The Evolution of Small Credit Unions

[00:00:00] Ron: A credit union, even a large credit union, can’t be all things to all people. So we really need collaboration, both with CUSOs, with strategic partnerships, and alliances to be able to survive. Alright, that’s a given. You’re listening to 22 Minutes in Lending, your go to podcast for insights on all things lending.

[00:00:25] Ron: From lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, host Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive into the latest in lending.

[00:00:42] Vince: Welcome everyone to 22 Minutes in Lending.

[00:00:44] Vince: I’m your host, Vince Passione, and I’m excited to introduce our guest, Ron Draper. CEO of Somerville Municipal Federal Credit Union and chair of the Cooperative Credit Union Association. Ron is a passionate advocate for small credit unions. I look forward to hearing what he has to say. So without further delay, let’s start these 22 minutes in lending.

[00:01:01] Vince: Ron, welcome and thanks for coming on the podcast.

[00:01:04] Ron: Oh, thank you, Vince. Appreciate the opportunity. It’s great.

[00:01:07] Vince: Well, let’s jump right to it. So lots of concerns about giving the current environment, the, the future viability of smaller credit unions. And in the 2nd quarter, there was a recent CU times article that said the approved about 36 mergers because these smaller credit unions couldn’t acquire a CEO or board members.

[00:01:26] Vince: So look, you’re, you’re the chair of the cooperative credit union. I know you do a lot of work with smaller credit unions. What do you think is behind the lack of talent that’s available? And what does the industry do about it?

[00:01:38] Ron: Yeah, I’m very much involved in this. As you noted, I run a 50 million credit union, multi common bond, very close to Boston, a couple of miles outside of Boston and some of them, Massachusetts.

[00:01:50] Ron: And as you mentioned, I’m also the chair and a longtime director of the cooperative credit union association, CC way. I actually got voted in to represent the small at large to the 4 states that CCUA represents, which is Delaware, Massachusetts, Rhode Island, and New Hampshire. So I represent the small credit unions, 100 million and under.

[00:02:12] Ron: So I live and breathe this certainly both personally and trying to help out my peers. I’ve seen that many times and you know, there’s certainly the recent trends kicked off and highlighted by the pandemic of the gig economy, the work life balance that us boomers sometimes cringe at when we hear that, but it’s certainly, you know, it’s a real thing with young people today as it should be.

[00:02:37] Ron: And then even this quiet quitting, but all that aside and all strategic Mergers aside, those are usually of the larger credit unions, the small credit unions, you know, I almost feel like it’s too easy to say that there’s a lack of candidates or there’s a lack of interest. I don’t believe that’s true. I believe that there’s a sales job that needs to be done to show people why working at a credit union is great is rewarding on so many levels.

[00:03:06] Ron: And I think it’s more of a, just having a lack of succession plan. Not having a succession planning, both on a board level and to a lesser extent, a committee level, supervisory or audit committees, but then certainly at the executive level and CEO level. So, in the 11th hour, if there’s no succession plan, and that’s why NCOA about a year ago created a rule or requirement for each credit union to have a written succession plan, board approved.

[00:03:34] Ron: Because too many of these credit unions are saying, look, we just don’t have a secession plan. And that’s a shame. I just think it’s very avoidable. No, it is. And I

[00:03:43] Vince: think it’s New Hampshire. We were chatting earlier, right? Last time we saw each other at one of the trade associations events. Is it St. Mary’s in New Hampshire?

[00:03:51] Vince: Was it the first credit

[00:03:52] Ron: union in the country? St. Mary’s bank. It was called bank because there was no credit union word invented back then. 1908, I believe. Yeah, they’re still alive and well in there. They’re doing phenomenal.

[00:04:06] Vince: That’s fascinating. So one of our prior guests was Pete Hilger, the CEO of Allied Solutions Group.

[00:04:12] Vince: And Pete had just given a great presentation at NAFQ 2023, their engaged conference. And you know, Pete’s a partner of ours, and he’s a big proponent of. Cooperation, right? It’s everything. Credit unions were founded on, right? This cooperative spirit and the importance of banding together and creating partnerships, right?

