Holding Their Own

Georgia’s credit unions, with money to lend, are seeing growth, but bracing for tougher times ahead.

From the windows of their airy and plush offices in Duluth, employees of Delta Community Credit Union can see the building that once housed Haven Trust Bank. The red and blue logo still adorns the top of the otherwise nondescript structure near the intersection of Sugarloaf Parkway and Satellite Boulevard in Gwinnett County.

The bank, seized by state and federal bank regulators last December, serves as a cautionary tale for the neighboring credit union, the largest headquartered in Georgia and among 172 across the state. As Delta settles into the 10,000-square-foot branch it opened in February, the site of the nearby Haven Trust building is a constant reminder that although

Delta experienced healthy growth last year, its fortunes are linked to an economy mired in a recession and consumers pulling back on their spending. Haven Trust, the nation’s 24th bank to fail in 2008, also was among seven Georgia banks forced to close their doors since late last year.

Delta officials, although concerned about the impact of a lengthy recession, remain optimistic, and they do so with good reason. The credit union grew its membership to more than 183,000, adding nearly 11,000 to its rolls last year. Assets grew by 12 percent to $2.9 billion on the strength of impressive gains in deposits and loan originations.

“I have a lot friends that have known I’ve been in the credit union business for a lot of years,” says Todd Marksberry, executive vice president and chief operating office for Delta Community Credit Union. “With all of the things going on in the marketplace, everyone would come up and ask me how things are going. My response is that it’s a great time to be a credit union. While a lot of folks had portfolios that were contracting and really backing off in terms of lending activity, we were having a great year.”

The credit union, chartered in 1940, built itself by serving employees of Delta Air Lines, but has expanded its field of membership to include 11 counties in Metro Atlanta. With a base of several thousand customers in Gwinnett, Delta worked to double its branches to four in the county by opening the expansive Duluth branch in February; a facility inside a Snellville Kroger will open this summer.

But the financial institution couldn’t ignore the realities of the economy, despite its strong growth last year, so it trimmed plans to expand its 18 branches even further. Loan delinquencies rose nearly 60 percent in 2008 from a year earlier, though they remain at less than one percent of Delta’s overall loan portfolio. Its members also are asking for more help, including loan modifications, forbearances and deferrals.

“We are going to continue to manage our balance sheet wisely and prudently. Our challenge in 2009 is to make sure that we make smart decisions for the future viability and sustainability of our franchise. We’ve always been conservative, historically speaking, but not risk averse by any means. In some cases a slow follower, but typically not necessarily a leader as far as product types or new things,” Marksberry says.

Challenging Environment

Credit unions across Georgia, which hold nearly $13 billion in assets for their more than 1.7 million members, are seeing smaller margins and boosting their loss reserves as they brace for increased loan delinquencies. But they aren’t facing the same challenges from troubled mortgages and commercial development loans that tripped up some community banks and forced larger institutions with a footprint here to fail or swallow large federal bailouts.

The Georgia Department of Banking & Finance maintains an industry watch list of troubled credit unions, as it does for banks, but it hasn’t grown significantly larger as the recession continues.

“Credit unions are not experiencing the downturn that so many banks have and they have not had the impact on their loan quality like the banks have had,” says Rob Braswell, the banking department’s commissioner.

“But the downturn in the economy will create a challenging environment for credit unions for the next year. Consumers are spending less and saving more, which is good. On the other hand, there are less car loans they may seek and less purchases that will need funding.”

Credit unions in Georgia can fail, although the last state-chartered one to close its doors was Atlanta-based Cleaners Credit Union in 2004.

Much like bank accounts, credit union accounts are insured for up to $250,000 by the National Credit Union Association, a federal agency similar in some functions to the Federal Deposit Insurance Corporation, which insures bank deposits.

Most credit unions avoided the subprime housing loans that turned toxic for many banks and employ more conservative lending guidelines. But because credit unions tend to focus on consumer products, including home equity, auto and signature loans – federal law limits their business loans to 12.25 percent of assets – they could find trouble lurking behind increasing unemployment and reduced consumer spending. Unemployment in the state reached 8.6 percent in January, the highest rate in a generation, meaning more Georgians are losing their jobs and their ability to service their debt. This could spell trouble for the state’s credit unions in the months ahead.

“My concern is that some of the issues haven’t come out. It is hard to give them too much praise when we are still going through the cycle,” says Christopher Marinac, managing principal and research director for FIG Partners, an Atlanta-based financial consulting group. “We went through a difficult year in 2008, but there is every reason to believe 2009 will be the same if not worse. You can’t sugarcoat it.”

A Long History

It was in 1922 that Atlanta attorney E. Marvin Underwood drafted legislation to create credit unions after hearing convincing arguments from a visiting Boston businessman. The Georgia General Assembly passed the legislation three years later and credit unions quickly followed, including Atlanta Postal Credit Union in 1925, which has grown into the state’s second-largest credit union by assets; Floyd County Postal Employees Credit Union and Pinnacle Credit Union were established in 1926.

