Managing Up to Member Expectations

The NCUA’s latest statistics show an acceleration of the decline of small credit unions, even during an era that is showing record gains in earnings, market share and membership for the movement as a whole.

The number and size of mergers is expected to increase this year, and Washington State is reflecting that trend.

In December, two small Puget Sound credit unions merged as Community 1st Credit Union ($110.5 million in assets, 8,245 members as of September 2018) acquired Generations Credit Union ($38.2 million in assets, 5,215 members).

That same month, Gesa Credit Union of Seattle ($2 billion in assets, 162,781 members) announced plans to complete a merger in 2019 that will make it the state’s second-largest one by acquiring Inspirus Credit Union in Richland ($1.3 billion in assets, 79,831 members).

The American Bankers Association has been amplifying a narrative in recent years that big credit unions are unfairly expanding and gobbling up the small, vulnerable credit unions.

But William W. Paulen, president/CEO of Community 1st, said that “meme” distorts the reality he’s facing: An environment with much larger banks and fresh competition from newcomers.

Community 1st, now $150 million in assets, is much smaller than most of the credit unions in the area, but they are tiny compared with banks in the area. JPMorgan Chase ($2.2 trillion in assets), Bank of America ($1.8 trillion) and Wells Fargo ($1.7 trillion) each have more assets than the entire U.S. credit union movement and together have $71.2 billion in total deposits in Washington State.

Competition from banks and credit unions is a familiar business condition, Paulen said. His bigger worry is the potential disruption from outside entities like Amazon.com, Facebook and Wal-Mart, which want to start making loans.

The rapidly-changing competitive environment and rising consumer expectations for convenience in doing transactions remotely have made technology improvements and other improvements vital for survival, Paulen said.

“It’s not a nice-to-have as it might have been maybe 10 or 15 years ago; it’s a must-have,” Paulen said. “We’re not just in competition with the other banks and credit unions around us, but also with other market entrants. The smaller you are the harder it is to authorize that $30,000 or $60,000 to modernize a system.”

Even with the use of CUSOs and outside venders, size limits “organizational bandwidth” – the depth of talent and time needed to identify, pursue and manage process improvements, Paulen said.

For those reasons, Paulen has a long-term goal for Community 1st to reach $250 million in assets, a size where he thinks the credit union will have the economies of scale to best fit its mission. Community 1st is already in talks with credit unions both in Washington and neighboring states.

“We don’t see the Generations merger as being the last merger we do,” Paulen said. “I believe there are other credit unions out there that will be excited about the possibility of partnering with someone like us.”

The rate of consolidation among credit unions has been almost identical to the rate among banks, Sam Taft, associate vice president of analytics for Callahan & Associates in Washington, D.C., said. The difference, he said, is that banks are much bigger.

While credit union efficiencies improve with size, Taft said mergers are not the only way to achieve economies of scale. State leagues, corporate credit unions and CUSOs can provide support for smaller institutions.

“Being an analytics company here at Callahan, we see plenty of small institutions – sub-$50 million even – doing interesting and creative things,” he said.

Taft said the common denominator is that they participate heavily with others in the movement. Some examples include:

• Rekindle Go Big, an alliance of small credit unions in Pennsylvania formed in 2003.
• CU Direct, a CUSO based near Los Angeles that offers software for credit unions to offer indirect automobile lending through its CUDL network and develops other software for direct car loans, home equity lines of credit and mortgages.
• myCUmortgage, a CUSO formed in 2001 by Wright-Patt Credit Union of Dayton, Ohio that helps small credit unions offer a wide variety of mortgages.

On the other hand, some credit unions disappear because their boards have failed their fiduciary duty to look out for the long-term interests of their members.

“We’ve all heard horror stories of situations where you have a CEO just running out the clock, then they just fold, rather than try to find a successor, or it’s a merger of convenience. Those are, to a certain extent, a failure of their membership,” Taft said.

Paulen, 48, worked in banking for most of his career. He was with Washington Mutual in 2008 when it imploded, and spent the next couple of years in consulting. His first direct exposure to credit unions came in 2011 when he took a job as a credit union examiner for the Washington State agency that regulates financial institutions.

Paulen’s first CEO job was at Generations from 2014 to 2017, when he was hired by Community 1st.

Both faced challenges. Generations had heavy loan writeoffs that led to losses. It also made heavy investments to its technology, but its biggest challenge was to make more loans. One target was Generations’ small, high-performing portfolio of point-of-sale loans, mostly loans to homeowners that came from referrals from heating and air conditioner installers.

The program expanded from a handful of contractors to more than 100 contractors referring loans. And Generations developed a specialty with loans for household solar energy installations.

Despite improvements in its results, Generations was still facing limitations.

“We either needed to raise deposits, or sell loan participations, or we needed to find a partner to merge with that had some more cash available to feed the lending machine,” Paulen said.

Paulen discussed this with the Generations board before he took the job as CEO of Community 1st in August 2017. Community 1st’s board liked the idea of a merger too. Its membership was languishing, and its technology needed updating.

Community 1st has its headquarters in DuPont and eaches 110 miles north along the eastern shore of the Puget Sound with its pre-merger branches in Tacoma, Shoreline, South Seattle and Bothell.

The merger added Generation’s single branch in Olympia, extending the line southward 15 miles to the southern end of Puget Sound.

Paulen chose to carry out the merger so that the Generations brand will remain, with its signage noting it is a division of Community 1st. Generations will have more control over its operations than it would if its branch was folded directly into Community 1st.

The approach was inspired by the Filene Research Institute’s “The Network Credit Union” white paper published in 2016. The idea is to maintain what is successful in the organizations – their familiarity and bond with members, while bolstering the areas where size is critical.

Paulen said the fruits of scale include not only the dollars to spend on vendors and CUSOs, but the experience of those in the organization who have successfully led improvements, and giving them more time to carry out future improvements.

He thinks other like-minded credit unions will notice. “When they see this business model, I think they’ll be attracted to it.”