[00:04:30] Vince: You know, Pete’s business, my business, right? We build these programs that credit unions can use and leverage our technology together. Can you give us an example of 1st, do you agree that these partnerships are pretty critical given how much spend goes into technology these days? And then 2nd. What are some of the successful partnerships you’ve experienced both at being the chair of the trade association as well as the CEO of Somerville?

[00:04:56] Ron: Yeah, I wholeheartedly agree with Pete’s statement. It couldn’t be truer and more on the mark. A credit union, even a large credit union can’t be all things to all people. So we really need collaboration, both with CUSOs, with strategic partnerships. And alliances to be able to survive, right? That’s a given.

[00:05:14] Ron: So I agree. Some of the examples that come to mind that my credit union has used, and it’s really helped us tremendously. I’ll get into a little bit how much it’s helped us. The first one that comes to mind is the QSO. Long term QSO, I think 20 or 30 years is the co op. Both the shared branching and the shared ATM networks.

[00:05:34] Ron: We belong to both about 5 years 6 years ago. I remember I had a hard time convincing my then board to expend the money to be able to get into this program and it was actually brought to my attention through a group discounting program at the time through the C. C. U. A. I thought it would be a great way to us.

[00:05:53] Ron: Not to have to open up on weekends and have late hours and that type of thing and not have to open up branches. Because we’re a single branch credit union, it turned out to be really the major help at the time was the disaster recovery aspect that it brought because during late 2020 between Thanksgiving and the holiday Christmas holiday, we actually had 3 quarters of our staff that had COVID.

[00:06:18] Ron: Significantly enough that we’re quarantined. We had to close. So we had one branch. We’re closed. Thank goodness for the co op. We have assisted credit union that is just about a mile away. So we’re able to direct all our members to there and they did all the transactions as if we, you know, they were here.

[00:06:36] Ron: Sure. They were a little confused and but once they understood, especially during the time. So that’s just 1 excellent example. That comes to mind. The other one is Posh, Posh Artificial Intelligence based out of Boston. And that was actually born, interesting story, that was born through the partnership of two MIT alum that were finishing up, I guess, a senior thesis and they got a one year funding to join DCU, Digital Credit Union’s Innovation Center.

[00:07:10] Ron: They went there for a year, they created Posh, and now Posh. Just celebrated their 100th credit union client. Right? And that’s just a great story. And they came to our credit union, our little credit union about 2 months ago. And they said, look, we’re looking to try to leverage this into the small credit union world.

[00:07:31] Ron: Because a lot of people. A lot of vendors that are in the AI aren’t looking at small credit unions, just not a sweet spot. And we’ve been on them for a couple of months now and it’s just going phenomenally well, I think they, at least according to Posh, we’re one of the first, if not the first generative AI credit union in the country to build, to offer this.

[00:07:53] Ron: So that’s on our website, a virtual chat, and it’s gonna keep on growing and enable us to do more. And we joined some of the ranks of D C U. Some of the much larger banks and credit unions in New England. The other one, I’m saving the best for last, of course, Vince, is our partnership since 2014 with you folks, with LendKey.

[00:08:13] Ron: I mean, that’s just been a service that I never, back then when I was about 35 million or so in assets, and today at 50 million in assets, would never had the resources, both manpower and just expertise. And the software ability to be able to do what you’re from has been able to do for us. No, those are great examples.

[00:08:38] Vince: And I, and we owe it to the credit union space, right? Who helped us understand the importance of low participations and how credit unions would cooperate, right? We originally thought when we launched the business, it was already white label. So, and we’ll get into that, but it’s, it’s very interesting about generative AI.

[00:08:56] Vince: I accredited your size. I remember when Posh launched, I met those guys, you know, really aggressive in what they’re trying to accomplish, but nice to hear that you’ve been able to really leverage

[00:09:07] Ron: it, Ron. Right. And they’re actually going to be, it’s already in the process to be working on with CCWay to be able to offer this to more smaller credit units, more of my peers.

[00:09:18] Ron: So I’m so happy about that. Now

[00:09:20] Vince: that is a great example of being able to reach technology. That’s very expensive and very complicated to implement. And have that power cooperation.

