Credit unions across Michigan have enjoyed strong growth in recent years.
Membership, assets, deposits, and consumer and business loans are all up as credit unions increasingly gain market share and move more into commercial lending and business services that have long remained the domain of banks.
To get a sense for where the credit union industry is going, MiBiz recently sat down with a group of executives to discuss the current environment and the drivers behind it.
Participating in the roundtable conversation were:
- Sandra Jelinski, president and CEO of Lake Michigan Credit Union in Grand Rapids
- Kenny Leonard, vice president of commercial loan services at Kalamazoo-based Educational Community Credit Union
- Tim Merwin, vice president of lending at Advia Credit Union in Parchment, near Kalamazoo
- Ken Ross, executive vice president and chief operating officer for the Michigan Credit Union League, a Lansing-based trade association.
Here are some highlights from the discussion:
How do each of you view the state of the credit union industry in Michigan?
Jelinksi: It’s never been better. I see more people look at credit unions for their financial needs than ever before, and it’s really helped our company tremendously.
Ross: Michigan, like a lot of states, obviously had a little bit of a bumpy ride during the financial turmoil. We always have more than our share when things go bad from an economic perspective, but I was impressed that credit unions kept lending in a strong way. We saw increases throughout the period, particularly because a lot of our counterparts in the banking industry essentially had to retrench. We saw people that actively wanted to limit their Michigan exposure from a bank perspective. That created an opportunity for credit unions and credit unions took advantage of it. They stepped up.
Credit unions are here and they’re not going anywhere. Generally, you don’t see that phenomenon of big out-of-state credit unions coming in and taking away market share or merging into Michigan credit unions. By and large, this is a homegrown industry that exists to serve the Michigan market. And by all indicators, credit unions have come out of that financial turmoil strong. Capital positions are as high as they’ve ever been and that speaks well for the future.
Leonard: You just see a general rise in all of the indicators throughout the industry. The biggest challenge I see for the industry is continuing to serve all members. What a lot of community banks and large banks have done is get away from that small-dollar loan on the business side …. that $40,000 or $50,000 loan that a mom-and-pop store needs to get up and running. My challenge is finding a way to leverage technology to do those loans safely and efficiently that’s still at least break-even for the institution and our members, but still serves those small businesses that really need that capital to startup and grow and expand.
Merwin: Overall, the industry is doing well and continues to grow and is continuing to be healthy and stronger. Obviously, the big focus is the millennials and how to serve them and what’s going to work to get them in.
What’s the competitive landscape like these days?
Jelinski: In the commercial arena, they (banks) will cut rates to take anything away from us.
Leonard: Especially the larger dollars. On small stuff, they’ll offer high rates. But certainly on the larger amounts … I’ve seen some crazy stuff. It kind of reminds me what was going on prior to the downturn when things were getting aggressive.
Jelinksi: There are even players in our market that will tell their staff, ‘You’ll beat any LMCU mortgage rate.’ It doesn’t work very often, though. But we feel it.
Ross: Historically, when you look at the big picture of where the tension lies, in my view, I don’t feel it as much between big banks and credit unions. I feel it between community banks and credit unions. That tension still exists. But when you look at where the market share has been eaten for community banks, it’s really out-of-state and large banks that have come in and consistently bought up community banks. They’re the ones who are taking market share and are the ones who are able to move markets because they are usually dominant players in many areas of the state.
While you have always had kind of this bank-credit union tension that you hear about, really the tension is between community banks and credit unions. Now more than ever, credit unions and community banks have common cause against their mega-competitors, who really have the ability to bring together huge resources to meet the regulatory burdens that regulators are increasingly demanding. Credit unions and community banks are by and large struggling to keep up with those expectations.
What will that mean for the relationships between credit unions and community banks?
Ross: We’re going to see a confluence of interests that are going to break down some of that historic tension that’s existed because community banks that want to survive as independent entities — and are not just building to sell — need to have some regulatory relief in the same way that credit unions do.
How well are credit unions serving the millennial generation and what could you do better?
Leonard: We talk a lot about … getting our story out. I don’t think credit unions as a whole do a good enough job on what the cooperative is and what that is all about for our community — as a whole, and for millennials in particular. The technology is something that credit unions are well aware of. By and large, I think most credit unions are lagging but certainly aware of the need to get to that technology.
The (Michigan Credit Union) League actually has some great products for smaller credit unions that they can tap into without having to do a lot of the R&D themselves, which certainly helps get us up to speed quicker. Over the next couple of years, you’ll see us catch up fairly quickly because of that collaboration as an industry and being aware of the gap that we have for capturing millennials, and certainly trying to get our story out more.
