Relationships First: The Differentiating Factor for Credit Unions

[00:00:00] Jim: When it comes to credit unions, I think we’re all stronger together. This is an industry that thrives on cooperation. I think as long as we continue to do so, we’ll reap the benefits.

[00:00:42] Vince: Welcome everyone to 22 Minutes in Lending. I’m your host Vince Passione and I’m fortunate enough to have met our guest for today’s podcast back in 2009 when we founded LendKey.
Jim Merrill is the President and CEO of Inspire Federal Credit Union. He has over 30 years experience in the credit union industry with four of those years running the lender participation organization at LendKey.Jim’s a seasoned operator and I’m looking forward to hearing what he has to say. So without further delay, let’s start these next 22 Minutes in Lending. Jim, welcome. And thanks for joining the podcast.

[00:01:05] Jim: Oh, it’s an honor. Thank you for having me.

[00:01:08] Vince: So, Jim, let’s start back in the beginning. So we met back in 2009. We were starting our outreach to credit unions. You were running business services for the Jersey Credit Union League. How did you get started? And you were instrumental in really organizing the first network lending program for us with New Jersey credit union. So thank you for that. It took us about two years to convince you to actually come and join us. We had a great run of it for about four years. Then you went back into the credit union industry and took this role as CEO again at Aspire. So I know it’s been a while, but can you talk a little bit about the transition from you were CEO of a credit union, you were in the league, you joined the FinTech and then went back into the credit union side of the business again.

[00:01:44] Jim: guess that’s the easiest place for me to start there is, I’ll reiterate, it was a great four years at LendKey, that it was a difficult decision to leave,you know, when I factored in, you know, how my experience and how your leadership influenced me and, motivated me and all the experience I acquired there and how to build a business from the ground floor up,these experiences were invaluable to me, from a professional standpoint.

[00:02:07] Jim: You know, as for what drove me back to credit unions, you know, looking at the big picture and how everything factored into my decision, you know, prior to LendKey, I had spent 23 years either working directly in or working for credit unions. And that’s probably what made me a good fit for LendKey, right?

[00:02:21] Jim: We were building a client base of credit unions. you asked me to run your lender participation team. And, I probably grew more professionally in that window of time than any four year window. As I’ve told people, in the last 10 years, a lot of people, startup companies aren’t for the faint of heart. the work is hard, the hours are long and the rewards are not always immediate.

[00:02:43] Jim: I think I learned that, but, You know, what I would say it’s the deciding factor was, is, you know, I probably found almost what I would call a near perfect opportunity for me when the inspire opportunity came along, you know, all of the experience I gained in my up to that point, 25 years in the industry, it really made me confident that I was ready to take on the challenge of effectively running a credit union.

[00:03:05] Jim: And I think the icing on the cake was, Hey. I’ve got the chance to do it in the community that I live in, to really make an impact on the local community. And it was just too appealing to say no. And, reflect back on that decision making process and, there was a lot of great mentors and leaders that I had the opportunity to work with over the years and including you Vince, and my career started A gentleman by the name of Kip Stetcher. He was the CEO of IBM Pennsylvania Employees Credit Union. back in brought me into the credit union world and he not only taught me about lending, but he me about trust and honesty and working hard and being loyal and you know, I look back on that and you know, without that entry point I would have probably never forged what’s now a 32 year career.

[00:03:52] Jim: So, I remember the days Vince, you know, sitting in the pit there and I use the term pit cause no one probably knows that term except for you and I, but we sat on top of each other for four years and I learned a lot and I absorbed so much and I cherish my time with LendKey but. You know, 10 years later now, I think I probably couldn’t have written a better script for, for how my career has progressed.

[00:04:13] Vince: No, look, I know it’s a tough decision and I remember you saying exactly that, Hey, look, I get to serve my community again. And it meant a lot to you. So I think we all understand that.

[00:04:21] Vince: It’s interesting. You taught us a great deal about partnerships and collaboration. And I think you, did it at the league and certainly. When we approached you at the league, it was pretty clear that you understood what it was like to get credit unions to cooperate and we were successful in building that network with you. And I think you took that into Inspire. So can you share with the listeners, sort of your approach to partnerships at Inspire now?

[00:04:49] Jim: Well, I think Vince, they’re just that we look for partners, not vendors. You know, when you think about the definition of a partnership, Let’s call it two organizations that are working together to advance the mutual interests of each other.

