’t go out and buy it. So it’s going to be a long path to get the capital back up, even to where we may want to be now.
KUEHNE: I agree. And it will impact our competitive nature in the area of savings accumulation—the pressure to add to capital ratios. It seems like it might have some impact on keeping saving rates down a little bit. We’ve always been able to be above the banking industry in those areas. But depending on the approach somebody takes, whether they’re aggressive in regaining that capital position or if they allow it to take five or 10 years, I think it will have a competitive impact.
CLARKE: Utah credit unions are still very well capitalized in comparison to the nation. I do know that there is some movement going forward for alternative capital, member-owned capital, that would allow us to perhaps support our growth a little more aggressively versus slowing our growth and managing it through membership. Overall, I think it’s going to be a long fight.
ANDERSON: The necessity to have capital available is going to continue to grow as more credit unions aren’t able to survive and need a merger partner. It’s going to be a dilution on the capital of any credit union that might help out. And if we don’t give them the opportunity to do so, it’s going to be a drain on everybody because of the assessments as more and more institutions do fail. And, obviously, it’s going to be more and more of a cost that will be a further dilution of capital. So it’s a cycle.
MOORE: One of the challenges in managing a credit union is the opinion of the regulator. Some regulators are encouraging us to find our own strategy to grow out of this. Other regulators are saying that we can’t grow because the way mathematics work, so they want us to reduce our asset size to make the ratios look better—they’re focused only on ratios. I’ve even heard the examiners fight among themselves, saying, “cut your assets,” “don’t grow,” “you need to grow out of this.”
We tend to get caught in the middle between the opinion of regulators. And we can create net worth restoration plans, strategic plans, but if the regulators don’t buy off on our net worth restoration plan or you get somebody that disagrees with your opinion, we’re going to continue to have struggles with the regulator. And then how much capital is enough to get to those plateaus identified in the regulation?
What about human resources? How are you dealing with employee-related issues today?
CLARKE: I think there is a lot of talent out there now. Our challenge has been to maintain a culture that’s proactive and positive through what has been a very, very difficult time. Company culture is where our focus has been. We’ve made sure that we still have fun. We’re still even paying bonuses. It might not be what employees have enjoyed in prior years, but they’ll receive a bonus this year. We have not eliminated any of the extracurricular fun that we have within the credit union. We’ve basically said to our employees, “No one will lose their job at Goldenwest. We will manage through this.” And we’ve been able to live up to that.
HOFELING: Three years ago, when we announced a teller job opening, we maybe got three job applications. Now we have more than 50 applications come in and they’re better qualified.
KIRBY: I think employees are starting to realize that we’re all in a tough situation and they’re doing a great job. They realize that resources are limited and they’re still going above and beyond. So in some ways, we’re able to do more with less. Our employees and their hard work have certainly helped us cope with a negative situation.
What do credit unions offer the community that other financial institutions cannot offer?
LUND: Credit unions have a very unique structure. Our structure is such that we make decisions not on what will increase the value of the stock price, but what will increase the value and service to those that we serve. We exist to serve our members—and that’s not just a saying—that’s reality. We make decisions that make our members lives better by improving their financial well being. And I think we have a responsibility to hold true to that philosophy. And if we do, credit unions will have a significant impact on the community.
CLARKE: I think we offer our customers a peace of mind. And I’m sure other financial institutions are doing the same for their customers, but I believe credit unions really bring peace of mind to our members. Many have been concerned about their life savings and we’re here to help them, to give them a peace of mind that their money is safe. I’m really proud of Utah’s credit unions. We’re all investing the time and energy to make sure members are comfortable.
ANDERSON: I think part of that, too, just goes back to financial literacy. Whether it’s educating people about fraud and how to protect themselves or other education. As a movement, credit unions have always strived to educate people, help them understand, help them become more informed so that they can take an active role as opposed to taking the mentality that I’m a victim.
MOORE: One of the things credit unions probably could do a better job of is combating our reputation. Our competitors paint us in a negative manner. While we offer the same services that banks do, we need to educate our people that there is a structural difference within credit unions. Specifically, there is the capital issue—we can’t go out and generate capital. So what I think we bring to our cities and towns and society is that we focus in on our members and serving our members and providing the best product for them, where some of our competitors are focusing on returns to investors. And their customers are not always their investors. So they’re not necessarily focusing on the customer.
CLARKE: Simply said, credit unions are a natural cooperative, owned and operated by our members. Banks can’t claim the same thing. While the economy is somewhat gloomy, the bright light of the credit union is strong.
KIRBY: The economic situation has forced credit unions and other financial institutions to deal with several issues, but it’s also presented an opportunity for credit unions to get back to the basics of who we are, what we offer, what we do and why we are different than other financial institutions. So it’s getting back to our core message, yet at the same time it’s advancing our message into new areas that have sprouted from this downturn in the last couple of years.