Ross: What we hear consistently from folks in credit unions is, ‘We may not have all of the bells and whistles,’ but they have the financial products (millennials) can understand and they don’t feel like they’re going to get ripped off by dealing with a credit union. When you have a long-term view, that’s critically important if you can build trust over a lifetime.
Merwin: I think something that credit unions do well, too, is the education piece for the members and educating that member, that borrower, through the process and really helping them understand the pros and cons of different products. That builds that trust, which is ultimately the key.
We hear a lot today from businesses in every economic sector about talent. What’s the environment like right now in recruiting talent into your industry?
Jelinski: Where we struggle the most is what our state talks about: technology. Not on the front lines, not in the back office, but on the technology side. It’s really, really hard to attract good I.T. people, so we actually have found more success on the other side of the state when we recruit people. We have picked up a lot of talent there.
Merwin: Technology is an area where we continue to look for talent. Technology is the key right now, even cybersecurity. As the industry changes and adapts and so much becomes technology-based, you have to have those people. So it’s finding those people. The younger generation, when they think of technology, they think of Google, they think of Facebook. It’s convincing them, ‘Hey, we have technology stuff here locally in your backyard and you can be a part of it.’ Some of it is the culture and some of it is the flexibility of the work-life balance.
What do you see today in terms of commercial borrowing? What types of requests are you getting?
Jelinski: We’re getting it from every avenue: tool and die, construction, even commercial buildings. We have some big borrows in Kalamazoo and we’ll go to $30 million depending on how good it is.
Leonard: We’re seeing everything. We’re seeing business acquisitions. We’re seeing purchases. We’re seeing startups. We’re seeing construction. We’ve got several brewery opportunities — that’s a big market right now.
Merwin: We’re obviously focused on the commercial real estate as well. That’s the primary makeup of our portfolio.
How has business changed in the last year or two?
Jelinski: We’re backing some of the building and real estate projects where people live down here (in downtown Grand Rapids). You hadn’t seen that kind of development in our area for years, but it’s big.
Leonard: There is kind of an urban boom. There’s a 1,400-apartment shortage right now in downtown Kalamazoo, based on one of the studies they did. But there are no buildings to convert to apartments anymore, so they have to go ground up. There’s a lot of available property in downtown Kalamazoo that can be used. So that’s certainly something that I see in the industry, the kind of urban revitalization. And just general knowledge being there to do commercial lending is something that’s starting to gain momentum as a whole. When people are going out and getting their bids for their loan opportunity, they’re including credit unions now, and they didn’t used to.
Merwin: The expanded knowledge of what credit unions are doing is continuing to grow. It started with mortgages and now it’s growing into commercial (business). It’s just an awareness from a membership base and even non-members knowing that credit unions are out there and doing your auto loan and have been doing your mortgages, and are now really jumping and doing commercial loans as well.
Jelinski: How about wealth management? We actually just hired a new leader because that was a big demand that I thought we were lacking at. It’s from the employer groups from the commercial side as well as our member base, as well as all of the people retiring. They are all demanding this.
What’s changed in the industry in the aftermath of the recession?
Ross: As I travel around the state and talk to credit union people, more and more of the old model of the front-line staff just taking transactions in a very passive way is continuing to be phased out in favor of a sales culture where you’re empowering your front-line staff to talk to the members about their financial needs, rather than just the transactions in front of you. That has caused, in some credit unions, a turnover in staff because some people don’t feel that they want to do that, but it’s a strategic opportunity for credit unions that can move their organizations to a sales culture.
A lot of credit unions historically have felt like, ‘We don’t push products. We are here to receive your needs.’ It’s a big culture shift for a lot of organizations. Ours is more progressive and those that tend to grow faster are the ones that successfully implement a change in culture. It also creates an opportunity to bring fresh perspectives into an organization.
Jelinski: We believe, and we track, that we have more millennials in our (branch network) than anyone would even imagine because they do want to know and touch you. They may be on Facebook and so on, but where they are putting their money and entrusting their financial future, they want to know you. And so we’re basically (doing) the opposite (of what some banks are doing) and building bigger offices (that are) more welcoming.
Leonard: The focus on the branches is more about not just transactions but a solution-driven approach. (Members) may not come into branches as often as they used to, but when they do come in, they want to know that you’re there if it’s a sit-down to go over a mortgage. So they’re using the branch in a much different way than they used to.
There’s been steady consolidation among credit unions for a while, especially with smaller institutions merging into larger credit unions. What do you see ahead for consolidation?