Credit unions are member-owned, not-for-profit organizations that serve a field of membership, which often means specific employers, faith-based groups and well-defined communities such as counties. While banks form by pooling capital from outside investors who receive stock in return, a relatively quick way to launch in prosperous economic times, credit unions may take years to raise the reserves from interested parties needed to form. The last credit union to receive a state charter, Macon-based Georgia Guard Credit Union, did so in 1997, an indication that most employers or affinity groups find it easier to attach themselves to an existing one.

“It takes years and years to build enough reserves so you are off and running by yourself,” says Mike Mercer, president and CEO of Georgia Credit Union Affiliates, the state trade association for credit unions. “Small businesses can’t sustain a credit union when you have 45 employees, so they attach themselves to an existing credit union and get access to all of the latest services and branches.”

In fact, credit unions say their generally strong performance in 2008 and in the first quarter of 2009, as some banks and financial institutions withered, is due in part to the difficult process to charter new competitors. They also are helped by the distractions faced by large financial institutions and a barrage of negative media attention questioning the stability of banks. Having the likes of financial gurus and popular consumer advocates including Suze Orman, Clark Howard and Dave Ramsey preach the attributes of doing business with credit unions doesn’t hurt, either.

“Five years ago, if people didn’t already belong to a credit union, they figured they weren’t eligible to join one or use one. Today, all that is going on is erasing that and people are aware they can get access to a credit union. Whenever they get worried about their personal finances and can’t get help where they do business, credit unions are what they are hearing about. It is a shame that this awareness is growing at a time of economic stress. It is not pretty out there,” Mercer says.

In other words, consumers are taking a flight of safety to credit unions, which are open for business with money to lend.

The Geography Factor

Credit unions also are growing by expanding their geographic footprint, as Delta did, or by merging with another institution. That’s the case for DOCO Regional Federal Credit Union, an Albany-based institution that last year merged with Southern Traditions Credit Union in Toccoa. The deal established DOCO as the largest credit union headquartered in south Georgia and moved it onto the list of 21 credit unions in the state with assets above $100 million. While DOCO added nearly $42 million in assets to its $85 million total, increased its membership to more than 36,400 and expanded its branches to 11 in two states, the merger also meant DOCO inherited loan delinquencies and ensuing charge-offs from its acquisition.

“Every financial institution certainly wants to grow, and we were growing about 12 percent a year in assets and nine percent in membership,” says Barry Heape, DOCO’s president and CEO. “We knew there were some issues and once we get through them, we will be fine and have $42 million growth. It was a good fit and we didn’t want those members to go to a bank.”

The realities of the current economic climate can be seen in two ways at DOCO.

Though south Georgia hasn’t experienced the decline in home values and increase in foreclosures to the extent seen in Metro Atlanta, the region is feeling the pinch of job losses and a stalled economy. That translates into more troubled auto loans; a credit union used to seeing five repossessions in a year is now dealing with five or more a month. DOCO, which is celebrating its 50th anniversary in May, recently hired an outside agency to assist with collections, a first in the credit union’s history.

But the financial institution also added a commercial lender to support its growing portfolio of small business loans, seeing an increase in the last 18 months from owners pushed out of their long-standing relationships with banks. The loans, either existing loans taken from other institutions or ones granted to start new small business projects, now account for about 10 percent of DOCO’s $100 million loan portfolio.

“We are hearing from more and more small business owners that say banks are calling in their loans. The banks are just trying to get rid of them – that’s what we are seeing. The economy is a big part of why we are seeing folks come to us, but it is the commercial loans as well. The banks are refusing to lend to them and we have money to lend,” Heape says.

Atlanta-based Georgia’s Own Cred-it Union, launched with $160 from a group of telephone company employees in 1934, utilized a more organic approach in growing into the third-largest credit union in the state. By slowly expanding its geographic reach – including the addition of Forsyth, Hall and Rockdale counties last year – the credit union celebrates its 75th year with more than $1.24 billion in assets, 121,000 members and 18 branches in metro Atlanta and Savannah.

While loan delinquencies and charge-offs are up, they remain well below industry averages for banks as assets and loan volume recorded double-digit growth in 2008. A conservative approach to managing the financial institution and its lending guidelines, like many credit unions in the state, leaves Georgia’s Own in a position to gain market share during the economic downturn.

“Where a lot of financial institutions really don’t seem to have the money to lend in the mortgage area, we have taken advantage of that and we’ve had quite a few members refinance with us and we are even seeing new purchases out there,” says Charlotte Ayers, president and CEO of Georgia’s Own. “In the financial industry, a lot of the mortgage money has dried up. We are certainly taking advantage of that.”

Credit unions also argue that their appeal draws strength from their origins of serving what’s in the best interests of their members, not the interests of detached investors and stockholders. That often means a conservative line of mortgage loans and consumer products served with a generous helping of customer service.

That approach helps North Georgia Credit Union, with 5,700 members in Stephens and Franklin counties, slowly expand its roster of 105 employers and grow its $35 million in assets. Last year, the credit union’s six percent growth in assets and deposits helped it weather an uptick in loan delinquencies.

“A lot of our folks are blue collar workers. When they lose their jobs, the payments will stop right away and you have to be ready to work with them. It is hard to convince consumers to spend money when they don’t know if their next paycheck is coming or not,” says Brian Akin, North Georgia’s CEO. “We feel like we are ready to handle what’s coming. I just wish we had that crystal ball to know what’s coming.”