[00:09:32] Ron: This is Ron Draper, c e o of sums credit union. So in 2014, we were looking for a turnkey student lending solution. One that was simple and efficient for our members to access, and eventually we chose LendKey because it just integrated seamlessly for quick member mobile access and. Easy to remotely review and approve from a loan officer point of view.

[00:09:53] Ron: And I should know because I’m that loan officer, I still recommend Lanky to people whenever I get the chance, because after almost a decade, it continues to offer consistent product and service delivery, both to our membership and to our staff.

[00:10:10] Vince: So Ron, next comment is, is really the topic that seems to be coming up a lot in the last six months, and that’s liquidity and deposit growth.

[00:10:17] Vince: Right. We haven’t seen this level of loan to share probably since 2018. I think that was the last time I saw it above 80%. I saw a recent report come outta Q Mutual Group or True Stage saying that the year we might end up about 85% loan to share. So we were chatting before the call about, hey, we used to live in a world of gravity where interest rates were so low, deposits didn’t move alive, but now what Interest rates moving as many times as they’ve had.

[00:10:44] Vince: It’s sort of, we’re living in this zero gravity where deposits can move pretty quickly, and there’s so much technology that lets consumers move them. And you got that wonderful sign up of a wonderful life reminds us as a run on banks, right? And what potentially happened. So tell us a little bit about your experience, both at Somerville.

[00:11:02] Vince: And then what you’re seeing at the league level, what’s happening in your region with deposits and what are some of the strategies? Because we haven’t had to fight for deposits in a very, very long time.

[00:11:14] Ron: Yeah. You know, I guess one benefit of being in the industry for a long time and being around for a while.

[00:11:19] Ron: I first entered the industry, printing industry in 1982. So I think memory serves me right. I think certificates of deposit were like 12 percent and savings rates was 7%. I think my first mortgage in 1981 on the Reagan might have been. 18 percent fixed. So all things that were old sometimes become new. And it’s certainly for those that haven’t been around as long as I have, then this is a little bit of a shock.

[00:11:42] Ron: So great question. You know, I think it’s important to note that as you, I think alluded to is that the credit unions really haven’t been impacted to the extent, thank God of the like SBBs of the world. Uh, and it helps to think about it that 91 percent of the credit unions are. Federally insured and safe and stable during this uncertain time, our credit union, our particular credit union has not experienced a increase in the loan to deposits ratio, and I think that’s because a lot of the New England credit unions, they’re really real estate.

[00:12:17] Ron: Heavy. So we certainly we’re not seeing any real estate activity, of course, in this market, but we’re still holding steady at about 65 70%. So we certainly have enough liquidity. Our members are coming to us. This is something that we haven’t seen in a long time. They’re saying, hey, I can get 5. 5%. Citizens Bank, Bank of America, whoever.

[00:12:38] Ron: So we just, my small staff is just less than a half a dozen of us. Everyone knows that when that situation comes, it’s like, Hey, we match competitors rates. We don’t want to see our funds leave. The loyalty, unfortunately, is it’s a different world than it was in 1982. And certainly people have access online to the latest and greatest rates.

[00:12:59] Ron: So you have to be able to be a little creative. So that’s how we’ve handled it. We also have in place, and many of my small credit union peers, a hundred million and under, even some larger, as a source of liquidity resource would be work leaning on their cooperative credit union, you know, so we lean on East Corp in our area and also a lawyer.

[00:13:20] Ron: Federal credit union, because we have access to secure lines of credit. And that’s how we don’t belong to central liquidity facility. We don’t belong to the federal home loan bank of the federal reserve bank. But I realized that is obviously something that many credit unions do rely upon.

[00:13:36] Vince: Now, Ron, the federal home loan bank, I didn’t realize that.

[00:13:38] Vince: So is it restriction by size? I know you can pledge things like HELOCs there, but is it restricted by size or it’s just. It’s just registering

[00:13:46] Ron: to become a, a, a member. Yeah. No, it’s not restricted by size. I don’t believe it is. I just feel that it, you know, this could be certainly exceptions to this, but usually I see more of my peers that are a hundred fifty, two hundred twenty fifty and up that have those relationships and even securitizing mortgages and selling or, or selling mortgages to Federal Home Loan Bank and increasingly not chewing up their liquidity.

