$1 Billion and Beyond

May 2018: Vol 41 No 5

Advantages of scale must be managed carefully.

A mountain climber about to reach the top of a mountain peak in front of a cloudy, sunset sky

Reaching $1 billion in assets has entailed a steady climb for many credit unions—and they’re not resting on their laurels after achieving that milestone.

The largest CUs may wield more resources and a higher profile in their markets than smaller ones, but the advantages of scale must be carefully managed to continue to advance.

“You definitely have to work at achieving efficiency and economies of scale. Size on its own won’t accomplish that,” says CUES member and board chair Kim Sponem, CEO/president of $3 billion Summit Credit Union, Madison, Wis., with 175,000 members.

CUES member Garth Warner, CCD, president/CEO of $15.4 billion Servus Credit Union, one of Canada’s largest financial cooperatives, concurs: “Size provides opportunities to gain economies of scale. It’s not automatic. The efficiencies are there, but continual cost discipline and strategic priority-setting are required to be sure that your costs are rising slower than revenue growth.”

What’s In a Number?

At year-end 2017, according to National Credit Union Administration data, the 287 federally insured credit unions in the $1 billion-plus range accounted for 5 percent of the total number but commanded 64 percent of U.S. credit unions’ combined assets.   

Based in Pleasanton, Calif., 1st United Credit Union joined those ranks in the fall of 2017, in an uptick fueled in part by favorable deposit rates offered with a goal of maintaining the influx of funds from its 58,000 members to meet loan demand, says CFO Steve Stone, a CUES member.

“When we could see that milestone in sight, there was a bit more concerted effort to get us over that hump,” Stone says. “On the one hand, $1 billion is just a number. But as we have gotten to be a larger credit union, it has allowed us to do more things. And psychologically, in terms of selling ourselves out in the community and the pride our employees have in the organization, being able to say we’re a $1 billion credit union, there’s value there.”

Achieving the $1 billion milestone has been “a nice benchmark” with benefits, says CUES member Frank Padak, president/CEO of $1.2 billion/139,000-member Scott Credit Union, Edwardsville, Ill. “It broadcasts that we’re a player and an influencer in the market. Vendors are more eager to work with a larger credit union. They see greater potential, and our transactional volume offers some leverage in negotiating pricing.”

At the same time as it has grown, Scott CU has devoted more energy to maintaining its culture and personal touch with members, training has become more formal and structured, and policies and procedures are documented more thoroughly, Padak says. Large credit unions can no longer rely solely on long-time employees to serve as the institutional touchstone for process and cultural guidance.

The increasing reliance on technology in financial services and the ability to hire the talent they need to optimize their operations proffers an advantage to larger credit unions, suggests Michael Bell, attorney with Howard & Howard, Royal Oak, Mich. “Technology is not the end-all-be-all, but bigger credit unions have more resources to invest in innovations that can increase efficiency and achieve some optimization.

“It’s not all about size, but I do believe that in a heavily regulated industry, bigger is better most of the time, to make credit unions most efficient, most effective and better able to serve their members,” Bell says.

Opportunities and Challenges

Stone says 1st United CU maintained growth by “doing the same thing that all credit unions should be doing.” He advises: “Monitor your procedures for redundancies to eliminate or simplify them. Automate what you can and look to optimize your opportunities. Make sure you’re approving as many memberships as you can. Make sure you’re approving and funding as many loans as you can.”

Chief among the advantages of scale is the ability to hire the expertise needed to support technology and business intelligence initiatives, to keep pace with compliance requirements, and to take chances and survive the occasional setbacks inherent in innovation.

“From that standpoint, especially in the areas of technology and business intelligence, it allows you to do more, and as you do more, you can offer more and better products and services,” Stone says. “You spend more money but tend to get more out of it.”

As 1st United CU has grown, its data warehouse and reporting team has expanded from one specialist to four, who work to combine data from core processing, loan origination, collections, online banking and other systems to track productivity and growth in real time and to disseminate results in reports and dashboards. The team also works on automating processes, such as monitoring fraud and credit risks in granting access to courtesy pay and mobile deposit services and enhancing account alerts so that they provide more timely information for members. (In all, the CU has 152 employees.)

The chief business generators for Summit CU have been mortgage, business and car loans, including indirect lending, with support for loan growth from contact center and branch employees. To maintain that emphasis, Sponem says a key metric she began focusing on more since the credit union reached $1 billion is assets to full-time equivalents. (It now has 540.) In effect, the CU strives to manage the latter to grow the former while maintaining an efficiency balance.

“As you grow, you also get more and more requests for new positions. The key is to determine which positions you need to add when,” she notes. “You need to ensure that your credit union’s ability to pay the bills is rising as fast as the payroll, and you need to staff with folks who are going to generate revenue for you.”

As credit unions get bigger, the pace at which they grow often accelerates. About every $300 million to $500 million in assets, there’s a push to add infrastructure and scalability, Sponem adds. “At those critical points, we especially pay attention to how many positions can we afford to put in place and which make the most sense to achieve our strategies.”

Scott CU’s staff expansions in step with growth have primarily been specialists in IT, risk management, fraud management, compliance and quality control. New positions have also been added in the call center and in collections to keep pace with higher volume, and the credit union now has 265 employees in all. Notably, steady transaction declines have turned branches into “huge billboards,” as Padak puts it.

Still, the credit union may lease new branch locations in its strategy to expand into a new geographic market, raising its profile across the Mississippi River. St. Louis County, Mo., matches the combined 1 million population of the 17 Illinois counties Scott CU currently serves. “Almost half of all our indirect lending comes from Missouri, but we have no branches there so we don’t get those members’ deposits. Branches drive deposits,” he says.