[00:05:01] Jim: And I think that really sums up my approach to partnerships, you know, we try to align ourselves with companies who demonstrate just that. the ability to advance the mutual interest of both companies. it starts with the alignment of the people in both organizations. and I think it evolves into supporting each other’s vision and strategy and a partnerships are what really make the difference.

[00:05:26] Vince: So Jim, do you categorize partners? Cause we hear this all the time about FinTechs, right? That perhaps not all FinTechs are created equal. Some are partners, some are competitors. How do you sort of. Yeah. Do you have a divining rod to figure this out? How do you navigate that

[00:05:40] Jim: That’s a good question and I guess I would say that not all FinTechs are created equal.

[00:05:46] Jim: any aspect of life, things are created differently and FinTechs come in all shapes and sizes. And I would say some are competitors. I would say some are partners and quite frankly, some could probably be both. But from a lending perspective, you know, I think our approach to fintech partnerships is, you know, we strive to leverage those fintechs that allow us to originate loans that we likely wouldn’t be able to have originated without them. whether it’s because they have larger marketing budgets, they have superior technology. there’s a lot of reasons that fintechs can go out and acquire loans that we don’t have the ability do. to complete the partnership, you know, like we bring our balance sheet because a lot of these FinTechs, on the lending side don’t have balance sheet capacity to fund loans.

[00:06:29] Jim: So that’s where the partnership comes together. They have the marketing budgets, the technology, and we have the balance sheets and that creates the value for both sides. but also I would say, yes, there are some that are just flat out competitors and. You know, probably those FinTechs that are going after the same market share that we are,we’re directly competing for the same customer using the same business model. Those are competitors and probably wouldn’t fit under the term of partnership and likely wouldn’t be ones that we would, do business with.

[00:07:00] Vince:Oh, no, great story. Good description. So, Jim, you took over at Inspire a little over nine years ago, but when you started, I remember you telling me this was an $80 million asset and credit union with a $50 million loan book, and it’s been less than 10 years. You’re up to $200 million in assets. You had $150 million in loans, and when you started, you said you inherited this vanilla portfolio. So help me understand what do you mean by vanilla?

[00:07:30] Jim: Well, you know, you think about it when you go to the ice cream shop, right? You know, you have ort of your plain basic vanilla, and then you have all of your other fancy flavors that, some people like, some people don’t. But, you know, I think I use the term vanilla as just really a reference to maybe a standard or a basic set of products, say we didn’t offer a variety of products and services that.
Set us up to grow, nor that really meant the needs of the broader community. our products were just that they were sort of the plain vanilla standard set of products.

[00:08:03] Vince: So, Jim, what did you do to spice things up and what does the portfolio look like today?

[00:08:08] Jim: Yeah, well, it looks a lot different,you know, nine or 10 years later here. you know, to spice things up, would say it was a combination of both adding new products and services. And expanding on maybe the features of some of the existing products and services that were in place but I think really we added products and services that allowed us to be more competitive in the broader market. but products and services that also supported, our strategic direction and,of growth from a services standpoint. it really started with investments in the digital channel to improve the member experience.

[00:08:37] Jim: You know, we converted to a new core banking platform. We added a new loan origination system as well as a new deposit origination platform. And, most recently we’ve migrated to a new online banking platform. All of these things, you know, to improve that, that digital experience. on the product side, it was more reaching, you know, we added many new channels, on the product side.

[00:09:00] Jim: We launched business deposit products,and we launched business lending subsequently right after that. And, that’s had a huge impact for us. we evolved their mortgage lending into more of a multi channel first mortgage program where we not only focused on growing the portfolio, but also used it as a revenue generating source of non interest income.we have built a very robust indirect auto lending program.

[00:09:25] Jim: We’ve added merchant lending and I think strategically, we’ve added a lot of diversification to our loan portfolio to being aggressive in buying and selling loan participations. So, you know, I think there was services we improved or perhaps added to the features, you know, we added a lot of products and we got a little bit more strategic and how we manage , the loan side , of the balance sheet.

[00:09:54] Vince: So Jim, I’ve talked to you and your CFO, Tim, many times about how you fund and funding’s on everybody’s brain these days, right? Especially liquidity.

[00:09:54] Vince: We just came back from a conference together, right? And a large portion of what we were discussing was just liquidity management and capital markets. So let’s start the highest level, your philosophy. So what’s the philosophy when it comes to funding? How do you intend to do it?

