CHICAGO — Three years will likely pass before Alliant Credit Union and The Golden 1 CU reach $10 billion in assets. But that growth target is already on the radars of the $8 billion shops that are preparing today for how life changes once they move beyond the threshold.
Both credit unions said the $10 billion bogey has garnered their attention due to new rules the institutions fall under once they reach that size - losing the carve-out for the new debit interchange guidelines and falling under the Consumer Financial Protection Bureau's direction.
Yet, they say neither present an obstacle.
Today, four credit unions are above $10 billion in assets: BECU, Tukwila, Wash.; Navy FCU, Vienna, Va.; Pentagon FCU, Alexandria, Va.; and State Employees' FCU, Raleigh, N.C. A fifth CU, SchoolsFirst FCU, Santa Ana, Calif., is poised to pass the asset mark by year-end. The Golden 1 and Alliant both project they will join the club in about three years.
"The $10 billion mark, in and of itself, is not impacting our priorities and affecting our strategies to any great extent," said Alliant CEO David Mooney. "In the grand scheme we tend to view reaching $10 billion as somewhat arbitrary and irrelevant. But, to be fair, it is real."
More Regulatory Exposure
What is most real, according to Mooney, is falling under the examination and enforcement powers of the CFPB. "There will be greater regulatory exposure and scrutiny, and we are preparing now to deal with that."
In Sacramento, Calif., Donna Bland, CEO of The Golden 1 CU, holds a similar perspective, saying the credit union will not change its business approach when it falls under CFPB direction. "The key to our success has always been our focus on the member and the community. Providing exceptional service, 24/7, does not change with CFPB enforcement. We are there for our members whenever they need us."
What has Alliant concerned is that the CFPB is a new agency. "There are wild cards," said Mooney. "The CFPB is still figuring out its approaches in many cases, so it's hard to predict exactly what it will be like under their regulation."
One thing Mooney is certain will happen is additional data collection and reporting, which will mean more human resources expended and time spent with regulators making sure the credit union is in compliance with all the laws.
"It's an issue of greater regulatory burden and regulatory exposure," said Mooney. "There is now greater opportunity for violations and sanctions."
Alliant is getting out ahead of the increased regulatory burden and adhering to many of the CFPB rules today, explained Mooney. "For example, we are moving now to a more formal complaint tracking system, which the CFPB requires. We are adding, as well, to our legal staff."
Increased NCUA Scrutiny, Too
Mooney noted that credit unions with more than $10 billion in assets are also subject to increased scrutiny from NCUA.
Mooney added, that overall, it won't be that difficult adjusting to CFBP guidelines since the agency has already been reaching below the $10 billion threshold with its enforcement power. "The CFPB seems to be ignoring that dividing line and has been promulgating rules for everyone."
What also makes the change to CFPB oversight a lot simpler for the credit union, according to Bland, is that many of the rules the agency enforces have been in place for years.
"The CFPB is just the oversight entity for many of the laws that have existed for years, like Truth in Savings, Fair Lending...," she said. "I think some people misunderstand and think you don't need to comply with the CFPB until you pass $10 billion. Not true. We have been complying with CFPB rules all along and are in line with all of them."
In The Golden 1's perspective, the $8.2 billion credit union simply needs to be prepared to be audited by the CFPB. Bland said the credit union may hire additional compliance staff to address the greater documentation demands that are coming. "We will have to spend time demonstrating our compliance."
Interchange Issues
Mooney and Bland agree the other big shoe that drops when credit unions pass $10 billion is the lower interchange rate mandated by the Durbin rules for FIs above that asset size.
But Alliant and The Golden 1 say they are not overly concerned about the drop in interchange due to both CUs steadily preparing for a reduction in interchange since the new rules took effect.
What softens the blow, as well, said Bland and Mooney, is the expectation that interchange rates for regulated FIs will eventually trickle down to those below $10 billion, and both CEOs also pointed to the uncertainty surrounding the future of debit interchange with the Durbin rules being challenged in federal court and the changing payments landscape.
"While we believe in the two-tiered interchange structure, we know the market will not support it over time," said Mooney. "That said, what the impact on us will be when we pass $10 billion is hard to say. I guess we will find out when we cross that line."
Alliant is already countering any future interchange reduction by increasing checking penetration, which Mooney described as "relatively low" at his CU, driving more debit transactions.
Bland projects that higher transaction volume will offset much of the interchange rate decline, as the credit union has been adding new members at a strong pace for the last two years.
"Let's just say that we are aware of what happens with debit interchange when we become a $10 billion credit union," said Bland. "But we will do what we have always done best, and that is provide members with the very best products and services, which will add to member totals and increase debit transactions."
The Golden 1 also plans to further tighten its already lean operating structure. "We have very good operating expense ratio (1.76% net operating expense to average assets), but we need to become even more efficient."
The CU will turn to greater automation, improving electronic access and the experience members receive across mobile and home banking channels. "We won't force a delivery channel on members, but we do need to educate them to show them how easy it is to perform a transaction online," said Bland.
Both CEOs emphasized that their credit unions are not growing for growth's sake. "We are not looking for bragging rights," said Mooney. "It's nice for the ego to grow, but it's not our goal to be among the biggest credit unions."
In fact, growth has leveled off at Alliant, posting $8.27 billion in assets at the close of 2012 and $8.17 billion through September 2013. Mooney attributes the flattening to continued effects from the economy and the low-rate environment, and expects growth to pick up as the economy recovers.
"For us it's mostly about healthy growth," said Mooney, who said the credit union is concentrating on its low (40%) loan-to-share ratio.
Streamlining Is Key
Alliant's growth over the years has come from its streamlined business model, said Mooney. Alliant reaches nearly 300,000 members nationwide with only 14 offices.
"We look a lot more like a direct bank than a traditional branch-based financial institution. At our branches we don't have any cash operations and a very limited transaction set. Most members access us remotely - online, mobile - we are very efficient.
As a result, the Chicago-based CU boasts an expense-to-asset ratio below 1%, which allows it to offer low loan rates and high deposit rates, including a 70-basis-points savings account. "The approach has attracted a great deal of high-wealth members who prefer deep relationships," added Mooney.
The Golden 1 has grown at a steady pace over the last five years and Bland attributes that to the strong brand the credit union has built in its widespread California markets served by 82 locations. The CU started the year with 630,000 members and is in on track to hit 650,000 by year-end.
Bland said the credit union relies on outstanding service and efficient operations to win new members. Like Alliant, lean operations allow the credit union to offer attractively priced products to bring in new members, and then the CU keeps them and expands relationships with superior service, said Bland.
Economies And 'Diseconomies' Of Scale
Mooney added that greater size brings more economies of scale, which the CU welcomes.
But longer term, if the CU grows too big, the CEO is concerned about losing touch with members.
"There are 'diseconomies' of scale in terms of efficiencies and effectiveness when you reach a certain size - like the behemoth banks. Mangers can become highly removed from the membership. Management also becomes separated by many layers and therefore is not very connected to what going on in the marketplace."
With all its advantages and disadvantages, $10 billion is coming for both The Golden 1 and Alliant. Mooney looks at what's looming with optimism and acceptance.
"The greater compliance burden, that's like death and taxes, not much we can do about that. But in general, whatever comes when we pass $10 billion - the greater economies of scale or the cut in debit interchange - we will absorb it all and keep moving forward."
