By Ray Birch
DUBLIN, Ohio—One credit union believes loan participation programs are the best way to address the issue of small credit unions struggling with loan portfolio growth.
Ohio HealthCare Federal Credit Union has embarked on a new loan participation partnership with two other Ohio healthcare credit unions. The arrangement is beneficial to all involved, said OHCFCU CEO Bill Butler.
The program, in its pilot phase, solves the larger $81-million Ohio HealthCare’s liquidity problem while getting more loans onto the books of the two smaller shops, which range from $10-$20 million in assets.
Atrium Credit Union in Middletown and Mercy Health Partners FCU in Toledo are participating with OHCFCU.
“We are at TIP-chartered healthcare credit union in Ohio,” said Butler. “There are 10 healthcare credit unions in Ohio, including us, and we interact with them on a regular basis, and I thought—what if we all tried to collaborate on loans?”
More Loans Than Books Can Hold
Butler said that looking at the Call Reports of the smaller healthcare CUs in the state, he sees most are having a tough time with lending, while at the same time Ohio HealthCare is making more loans than its books can hold.
“You can see the issues in some of the smaller healthcare credit unions, their ROA is down and many of them have a loan-to-share ratio of 50% or less,” he said. “Their ROA is a clear reflection of their problems originating loans.”
As CUToday.info has extensively reported, the majority of the movement’s record-setting loan growth is occurring in the very largest credit unions, according to NCUA data, while small shops, collectively, are experiencing negative loan growth.
“We thought we would reach out to our partners and collaborate and this could be a win for all of us,” Butler said. “CUNA, NAFCU the leagues . . . everyone is saying smaller CUs have to collaborate more.”
What sparked the program, explained Butler, is the 92% loan-to-share ratio at Ohio HealthCare FCU, which pushed it into a slight liquidity crunch that regulators made a note of.
“The regulators told us we needed to do something, so we immediately referenced our liquidity plan we had already established,” explained Butler. “One of the bullet points in the plan is selling loans as participations. We had never considered that before, but we said, ‘Why not?’”
Nine CUs Contacted
The credit union reached out to each of the nine other Ohio healthcare CUs in April. Butler said OHCFCU was pleased when two wanted to be part of the program. The participation loans were sold mid-August. In the last year, Ohio HealthCare had also tried a deposit promotion, but said that the low-rate environment made even a 50 BP hike not attractive enough to encourage many consumers to move their funds. Ohio HealthCare also borrowed from the Federal Home Loan Bank.
Atrium and Mercy Health each bought about $500,000 in participations. The portfolios consist of new and used direct auto loans, with 45-50 loans in each portfolio. Ohio HealthCare is charging the two CUs a 0.375% servicing fee.
“That took our loan-to-share ratio down to 90.5% and raised the other two credit union’s loan-to-share ratios by about 10 percentage points each,” said CFO Julie Carpenter.
Carpenter explained that in August Atrium and Mercy Health were invited to OHCFCU’s headquarters to closely review the portfolios for sale and ask questions about each loan.
“They were allowed to remove loans from the portfolio and replace them with others, which each did with a few,” said Carpenter. “It was a very good experience, that meeting. And by the end of the day each credit union signed off to buy a very high-quality loan portfolio.”
Butler expects that Ohio HealthCare will continue to sell participations to Atrium and Mercy Health and possibly expand the program.
“This was enough to give us a good proof of concept,” said Butler. “In six months or so we will look at it again. The participating credit unions have had portfolios with declining loan balances and my guess is that after six months they would come back and say they need more loans,” said Butler. “And at that time I think we would be ready to consider selling more loans. This may become a regular source of funds for us and loans for our partners.”
'Unleash' Lending Team
While Ohio HealthCare is not a big credit union, it has a strong and well-established loan department that has been very successful over the years in driving loan growth. By expanding the participation program to more Ohio healthcare CUs, and possibly outside the state to other healthcare credit unions, Butler said that would allow his team to become more aggressive.
“In a sense, I want to unleash them,” said Butler. “I’d like to tell them some day that we have a number of credit unions that need loans and are ready to take some of these loans we are putting on our books.”
Butler said that what would trigger Ohio HealthCare to sell loans is reaching a 92% loan-to-share ratio.
“We’d sell some loans, get back to 89% loan to share, continue to lend and get into this very positive cycle for all of the healthcare credit unions that want to be part of this program,” said Butler. “Our partner CUs become a source of liquidity for us so we can continue to meet the borrowing needs of our members, and we become a source of loans for them. It’s the perfect example of smaller credit unions working together.”