[00:14:10] Ron: Whereas I, my portfolio. A mortgage. So that’s just, I think, a function of not having the expertise in house. Right. To be able to do that. And there is sometimes, as you probably are aware, there’s some intricate, complex applications to some of these federal agencies as well. No,

[00:14:31] Vince: no, and a lot of our clients are leveraging the homework bank right now, as I said, and you’re right, there are lots of different ways to get this done.

[00:14:38] Vince: And the cost of funds are going up, right? As a result of that, it’s not cheap, right? To get it done. So we’ve been waiting for Cecil for a very long time. It’s finally arrived. We’re now 6 months into this big change, right? To the way. Credit unions deal with how they project losses on these portfolios and a big hit to capital, right?

[00:15:00] Vince: Given the fact that you need to take the hit all up front. So, how has CECL affected you? Is it, is it turning out the way you thought it was turning out? And what about your peers? What are they saying about the CECL rollout?

[00:15:13] Ron: Yeah, I’m not hearing a lot of discussion amongst my peers, which leads me to believe that no news is good news.

[00:15:19] Ron: Look, using my own credit union as an example, we, Just using the old allowance for loan loss and lease reserves, we certainly were more significantly over reserved. And then once we put in Cecil, which we used a quick rate, a fairly well known industry provider, both on CD rates. And now they came out with a product called Cecil Solver, very affordable.

[00:15:46] Ron: We outsource that model to them, but certainly we run it ourselves. Every quarter. We’ve I like the fact that you’re able to tweak and you quickly have it. You’re back in call. You have a platform. You’re able to look and see. Okay, what’s my industry doing? I don’t, you know, you have the peer data is provided by N C A, that you don’t have to separately look up, that’s all integrated.

[00:16:08] Ron: You also have the ability to append like quality and environmental factors. So I feel it’s just more an administrative, much more easier it. But once again, I don’t have as much reserved as I once thought I did, you know, and, and with the relationship we have with LendKey, even. Prior to Cecil, certainly from the day 1 in 2014, you’ve always had great data on historical losses, and we’ve certainly been able to use that to our benefit.

[00:16:37] Ron: Now, it’s

[00:16:38] Vince: interesting you touched on that. So, you’ve been buying participations for some time. The question now with Cecil, does that change the way you decide where you buy loan participations from when you do it? Or is it business as usual

[00:16:52] Ron: for you, Ron? It has been business as usual, although we have not, aside from LendKey, we really have not been that active in other participations because they were more real estate and also commercial real estate participations, so that is dried up for the present moment.

[00:17:10] Ron: But we have a lot, you know, we’re about 15 percent capitalized on our net worth, so it’s fairly strong. I would consider that though, going forward, whenever there is an opportunity for loan participations, and I just feel like it’s another tool that I have.

[00:17:25] Vince: So, we prior guest was Matt Harris, who is a partner at Bain ventures.

[00:17:30] Vince: And 1 of the things that Bain just raised about 1. 9Billion dollars in a venture fund. And 1 of the technologies they’re looking at aside from generative AI. Is embedded finance and D. C. U. C. conference, the defense creating council conference. Tony Hernandez had a speaker up there and they were also talking about the importance of embedded finance, right?

[00:17:52] Vince: Very what we see at Uber, right? The ability to embed payments, right? Into any application important. Is that to you and to your peers when you think about how to keep your credit, you’re relevant and placing you at that point of sale.

[00:18:08] Ron: Yeah. I think it’s crucial from I read a recent financial brand article.

[00:18:14] Ron: I think it was about a week ago and they said that it’s gearing up towards 50 percent of people spend. That’s going to be through embedded finance. Right? And then it’s. Going to quadruple between 2021 and 2025 between like 41 billion and 160 billion. So, as a small credit union, and hopefully I’m not mischaracterizing me and many of my peers, but, you know, when we hear something like embedded finance, you’re like, oh, my God, what the heck is it number 1?

[00:18:49] Ron: And then how do we get it? And what do we do about it? And can we ignore it for a while? So, I think those figures that I just mentioned show that. That would be foolish to, you know, it would literally be a death sentence and perhaps not a slow death sentence to ignore that. So, as you mentioned with Uber and other things, our consumers, our members have been using this.

