Recently, experts from the credit union industry sat down at Cili Restaurant in Las Vegas to discuss challenges facing Nevada, including growth, taxes, competition and staffing issues. Connie Brennan, publisher of Nevada Business Journal, served as moderator for the event that, as part of the NBJ’s monthly Industry Focus series, brings industry leaders together to discuss issues pertinent to their professions. Following is a condensed version of the roundtable discussion.
Industry Challenges
Tony Mook: We have short-term and long-term challenges. A short-term issue is the current state of real estate and what it means for consumers in Nevada. Those who took advantage of sub-prime loans are in precarious conditions. As an industry, we need to find ways to help those consumers back on their feet, if necessary. From a long-term perspective, I’m concerned about the growth of the credit union industry. We need to do a better job educating consumers about credit unions.
Tim Brennan: Currently, one of the biggest issues we are having is managing growth. We continue to grow at a pretty phenomenal pace. Our multi-state groups have taken us outside of our comfort zone in Utah, so dealing with the different environments and financial conditions in different markets has become a challenge for us.
Bruce Rodela: Credit union growth has kind of stagnated over the last couple of years. The biggest issue is to make sure our members are well-educated, which actually allows us the opportunity to give members more services than we’re now offering.
Sue Longson: The major concern for the credit union industry is membership growth and share growth. It’s difficult with the number of financial service providers in the marketplace now to differentiate ourselves from the other players. It’s not as easy as it once was to get new members or retain them.
Alan Pughes: The current real estate market and the economical market right here in Las Vegas is a real challenge for all financial institutions. We’re not involved in any of the sub-prime mortgages, but the fact that real estate prices have dropped dramatically and a lot of real estate people are out of work, has impacted different perspectives. The margins have been squeezed these past couple years.
Wally Murray: As a market player that’s focused primarily on consumers, not solely but primarily, I believe our biggest challenge is to remain relevant as the demographics of each of our marketplaces shifts. We have to shift along with it in order to remain relevant in the long-term to the people that we’re supposed to serve. The way in which we go about doing it will dictate our future.
Wayne Tew: I agree that the pressing issue is real estate, even though we are not involved in traditional products that have been having problems. We have home equity loans and back-end loans, so we’re seeing some losses there. I think the long-term trend for the industry really becomes defining who we are in the crowded marketplace and developing efficiencies so we can compete.
Structure of Credit Unions
Rodela: Primarily, a credit union is structured as a not-for-profit organization. By falling under Title 14 of the U.S. Code, our focus is serving those eligible to join by definition within certain limitations. In other words, credit unions can’t raise capital from outside markets in order to withstand. Their capital basically grows from accumulated retained earnings from the inception of the organization. Now, bankers question growth without an infusion of capital. You’re looking at several people here that make organizations work without capital infusions from the outside markets which goes hand-in-hand with the not-for-profit structure of being a credit union.
Tew: I would say that I’m a credit union because my whole existence is to give back the best return for my members. We’ve given back nearly $40 million the last seven years after we’ve closed our books, and we’re on target to give about $5 million back at the end of this year.
Pughes: It’s a cooperative organization, so structure is different. Credit unions only serve those people who own the organization. Our focus is not to create value for the stockbrokers. Our purpose is to create value to give back to the members, who own it. That’s the difference in the structure. We’re focused on the members. Banks are focused in creating value in their stock, as they should be.
Mook: We’re not the only type of cooperatives. For example, there are not-for-profit hospitals, rural electrical cooperatives and telephone cooperatives. They don’t pay any taxes and are owned by the customers who use them. As a credit union, we find that our members’ needs have changed, and we have grown at their request to accommodate those needs. From a cooperative standpoint, we’re no different than any of these other types of cooperatives active in the United States.
Credit Unions Versus Banks
Tew: If a banker has the option to be a subchapter S corporation as well, and most of the new banks do fall in that category, they’re not paying the taxes, either. The principals are paying the taxes, not the bank.
Mook: I guess you’re looking to compare apples and oranges. We’re both fruit and fulfill a similar need, but we look and taste different. If you are elected by the people you serve, compared to a for-profit stock company whose depositors really have no say in the overall organization, there’s a completely different motive for operation. Credit unions are not-for-profit – not for charity – but for service. Banks are for maximized profit. We have different missions.
Rodela: We pay taxes too – payroll taxes, property taxes, the full gambit other than federal income tax. Our job is much harder. It’s easy to raise fees and interest rates to maximize profits. It’s much harder to give back as much as you can to the members and still maintain a healthy institution. When your focus is to give back, lower the loan rate and lower fees on ancillary services, it’s really difficult. It’s a great problem to have, but every decision we make regarding how we treat our members, we consider their interests first, rather than the bottom line.
