NAPLES, Fla. – Think you can make your credit union successful simply through your investment portfolio, better think again. "It can't happen, it won't happen," Callahan & Associates President Chip Filson told attendees of CUNA's Lending Council Conference. "Lending is still key to credit unions' financial success, to their non-interest income," said Filson speaking on "Innovative Approaches to Competing in the Auto and Real Estate Markets". "Credit unions can't impact their investment yield, but they can affect their loan yield," he said. What's more, Filson added, credit unions have to stop thinking of loans simply in terms of one member one loan at a time, but rather as creating a "wholesale relationship." Real estate loans, said Filson, are how members think of their borrowing relationship with their credit union. These loans currently account for the largest piece – $143 billion – of credit unions' total loan portfolio – $339 billion ($132.2 billion are auto loans; $20.8 billion, credit cards; and $42.3 billion, other). Understandably, size makes a difference in lending because of capabilities. Larger credit unions, for example, have underwriting capabilities that their smaller peers do not. Not surprising then, as credit unions grow they rely more and more on real estate lending, said Filson. "Real estate lending is the engine that drives the lending patterns of the largest CUs in the industry," he remarked – of the 62 largest CUs over $1 billion, real estate loans account for 50.7% of all their loans. In comparison, the loan portfolios among credit unions under $100 million in assets are more evenly distributed among all loan types. Among smaller CUs, auto loans-new and used-account for almost half of their loan portfolios. Credit unions' loan-to-share ratio has dropped from 80% to 70% primarily because of very fast share growth. But even though loans as a percentage of CUs' earnings assets has declined, "loan income has never been more important to credit union finances," said Filson. In 2001, lending accounted for 81% of CUs' total interest income and 65% of their earnings assets. In addition, credit unions' delinquency rates are falling, and that's not because of loan growth. Rather, said Filson, it's because credit unions are making better loans. "In fact, in some cases, some credit unions may be too conservative," he said. "Loan income is propping up loan growth," said Filson. While credit unions have plenty of lending opportunity, most credit unions are too small to be a market mover, said Callahan's president, but there is a way for even small credit unions to overcome their size to be effective lenders. The three keys to lending success, said Callahan are: * benchmark your trends in key markets – "What you measure is what you manage," he said; * work together with other credit unions to compete effectively with other lenders; * form strategic alliances for loan volume with other credit unions, CUSOs or SEGs. "Credit unions need to manage the flow of loans, not simply turn the demand `faucet' off when we are full," he advised. As an increasing number of credit unions expand their field-of-membership and convert to community charters, it's critical for CUs to change the measures they've used in the past to measure their lending success, advised Filson. "Just saying X% of your membership have auto loans with you doesn't tell you where you are in the open marketplace. It's critical for credit unions that have community charters to see where they are in their market." [email protected]