With 2.97% annual loan growth and 0.88% ROA as of second quarter 2013, according to Callahan Associates’ Peer-to-Peer Analytics, SPIRE Federal Credit Union is hitting its lending stride. But the Minnesota-based cooperative is doing so in a different way than it has in the past.
“We need and want to grow, but it has to be controlled growth, says Jon Seeman, vice president and chief financial officer.”
As of midyear, SPIRE ($596.7M, Falcon Heights, MN) had 0.62 loan accounts per member and an average member relationship of roughly $15,000. This compares to an average of 0.51 loan products per member and an average member relationship of $6,700 at similar-sized credit unions.
One contributing factor to the credit union’s lending success is its approach to sales incentives. In addition to maintaining role-specific benchmarks for individual staff members, SPIRE offers quarterly goals, which include both a loan and checking account component, for all employees across the institution.
“Every quarter, as part of this program, we develop tier one and tier two loan goals, and then we have reminders every week about where we are on this gauge,” says CEO Dan Stoltz. “If we hit those goals, every employee gets the same dollar amount, from the CEO, to the managers, to the front line. And if we lose, we all lose together.”
The timing of these payouts is also important, as SPIRE wants employees to remember exactly why it is rewarding them.
“A lot of bonuses are done on an annual basis, so the employees have to wait until January to see the benefit,” Stoltz says. “But if every quarter they see there’s something extra in their paycheck, it helps continue that momentum.”
According to Kellie Eaton, SPIRE’s vice president of retail and card services, the credit union leans heavily upon the credit bureaus to help deepen member relationships.
“Whenever new members come in or an existing member fills out a loan application, we go through their credit report and find out how we can save them money,” she says. “We call it ‘steal a deal.'”
Although building a more effective sales culture is an important factor in SPIRE’s success, its lending philosophy which started evolving in 2010 when Stoltz became CEO goes much deeper than that. For example, SPIRE has doubled down on new strategies to safeguard and bolster income streams in areas of the portfolio that have always performed well. And in historically weaker areas, SPIRE has stripped down and rebuilt entire departments from the ground up. Lastly, it has launched new departments focused on meeting the evolving needs of businesses and other cooperatives.
“People aren’t borrowing as quickly as they have in the past,” says Miriam Wells, branch manager at SPIRE’s Maple Grove location. “So we are looking for ways to be inventive and help all our members with their changing needs.”
Do What You Know
As a member-owned institution in a highly regulated era, SPIRE needed to anchor itself in its core strengths before exploring riskier revenue streams. Fixed rate first mortgages, which have grown 32.4% year-over-year at SPIRE as of second quarter 2013, was one of those anchors. Yet because of its real estate focus, SPIRE must address evolving rate challenges.
“We want to be competitive when it comes to rate, but we don’t want to be a loss leader,” Seeman says.
Although SPIRE periodically runs rate promotions to attract new members, it is careful to focus on areas where it has a maintainable pricing advantage.
“Auto rates are so competitive, you need to go down to about 2% for a rate promotion, so it’s hard to see a real gain in that area,” explains Mike Schrader, vice president of consumer lending. “On the other hand, with real estate, we’ve been able to roll out some low loan-to-value, shorter-term options with no closing costs that still present the yields we’re looking for.”
As a primarily fixed rate lender, the credit union balances interest rate risk by avoiding longer-term loans, and although 30-year mortgages are nowhere on the horizon, SPIRE is considering booking more 15-year or less products in anticipation of the expected rise in rates. In addition, it sells almost all of its first mortgages to the secondary market.
“We sell [first mortgages] for the origination plus the service release fee, which has been one of the primary drivers of our other operating income,” Seeman says.
SPIRE has tapped into its market opportunity and is continually adjusting its real estate strategy, particularly with regard to attracting new purchases.
“Today we’re seeing 30-40% purchase and 60-70% refi, whereas not too long ago it was at around 90% refi,” Schrader says.
As of second quarter 2013, SPIRE averaged 6.3% mortgage penetration among its membership, compared to just 4.5% among similar-sized peers. This focused model proves that sometimes, it’s not about offering everything to everyone; it’s about offering the right product at the right time.
Do What You Did, But Do It Better
“Many times, an institution creates a member business lending department by reassigning a portion of its consumer or real estate lending staff to the commercial division. Unfortunately, a majority of those employees typically have little to no commercial lending experience,” says Cliff Wantz, vice president of business services.
In its earlier iterations, SPIRE’s business lending department was no different.
“You can select individuals who may be strong lenders, but if they don’t understand the commercial world, it can quickly lead to some stubbed toes and bad decisions,” Wantz explains.
SPIRE’s lack of expertise limited the department’s initial effectiveness and combined with unpreventable downturns in the marketplace lead to significant losses during the recession. Even today, the department is still working through a small handful of problem loans from this earlier era.
Despite these initial challenges, the credit union was not deterred from the potential it saw in the MBL market, particularly in regard to commercial real estate. To correct the situation, SPIRE hired Wantz and other key staff from the commercial banking world and has invested roughly $250,000 a year since 2010 in related enhancements, such as:
- Hiring outsiders that understand and can anticipate the nuances of this market; these outsiders can help train others as well. “When you do business lending, you need to understand both the national and local economy as well as the submarkets,” says Ryan Panariso, director of business services. “You also need to have expertise in a range of industries and business models and be able to understand complex financials.”
