Lake Michigan CU's asset growth has been so rapid its capital can't keep up. Source: Lake Michigan CU 2003 Annual Report By DAVID MORRISON CU Times Staff Reporter GRAND RAPIDS, Mich. - In what would be the largest such conversion ever, the $964 million Lake Michigan Credit Union has taken the first step toward becoming a mutual bank. On January 26, the credit union sent its 95,000 members a letter, as required by the Michigan credit union act, in which it formally alerted them to the possibility it might seek a charter change. "We are considering converting to a federal mutual savings bank (the "Charter Change"), and then to a stock savings bank using a mutual holding company structure. The Charter Change and the conversion to a stock savings bank using a mutual holding company structure each require a separate vote of our members," the credit union wrote. "If members approve, we intend to raise capital by forming a mutual holding company and offering up to 49% of the stock to members and the public in our market area. The mutual holding company, which is controlled by the members, will retain control of at least 51% of the stock. Members are entitled to purchase stock on a first priority basis," the credit union added. So far 29 credit unions around the country have either merged with banks, changed to bank charters outright or have filed to do so. If Lake Michigan goes through with the move and succeeds, it will be number 30 or 31 and the largest credit union in the country to have done so, as well as the most recent since Columbia Community's failed attempt, the aftereffects of which still linger (see page 12). Growth And Capital Root Of Problem CU Says In its letter to the members and in a prepared press statement, the credit union cited rapid growth and capital limitation as the two biggest challenges that have led it to consider taking this step. Becoming a bank would help it expand is base of depositors and borrowers and offer more products and services, the credit union said. "Lake Michigan Credit Union has been successful to the point that the organization has developed up to the parameters of our current charter," said Sandra Jelinski, President/CEO of Lake Michigan in a press release. The credit union has become the largest credit union in western Michigan with 17 locations and over 45 ATMs in their four county charter area (Kent, Allegan, Ottawa and Muskegon). Although no credit union executive has yet become available to comment on the source of its growth, other credit union CEOs in Grand Rapids cited a series of mergers with smaller credit unions, a strong program of building new branches in carefully researched locations and a mixture of aggressive marketing and programming for the rapid expansion. "I know that somebody over there has been paying attention to where they put their new branches," observed Rosalie Shook, CEO of the Grand Valley CO-OP Credit Union, a $77 million credit union also headquartered in Grand Rapids. "I have noticed that several of the most recent branches were placed close to some of the largest schools," she said, "and they still have a lot of pull with teachers from when they were Grand Rapids Teachers." Founded in 1933 by a group of teachers, the credit union changed its name to Lake Michigan in March 2002, when it completed mergers with three other area credit unions, Health Care, Alliance, and Saint Mary's Hospital, the credit union's Web site explained. Data on the credit union which can be found on NCUA's Web site dramatically illustrate the tale. In December of 2000, the credit union stood at $304 million in assets, in December of 2001 at $517 million. The institution hit $685 million at the end of 2002 and stood at $694 million as of the end of September 2003. That growth has meant that the credit union's net worth ratio has dropped as well, moving from 8.90% in December of 2000 and 2001, to 8.27% in December 2002 and standing at 7.77% in September of 2003. No data from December 2003 has yet become available. It is that net worth slide as the credit union has tried to grow and keep up its capital that has fueled the interest in changing the charter, Theriault said. "This is a credit union which has set its sights on growth and when you want to grow you need capital," Theriault added. "This is a fundamental problem that no amount of tinkering with PCA is going to fix." As a mutual holding company that will in turn issue stock, the credit union will have access to capital that it is currently unable to tap, he explained. Other Options To Be Explored But other credit union executives noted that Lake Michigan might have some options it could use to confront its growth challenges while remaining a credit union. CUNA Chief Economist Bill Hampel noted that while the credit union's financial reports made it appear to be a "poster child" for ongoing capital problems, he nonetheless also explained that the problems related to growth would likely moderate. "It seems unlikely that the credit union would