A group of seven credit unions are taking advantage of a 2016 change to the Michigan Credit Union Act to provide trust services for their members.
Historically, only federally chartered credit unions were able to offer trust services in Michigan, so state-chartered credit unions had to send customers elsewhere. But in 2016, the state’s legislature amended the Michigan Credit Union Act to permit state-chartered credit unions to form a credit union service organization to offer trust services.
"The Michigan legislature's action simply gives our state-chartered credit unions parity," said David Adams, president and CEO of the Michigan Credit Union League.
The seven credit union organizers — Farmington Hills-based Community Choice CU, Alpena-based Alpena-Alcona Area CU, Burton-based ELGA CU, Frankenmuth-based Frankenmuth CU, Berrien Springs-based Honor CU, Midland-based Members First CU and Saginaw-based Team One CU — will form a trust bank named Credit Union Trust. The trust bank will be the first of its kind in Michigan. It will not accept deposits or make loans; it will offer investment, trust and related services only.
Scott McFarland, CEO of Honor CU, said the seven credit unions are like-minded in terms of offering new products and services and have a shared geography. The credit unions have previously looked at opportunities to collaborate in other areas. McFarland said too many CEOs in a room can lead to a lack of focus, so it is unlikely the group will expand to include other credit unions in the near future.
McFarland told S&P Global Market Intelligence that the idea came about after credit unions repeatedly had to send members to banks to find those services. "When people start talking about trust, we have to defer and say 'we can't do that,'" he said.
The state of Michigan has 100 days from the date of application acceptance to approve the group's application. That period expires Oct. 31, and until that time Credit Union Trust is not an official entity. Bob Sajdak, who is slated to be the CEO of Credit Union Trust, said the organization is targeting the first quarter of 2019 to be up and running. It will operate out of Community Choice CU office space in Farmington Hills.
All seven credit unions have equal partnership and will contribute evenly to the $5 million in startup capital it estimates it will need. McFarland said customers of the bank will likely first need to be members of one of the partner credit unions. "It's the members' money, so we're very cautious of that," he said.
McFarland said the institutions want to drive membership, and that having the trust bank might attract people who otherwise would not have been interested in joining a credit union.
Sajdak, who was previously senior vice president and group business manager for Comerica Bank & Trust NA, said in an interview that about 25 Michigan-based banks offer trust services and another 25 based in other states operate in Michigan. He pointed, for example, to Northern Trust Corp. as a large out-of-state provider with offices in Michigan.
Sajdak said Credit Union Trust will likely offer services and take on smaller customers that many of the larger banks do not want because the business does not move the needle enough.
But Adams said that as with any new business there will be a lot of competition, and the founding institutions might need to partner with other credit unions to create enough scale to support the operation. "But this certainly is no threat to banks and their trust operations. Many don't offer trust services because it isn't very profitable," Adams said.
Credit Union Trust will not be insured by the FDIC and will not be a member of the Federal Reserve. It will be regulated by the State of Michigan's Department of Insurance and Financial Services, Bank & Trust Division.
Sajdak said the only similar bank he is aware of in the U.S. is Tampa, Fla.-based MEMBERS Trust Co.
McFarland said the bank hopes to break even in its first three years and to show a profit in year four.