- Establishing an MBL committee to help executive and departmental leadership set the correct course for the department. SPIRE’s current committee includes a former FDIC examiner and a board member with business expertise.
- Focusing almost exclusively on business loans between $100,000 and $2 million, made to businesses who can secure the loans with existing property. Investment properties, industrial warehouses, multi-family apartment units, and retail or office space typically fall under this guideline. The credit union steers clear of riskier construction and development options like hotels or golf courses. “You have to pick your niche, not just go for whatever is out there that’s tempting,” Stoltz says. “For example, we have lot of restaurant owners in our membership, but that business is very volatile, so we might have to help them find funding from another source rather than taking on that loan ourselves.”
- Building out supporting resources, such as the new in-house underwriting system, that are tailored to the distinct analytical needs of commercial lending. “We looked at other third-party options for underwriting these loans,” Wantz says. “When they didn’t have the complete package, we built our own. This system lets us better hold and manage loans, monitor the value of the properties, and even do complete, comprehensive global cash flow analysis of all these businesses’ financials.”
The credit union’s $16 million MBL portfolio offers a more secure book of business than its earlier iterations as a result of these changes.
SPIRE held off from aggressively pursuing new business during this repositioning, but now that the foundation is set, the reformed commercial department is ramping up new relationships and beginning to contribute significant, diverse income streams to the bottom line. Roughly 150 of the credit union’s 2,000 business members have a loan product with the credit union, so the energized department has a lot of ground to cover. And by partnering with key brokers in the Twin Cities region, SPIRE has ensured a steady pipeline for new loans to bid upon.
“MBL is currently about 4% of our assets,” Stoltz says. “We see that climbing closer to 10% over the next five years.”
This department has the potential to also serve the commercial lending needs of other cooperatives. For example, SPIRE is currently looking to attract participations from both cooperatives and community banks and might eventually to offer its new origination system as a turnkey solution for others with similar commercial needs.
“We’ve even developed a relationship with the NCUA, offering up our assistance to credit unions who are struggling in this area,” Seeman says. “So we’ve swung the pendulum and actually have regulators as our proponent in this process.”
Do Something New
The credit union’s merchant services represent both a valuable income strategy as well as a tool to increase loan volume among targeted demographics, such as small business owners. Bolstering supplemental earnings through non-interest income on services members want to pay for rather than those charged as the result of a negative action has been and continues to be an ongoing priority for SPIRE, even as loan activity rebounds.
For example, through a partnership forged with the New York-based merchant services company Newtek, SPIRE offers local businesses several different cash management packages, including payroll services, web design and hosting, card processing, remote deposit capture, and commercial insurance. Despite its own growing expertise, SPIRE can offer these products less expensively through the third-party than if it were to build them itself. And if SPIRE business members can find better pricing on these products and services, Newtek will pay them $250. To date, though, Newtek has never needed to issue such a payment.
“If we can help [SPIRE business members] save $30,000 a year, they might be able to hire another employee or purchase a piece of equipment that will change their business,” Wantz says.
Plus, Newtek’s cash management services are an excellent complement to the card partnerships SPIRE already offers to several fellow cooperatives in the Twin Cities region.
“We’ve always been very involved with other cooperatives,” says Casey Carlson, vice president of marketing and strategic planning. “We’ll sometimes present at their annual meetings and our CEO even serves on the board of The Cooperative Foundation, which helps us get to know these businesses and their needs.”
SPIRE’s first cooperative partnership was with The Wedge, a well-known Minnesota grocery cooperative. In the late 2000’s, the two organizations produced a cobranded credit card product that SPIRE still underwrites, holds, and services today. Fee income generated from the card is split between the two parties.
On the heels of The Wedge success, SPIRE has expanded the concept to include several other food co-ops.
“This has been beneficial for both the co-ops and the credit union,” Panariso says. “It increases brand awareness, allows us to cross pollenate membership, and increases everyone’s profits.”
SPIRE isn’t focusing on the cooperative business sector by accident. The credit union was originally founded to serve members of non-financial cooperatives, and it continues to embrace new opportunities in this marketplace today. According to SPIRE’s board vice chair, Jeff Streiffer, Minnesota has more cooperatives than any other state in the country. Its more than 1,000 organizations and 3.4 million members generate approximately $10 billion in revenue annually.
The fee revenue from cobranded cards totals approximately $25,000 a year for the credit union, but merchant relationships as a whole create a ripple affect in the business community and drive new activity to the MBL portfolio.
“Merchant services isn’t heavily regulated, so this is an intimate topic for business owners,” Panariso says. “Being able to offer both extra savings and a local point of contact gives us a significant edge. If we can do right by them, they’ll give us more opportunities down the road.”
The credit union is examining expanding these services to other types of businesses, but it does not want to move into an area in which it does not have a long-term plan or the expertise to be successful.
“You have a lot of referral potential in the business world, so we don’t want to do anything halfheartedly,” Wantz says. “If we don’t think we can do something well, we will stay out of that arena completely.”