How regulated are credit unions?
Mook: I think it is really a function of who regulates you. Some credit unions are federally chartered and federally insured. Depending on the type of charter we have, we have to go through different types of groups to offer different types of products. In general, however, if we’re going to offer a new type of product or service, we need to obtain regulatory permission either from our state or federal regulator.
Pughes: They actually did a good job identifying different types of services that are authorized for federal credit unions. If you do come up with a product, you have to apply and show a business plan. The laws are very restrictive. Authorized products are even regulated very closely.
Rodela: They can even test members to see if they really are qualified to be a member.
Competition in the Marketplace
Rodela: There’s a great variety of remote-accessed financial services today that weren’t available before, which fuels more competition in the marketplace.
Tew: Specifically, there is State Farm, ING Direct, Wal-Mart and ETrade. People recognize there’s money to be made in financial markets and it’s very competitive for everybody involved. Consumers are also more aware of what’s available today.
Pughes: Look at the modes of access – it’s much different today. Five years ago, people weren’t accessing financial services from their computers through the Internet. Today, there is a complete shift in the way people conduct their financial transactions. That’s why places like ING have done so well, because now people are utilizing the internet to buy CDs (certificates of deposit). Because of this revolution in accessibility, we no longer compete solely from a local standpoint, but with institutions across the country.
Murray: In addition to the non-traditional players that have entered the marketplace, the traditional banks have rediscovered the consumer. A large part of that was a compliment to us and others like us. It served the consumer well, and some of those banks looked at us saying that we are doing a good thing. The bar is being raised, and it’s up to us to work at raising that bar, as well.
Murray: Bankers are paying more attention to their consumers now, and it has caused more competition for us.
Mook: Changing banking relationships has become increasingly more difficult due to Internet banking. If you set up all of your payments to come out of your account electronically, although somebody else like a credit union may offer you a better interest rate and better personal service, detaching yourself from that product that you have set up through your financial institution becomes increasingly difficult. Recruiting new accounts becomes more difficult.
Tew: Competition is good because it forces financial providers to reflect on how they do business, and the consumer will ultimately get a much better deal. If we cannot do it internally, they will go elsewhere. The challenge will always be delivering a great product with efficiency so we can be players in the market.
Financial Health of Industry
Mook: We need to worry about the unintended implications of things like the sub-prime loans. Luckily for my credit union, which is very heavily involved in the real estate market, we haven’t had any foreclosures or losses. Eventually, given the real estate market we’re in, we will see some of those implications.
Brennan: Actually, we didn’t do any of those sub-prime loans. We didn’t take the chances that they did. It’s not affecting us, and we don’t anticipate it will affect us as much as it will others. It’s going to hit us on the home equity lines, which people will be unable to repay as a result of foreclosures or job losses. We offer a few programs to help with that, too. A credit union will even skip a payment or two to help them out. We don’t anticipate it being a big factor.
Longson: It’s different in each particular credit union. Our credit union membership, which the majority of membership is Nevada Power employees, is doing quite fine. We’re a very small financial institution, so we have a limited range of products that we can offer our members. We have to turn down some of our members because we don’t offer the types of loans they want, and in those cases, members must turn to another financial institution. But the credit union as a whole is in sound financial condition.
Rodela: Keep in mind credit unions have all the natural insurance backing from the federal government and private insurers for their members, as does any other institution. But on top of that, they also deposit 1 percent of their insured deposits with their regulator as a backup to assist with safety and soundness. We do that voluntarily from the standpoint of an industry to ensure the credit union movement. Everybody does it.
Mook: The initial funding is voluntary, but once the government has your money, they want to keep it.
Staffing Issues
Murray: It’s not just a matter of finding people – it’s a matter of finding the right people who believe in our philosophy.
Mook: It’s difficult when we hire employees who have worked for banks because they have to learn a completely new corporate philosophy. We must get them to understand that we’re doing what’s right for the member, our customer, not necessarily what’s right for an institution. So trying to make sure that they understand that the sales and quotas that they were once required to fill, isn’t the way we do business. We do business based on what our members need and want, and although they have some basic understanding of products, they don’t have a basic understanding of what we want to provide our members.
Tew: We are dealing with another generation who is used to things our generation isn’t used too. People wat to have more flex time or daycare, whatever it may be, it’s part of our society and we all have to deal with it.
Mook: There is more to it than salary and benefits. There needs to be a cultural fit. Employees need to feel appreciated and need to be recognized for their work. We try to provide a career path for those employees who show effort and want to succeed. We make sure they understand we appreciate them and that opportunities are available to them, if they’d like to stick around.