[00:19:11] Ron: We’ve all been using these products ourselves for many years. We may not consider it. And certainly our members don’t call it. I don’t think they call it embedded finance. But when you’re getting things through DoorDash and Uber and PayPal and those typical means, then even indirect lending, I think it could be characterized as a form of embedded finance.

[00:19:33] Ron: And that’s been around for decades, uh, you know, better than most, right? So that is just. It’s crucial. It’s imperative. It’s not going to go away. And credit unions of all size, and somehow the small ones, I have an idea how they could, but somehow the small ones like myself need to embrace that more. No, you’re spot on.

[00:19:55] Vince: I always argue that indirect auto was the original embedded finance for credit unions. When you really think about it, right, the consumer shows dealership, the F and I manager turns around there in the middle of the sale process, introduces the credit union, closes the deal payment occurs and obviously much larger payment than paying for your Uber drive, but driving, but something crazy has been doing for a very, very long time, which makes this a natural fit.

[00:20:20] Vince: Right I would say, like, what’s old is new again, right? The tech is changing, but the concept for credit unions is not new. And it’s 1 that, as you said, we both know pretty well. So, well, cyber security, right? Getting close to our last topic here. So. Lots of investment in tech, right? You’re using people like Posh, which I think is just fascinating.

[00:20:41] Vince: I think I didn’t think we would be talking about generative AI, Rob today. So I think that’s awesome. When you think about cybersecurity and partnering with people, you’ve got this upfront cost to create this partnership. How do you protect the credit union then from cybersecurity? Right? We see this all over.

[00:20:56] Vince: We see this everywhere, right? The fraudsters are getting more and more clever. They have, they seem to have lots of resources. How do you

[00:21:03] Ron: protect yourself? Yeah, it really is. It starts internally and externally. And by internally, really, if you’re fortunate and most small credit units aren’t to have an in house compliance person or manager or specialist, then that’s certainly beneficial.

[00:21:20] Ron: And and. Easier because you have someone dedicated to that, but that’s usually not the case until you become a larger credit union. With that said, then you have need to outsource that, right? Because you just can only wear so many hats. And that’s a specialized field. You need to outsource it. N. C. U. A. has a resource page on cyber security.

[00:21:39] Ron: There’s a lot of cool tools under that evaluations and exams that you can self administer just to get a feel as to Sure. How good and maybe not so good you’re doing in that area, but I think it’s paramount to be able to find a vendor or an alliance partner that knows that area. Right? And once you’ve done your due diligence, certainly vendor management, due diligence, big part of all this is to be able to rely on them to a certain extent.

[00:22:04] Ron: But then you get that other part, which is more like dealing with your members, dealing with your own staff. A small credit unit staff, a larger credit unit staff and more employees, I’m sure it’s more challenging, but these phishing and different items like that that happen through email, through phone calls, that’s alive and well, so you need to have everyone on the same page.

[00:22:26] Ron: You have to have your members be aware. I think you mentioned before we were speaking about my own credit unit, I have You know, a post up there from recent, I have more old school fishing that was done by have some elderly members being contacted, basically getting information from them being portrayed as the credit union and then creating fictitious accounts.

[00:22:48] Ron: And fortunately, my branch manager was able to catch that very quickly, but it was not that sophisticated, but the sophisticated ones are the ones that concern us all. And that’s why we really need to be looking for alliances and partners in that field. Yeah,

[00:23:03] Vince: look, it’s where we started in this conversation.

[00:23:05] Vince: I think for small credit unions and most credit unions, those alliances are pretty critical and it sounds like you’ve got a bunch of great experiences and best practices, Ron. So thank you for sharing the insights today. Sure. That’s all the time we had. I’d like to thank Ron again for coming on the podcast.

[00:23:20] Vince: I’d like to thank our listeners for tuning in. Make sure you subscribe so you can join future episodes and I’ll meet you all here at the next 22 Minutes in Lending. Thanks again. Thank you, Ron.

[00:23:29] Ron: Thank you. Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode.

[00:23:37] Ron: You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, please be sure to subscribe and leave us a five star review.