[00:10:17] Jim: listen, think Inspire would love to fund all of our loans with core deposits. It’s just not possible, you know, when you look at the industry averages, I think share balances across the credit union industry are generally about 30 percent smaller than average loan balances.we always need to maintain multiple sources of liquidity. so one of the first strategic initiatives in terms of funding that we implemented here, was to join the federal home loan bank and federal reserve bank discount window.

[00:10:41] Jim: In doing so we can pledge our investments in real estate loans and returns for access to advances. and, you know, I think equally important is our focus on working with our investment brokers to, you know, have access to non member deposits from other credit unions and banks. I think our philosophy on loan funding is, you know, we’re not shy about comparing rates amongst. Member CDs, federal home loan bank advances, federal reserve bank discount window, non member CDs, all of the sources.when we’re looking to fund a loan pool, you know, I think our goal is to secure the best interest rate spread we possibly can. and I think, you know, in terms of our philosophy, we’re also very cognizant to try to match weighted average life between loans. in funding to prevent a mismatch that could negatively impact our spread through the life of the loans. And I think by using all of these resources, it allows us to remain competitive and it maximizes our ability to effectively manage our balance sheet.

[00:12:12] Vince: So let’s go back to deposits. So I was looking at some stats. It looks like year over year average deposit for a member and accrediting has gone down by about 260, which is probably the lowest drop in history. So are you seeing the same at Inspire? Are you seeing that same drop in deposit balance?

[00:12:30] Jim: Yeah, you know, think we have experienced some declines in regular share and checking account balances during this period,the period you reference, you know, I think at Inspire to soften that impact, we began offering longer term member CD specials right after the pandemic and the goal was to lock in lower rates. Maybe ahead of our competitors. in addition, you know, we locked in some longer term federal home loan bank advances during the pandemic, it costs probably as low as 50 basis points. and

[00:12:56] Jim: I think when you factor in the federal home loan bank activity stock, probably a lot of those advances that we locked in longterm were even below 50 basis points.that is certainly helped us terms of what we’ve seen sort of soften the blow and lastly, you know, think we’ve seen a little bit of relief, in that trend is we really focused on. developing new business in that member business channel, right? Leveraging our new technology, our new mobile and online banking to help us grow, the business side, core deposits with business checking and savings.

[00:13:36] Vince: Now, Jim, on the business checking and savings, how aggressive are you? We had the chairman of Live Oak Bank on, he’s paying I think it’s either four or four and a half percent, Chip Mahan said, on a business checking account. Are you that aggressive?

[00:13:48] Jim: Now, we’re not that aggressive, you know, our strategy is,we approach the business side a little bit different than the retail side. on the business side, we are much more relationship focused.

[00:13:51] Jim: We leverage the importance we place on relationship banking and, in in the pond that we sort of fish in, so to speak,the small-to-maybe-mid-sized business. You know, small business owners, they’re busy running their business, right? they’re busy, you know, day to day trying to get by. and I think the relationship aspect that we have is sort of what differentiates us and how we go about growing that segment of our business.

[00:14:25] Vince: Now, Jim, you call, when you call it small business, is it commercial real estate or is this really working capital lines?

[00:14:31] Jim: Well, I think it’s both. you know, our target is small to medium sized businesses, but a lot of what we do in that business channel are,real estate investors. a large portion of the collateralized loans we do are secured by residential real estate, much more so than commercial real estate.

[00:14:50] Vince: Got it. So Jim, we had this long discussion with Steve Williams at our advisory council meeting. We talked about zero gravity. We talked about deposit betas and how fast they’re moving. Do you think at some point, this stabilizes out, do you think the cost of funds hits? Oh, I don’t know what it is now, one and a half. Do you think it, it sort of tops out at about one seven and now it’s just about a spread and then where do you get the spread?Right? Because the next question is going to be about all right. So is this going to be a world that we live in where back in the day, when I said, when I first started at Citi, it was three, six, and three, right? You know, 3 percent cost of funds, right? 6 percent on a loan. you know, three o’clock on the golf course.is that a viable place to be?

[00:15:32] Jim: yeah, I don’t think it’s a viable place to be for us. I do think. We’re starting to see it stabilized, right? we continue to monitor rates and when needed, we raise our rates, you know,balancing our focus on continued growth, our strategy has always been to base our rates on market driven data.

[00:15:42] Jim: So treasuries, prime rate, mortgage backed securities, fed funds. those are the indicators we use to set our rates. Then what we do is we review all of our asset classes, which we originate loans in, we try to factor in net charge offs. We look at servicing costs and we use that data, you know, set.