Ross: Consolidation is not unique to this particular time in history. In Michigan and nationally, we’ve seen consolidation in the Credit Union League since the 1960s. Ever since then, there’s been ebbs and flows, but basically regular consolidation year in and year out. In Michigan, we’ve seen a slight uptick over the last year or two. We saw about 20 last year.
What’s driving the consolidation?
Ross: Some of it is the regulatory kind of fatigue. Sometimes when you have a long-time manager and a board is faced with retirement and can’t find someone who’s qualified, particularly in the smaller credit unions, that may cause them to look for a merger partner. The increasing pace of technology (and) required investments for regulatory requirements — those things all drive consolidation and efficiencies in any industry. It’s not unique to our industry.
There’s a variety of factors that flow into it. Regulatory pressure doesn’t help. This is one of the concerns that we’ve articulated to our regulators, both state and federal. You have to really be smart about it. … We always want credit unions that want to survive to be able to survive. If they choose to merge, that’s their business. It shouldn’t be externally driven by regulators and it shouldn’t be driven by anything other than the decision-making of that credit union membership.
Leonard: I think competition in the financial industry … is so beneficial to the communities that we serve. As much as I would like to be the only credit union in town, competition is good for everybody. Not only does it drive us to do everything better, faster and more efficiently for our membership and our customers, but it also helps make sure that we are offering the best products at the lowest rates, not only for what works for our institutions but for what the marketplace can provide.
Jelinski: And don’t you think technology is driving a lot? We studied this at the board level a lot and over the last 20-some years, it’s over 90 percent of the mergers that have been with institutions with $50 million or less (in assets).
Leonard: And if you haven’t been keeping up with technology, it’s just extremely expensive to catch up.
Jelinksi: You just can’t.
What are your predictions for where interest rates will go this year?
Leonard: The Federal Reserve is charged with a specific task to keep an eye on inflation and unemployment. I think sometimes it gets a little politicized and that they’re trying to do much more than what they’re tasked with. But if you look at those primary indicators, inflation isn’t on the rise and we just got the job numbers (for May) and it was 39,000 (jobs). Based on those two data points, I don’t see how they can justify raising rates at this time. My prediction, if I can put on my guessing cap, would be sometime next year. Certainly an increasing interest rate environment is looming. We’re having these conversations with our borrowers all the time as to whether they want to play the interest-rate game to lock in some long-term fixed money now to better their business.
Merwin: I wouldn’t be shocked if it’s the end of the year. I think the Federal Reserve was bold at the start of the year (when it raised interest rates) and it said three or four this year and they’ve done one. Will we get two? Maybe. But I think the indicators are fluctuating so much, especially with everything going on in the global economy.
After years of growth in this industry, what’s the next frontier?
Jelinski: In our shop, it’s the wealth management side. We offered it all along but not to the extent that I think our members are demanding, so that’s our next real push.
Ross: In Michigan, we’re going to see an increased migration to the state charter. We still have about a third of the credit unions or so that are federally chartered. … As we talked early on, there’s this strategic alignment potential between community banks and credit unions that will come to realization in the next few years as the contrast becomes starker and starker between big and small (banks), versus banks versus credit unions, which is going to be a very interesting development.
Credit unions have always been cooperative and interdependent of each other. I think we’ll see an increase in that because with technology, no one can afford to do things on their own. We’ll increasingly see — through CUSOs (credit union service organizations) and joint ventures — credit unions cooperating together to meet the common challenges in their marketplace. They’ll still be competitors, but they’ll have significant opportunities to cooperate.
Leonard: Certainly, the expansion of commercial services or member business lending in the industry is going to be an opportunity. They are much more profitable and give you a stronger community sense when you can put your sign out on the Main Street door that says, ‘Financed by ECCU.’
The cooperation and the consolidation will continue as well, maximizing assets to efficiently manage the regulatory burden. A majority of the mergers and acquisitions (are driven by an inability to survive) if you’re too small from a regulatory perspective.
I would also agree with Sandy on the wealth management and the trust stuff, especially with products that the (Michigan Credit Union) League has been able to put together and the ability for us to put together more products to be a one-stop shop. Wealth management and trust certainly goes hand-in-hand on the business side and commercial lending. There’s great opportunity there where people can have their entire relationship with us, as opposed to going to three or four institutions to get that same level of service.
Merwin: The growth is definitely there and it’s going to be interesting how each credit union is going to do it a little differently. It’s going to depend on their membership makeup and the talent that they’re going to bring in to be able to help with this. I think that’s still one of those existing challenges — being able to get that talent, to offer the different product and to offer them successfully, which is where I think the cooperation and the CUSOs come into play.
The major benefits of how the credit union movement works is going to ultimately benefit all of the credit unions and ultimately membership and the communities.