Even with those expansion plans, Scott CU closely manages staffing costs, its largest expense, to maintain its commitment “to create maximum value for the membership without relying on fees or different ways of manipulating member services to increase revenue,” he notes. “Credit unions of all sizes need to assess staffing needs carefully to ensure that every position is needed. Regardless of size, efficiency is critically important to compete.”

Scaling Up

Geographic expansion entails additional “step costs” to create new infrastructure to support that outward growth, notes Warner, whose Edmonton, Alberta-based CU serves 370,000 members in 59 communities across the province with 104 branches and 2,200 employees.

Moving into new markets involves establishing a brick-and-mortar presence, adding staff and expanding marketing and travel costs, he says. “And it requires the development of a new skill set to manage operations and communications remotely to maintain consistent service delivery and quality control across locations. It’s easier to supervise when you can see what’s going on daily, all the nuances of human interactions,” he adds. “There’s a different art and technique in recruitment and retention in more remote locations.”

As credit unions grow, leadership development becomes more essential. “How do you communicate the direction of the organization through multiple layers of management without being able to speak directly with everyone?” Warner asks. “Even with a goal to keep the number of layers between the CEO and front line staff at a minimum, sheer size requires you to pyramid up a bit. You can’t provide effective coaching and support if you’ve got too many people reporting to you.”

Expanding the hierarchy makes it harder to ensure key messages are shared consistently across the organization. “It’s constant work to make sure that everyone is on the same page,” he says. “Communication becomes ever more challenging and more important the larger you get.”   

Automation can help enable communications and streamline operations, but Warner adds, “Fundamentally, as a skill set, I view technology as a tool. It can help people do their jobs better and maybe make them more efficient, but it can’t replace the knowledge and expertise required in leadership, lending, financial planning and risk management.”

Larger CUs need to formalize processes and procedures, such as communications, project management, talent assessment and leadership development, Sponem says. Summit CU partnered with a local college to create a leadership academy to groom future managers and executives.

“One of the things we realized is that just because we have more people doesn’t mean we have more leaders. Bench strength is not an automatic,” she says.

Breaking Down Barriers

The larger a credit union gets, the harder it needs to work to avoid becoming siloed in distinct business units, Stone says. His CU has developed several strategies to ensure that managers and staff across the organization understand and work together toward the same goals. For example, executives regularly reshuffle duties, trade off areas and add departments so that they continually learn more about the business.

“I was chief lending officer for many years before becoming CFO,” Stone says. “I didn’t leave lending behind—I just brought that knowledge with me into the finance area. Lending is the biggest driver of income, so it’s good knowledge for the finance area to have.”

A staff rotation team was also created at 1st United CU to facilitate front line and back-office staff up to mid-level managers working in various departments to learn different aspects of the business. The goal is to help employees become well rounded and engaged while increasing staffing flexibility to cover spikes in demand or employee absences. For example, a branch manager was assigned to handle administrative tasks on the collections team and later worked in real estate lending and finance. Those temporary assignments help spread knowledge across departments and lend an “outsider’s view” to suggest possible efficiencies within business units, Stone notes.

Cross-functional teams provide another pathway to facilitate connections and communications across business units as operations grow in size and complexity, Sponem says. “Collaboration becomes even more important within a larger organization where there are more stakeholders and more people who need to be in the know.”

Carrying the Cooperative Banner

Bell has heard the suggestion that $1 billion-plus CUs are less reliant on cooperative principles, but he soundly rejects that notion. “I’m a firm believer that the cooperative model is just as much in place and may even get stronger the larger a credit union gets. The bigger the credit union, the more it can do for the movement” both on the advocacy level and in promoting the credit union difference, he says.

“The cooperative movement and its underpinnings are in their DNA. It’s what got them to where they are,” he adds. “It’s what
defines their business model and differentiates them from competitors. They have no reason to move away from that.”

Sponem agrees. “I think that being part of the cooperative movement is a huge competitive advantage—our biggest advantage over banks,” she says. “The ability to share information, call on colleagues and bounce things around and learn from them—that’s not available to industries where companies are publicly traded. Collectively, credit unions have a wealth of information and experience to share, and we all are stronger for it.”

The increased visibility of large CUs may help the industry make headway in the challenge of explaining what CUs are and how they benefit members, Stone says. “Anything that can help us get our story out is an advantage for all credit unions.”

“We think the cooperative model is the best model in the world if done right,” Warner says. “We are proud to be a financial cooperative. We adhere to all the cooperative principles of member ownership, directors elected by members, members being able to pass resolutions at the annual general meeting, collaborating with other credit unions and sharing economic gains with members.”

In fact, Servus CU shared $50.6 million in dividends and cash patronage with members in 2017 and $420 million over the last nine years, a significant contribution in a province that has suffered economically. Beyond that financial return, the credit union is committed to supporting the communities it serves and the financial well-being of its members. “Shaping financial fitness is our noble purpose,” he says simply.  

That purpose is echoed in Warner’s definition of the type of growth that Servus CU has enjoyed in recent years: “Organic growth really comes from what you build from within—your core differentiation in the market and the value you offer to members, and the culture and internal processes you build to deliver on that. The bigger you get, the more you can invest in the resources to achieve that.”

Karen Bankston is a long-time contributor to CU Management and writes about credit unions, membership growth, marketing, operations and technology. She is the proprietor of Precision Prose, Eugene, Ore.