[00:16:06] Jim: Our deposit rates,a lot of times we seem to be the 1st to change rates and, you know, we change rates fairly frequently, you know, based upon how the market moves and a lot of times we’ll see our competitors follow us shortly thereafter. So that’s always been our approach. Is, you know, use the market indicators sort of back into, you know, what your costs are to originate loans and set your rates from there.

[00:16:42] Vince: Makes sense. So Jim, as. As cost of funds go up and also just member need goes up, do you find the need to go deeper in the credit spectrum? I know credit union CEO is always trying to say yes more often, but do you see yourself going deeper in the credit spectrum to A, service a client that might be under stress and B, just to expand margin a bit?

[00:17:03] Jim: listen, subscribe to the approach of find a reason to say yes versus no, right? We’re always looking for a reason to say yes. But I don’t think saying yes necessarily always means having to go deeper in the credit spectrum. I think it means more understanding the request of your member and really understanding what that member’s profile looks like.

[00:17:15] Jim: Lower credit quality, in my opinion, doesn’t always translate to a bad loan. you know, we need to assess the risk to our credit union. our credit union members come to us for help. It’s easy to make loans to W-2 employees with 800 FICOs and low DTIs and, you know, fully collateralized with real estate. it’s easy to do it, but I think our differentiator continues to be the time we take to understand the member’s situation and offer solutions that allow us to say yes trying to manage that risk accordingly.

[00:18:01] Vince: No, that makes sense. So, Jim, we had some time , with Rodney Hood and off camera, we chatted with Rodney about this new CUSO rule, right? Back in November of 2021, the NCAA expanded the number of permissible activities for CUSO to allow it to lend. and I think what they meant was that these CUSOs could actually lend without memberizing. And as long as 50 percent of those loans actually became members of a credit union later on. And the rationale for what I was told was to level the playing field between credit unions and FinTechs, right?

[00:18:20] Vince: So this field of membership didn’t always have to stand in the way, especially when you’re participating in things like merchant funding. So what do you think about these lending CUSOs? Do you think they make sense? Is it something that inspire? Is currently participating in, and do you see it as a way to expanding liquidity and growing your membership?

[00:18:40] Jim: I think the broad answer to your question Vince is yes. I absolutely believe these lending customers are beneficial for credit unions to sort of level the playing field and to become more relevant and compete with the fintech. So. There’s no doubt in my mind that these lending CUSOs can and should be leveraged,and they can do so, with great help for credit unions. In terms of Inspire, I think, unlike a lot of credit unions, we’ve not previously and really currently don’t have any issues with originating loans, you know, we operate today close to 100 percent loan share.

[00:19:15] Jim: And historically over the years, you know, we’ve been, , in the 90 percent tile of,you know, loan to share. So, we haven’t had problems originating loans, you know, be it during this economic cycle or previous cycles, we’ve kept busy when the loan originations and what we’re not available, able to originate organically, we sort of fill those gaps with loan participations, in terms of.

[00:19:38] Jim: Do I see benefits in helping credit unions manage liquidity? I think the primary benefit of a lending CUSO would be to make it easier by having multiple partners and it spreads out the funding. Right. what you do with your loan participation models, you know, it allows folks to come in and fund, you know, pieces of loans and help spreads out the funding, which in turn helps them manage liquidity.you know, I think the lending QC is also provide asset diversification.

[00:20:03 ] Jim: You know, right. You want to build a loan portfolio. It’s always been our goal here at Inspire. To sort of build a loan portfolio that is 50 percent in shorter term assets and 50 percent maybe in real estate, member business loans, and some of those longer term assets and have sort of a 50, 50 mix.And as you originate loans organically, where you need to fill gaps to sort of keep that diversified, well balanced portfolio, I think these lending CUSOs are another avenue to help you do that. So listen, when it comes to credit unions, I think we’re all stronger together. This is an industry that thrives on cooperation.

[00:21:00] I think as long as we continue to do so, we’ll reap the benefits. And in this lending, these new regulations on lending, QSOAR, another avenue to allow us to do that.

[00:21:03] Vince: No, we’ll put Jim in. I think it’s a. We can end it on exactly where we started, right? This whole concept of cooperation and collaboration, right? that’s really what’s going to make the system thrive and survive through the tougher times. But, well, listen, Jim, thank you so much for the time today. Appreciate your insights. So thank you. thanks to all our listeners. I want to remind them all to subscribe so you can get access to future episodes. And I look forward to seeing you all at the next 22 minutes in lending. Thanks again, Jim

[00:21:28] Jim: Thanks Vince. It was my pleasure.