keep growing at these rates," Hampel said. "It's possible, but maybe unlikely." With a still strong, but more moderate, growth rate, the pressure on the credit union's capital ratios would drop Hampel explained. He also explained that if it opted for a method of calculating its capital ratio over the previous four quarters, instead of solely on the most recent month, Lake Michigan's capital ratio would stand at 8.88%. Hampel admitted that such an approach could only slow a slide in a credit union's capital ratio, but would still help the credit union buy time for its earnings to catch up to growth. "The other factor, too, is that access to greater capital comes at a cost of course," Hampel said. "The cost of taxation being the biggest and that has to be factored in as well." If Lake Michigan had paid taxes last year, Hampel estimated, it would have paid about $4 million in taxes. David Adams, CEO of the Michigan Credit Union League, said he is drafting a letter to the credit union board offering to meet with the credit union's leadership to discuss options the credit union might employ to meet its needs and remain a credit union. He is making the offer even though Lake Michigan disaffiliated with the League and with CUNA two years ago, for reasons that they did not specify. Adams said he will seek to discuss working with the state and federal regulator to modify the way capital is calculated so as to better recognize "at risk" capital in the capital calculation. He said he also looked forward to bringing out changes to the Michigan Credit Union Act that would allow Lake Michigan to use service organizations more to meet their members' needs and expand their already substantial field of membership even more. But one credit CEO whose institution is headquartered in the Grand Rapids area suggested that there may be other problems that might have driven the credit union to seek this step. The CEO pointed out that Lake Michigan's auto leasing program, which another CEO had cited as a contributor to the credit union's growth, might have grown to be a heavy loss now that the bottom had dropped out of the used car market. According to credit union's most recent call report, $226 million of the credit union's $722 million in loans are in auto leases, or 31% are leases, portions of many of which may need to be written off. In fact, the credit union has a used car lot to help sell the returned cars, which include Porsches, Mercedes and Cadillacs along with sports utility and other vehicles. What Happens Next? In one brief interview so far Richard Austin, director of marketing for the credit union, emphasized that the credit union board had not finalized the decision to seek a charter change and to really seek members' opinions. When those opinions come it, the credit union may find that it faces more opposition than it may have expected. At least 66% of the credit union's members who vote will have to cast ballots in favor of the charter change, according to state regulations. The credit union will also have to submit the conversion plan and any member comments it receives as part of the information gathering process to the Michigan regulator as well as submitting its disclosure documents to the NCUA for approval. Shook and other credit union sources in the area explained that the credit union has aggressively marketed itself to area residents who were formerly bank customers and who had been left reeling by a series of bank mergers in the community. Those so called "bank refugees" might not want to lose their new financial home, Shook and others explained. "Their [Lake Michigan's] billboards have been very prominent about saying that they were an alternative place for residents to put their money," she said. Shook said she didn't know whether that would necessarily influence any Lake Michigan member's view of the charter change, but she thought it could. Another CEO who did not want to speak for the record spoke more bluntly. "It's up to them if they go, but if they go it's good riddance," the CEO said. "They haven't been a credit union in spirit for a couple of years now, upping their fee schedules and charging people for things like seeing a teller. It's an attitude thing." But Kurt Thelen, CEO of the $114 million LSI Credit Union, also headquartered in Grand Rapids, said that he thought more people had come to Lake Michigan looking for a local financial institution rather than a credit union per se. Thelen, who is a Lake Michigan member himself, said he supported the move even as he regretted seeing a credit union change. "There is a difference between being almost a billion dollars and being $114 million," he said. "They just seem to need more capital and room to serve their members." Echoing Shook and some of the other CEOs, Thelen said he was not terribly surprised that Lake Michigan was opting for the charter change. "We could see it coming for a while now," he said, "when you looked at the growth trajectory they were on." [email protected]