Driving Growth Through Member-Centric Lending

[00:00] Richard Wada: I really think it is just to be eyes wide open that consumer behaviors shift so quickly. And it is imperative for a credit union to keep an eye on what’s happening in terms of shifting consumer behaviors and to react accordingly.

[00:24] Narrator: Welcome to 22 Minutes in Lending your go-to podcast for insights on all things lending, from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[00:47] Vince Passione: Welcome everyone to 22 Minutes in Lending. I’m your host, Vince Passione. And I’m happy to have our next guest, Richard Wada, Chief Lending Officer at Patelco Credit Union, join us today. Richard has held executive roles at Citibank, including Global Head of Personal Lending and Head of US Retail Consumer Lending. Since joining Patelco, Richard’s been instrumental in driving the credit union success, leveraging his expertise in digital transformation and customer-centric strategies.

[01:12] Vince Passione: So Richard, great to see you. Little speeds and feeds on Patelco, so Patelco Credit Union is one of the top 1% of credit unions by asset size, about $10 billion. Based in the Bay Area in Dublin, California. With 500,000 members, which by the way, I noticed that you signed your 500-member just three days ago, so congrats on that.

[01:32] Richard Wada: Thank you.

[01:33] Vince Passione: Credit Union was founded back in 1936, from our research, with $500 for employees of Pacific Telephone and Telegraph Company. So amazing history, Richard. So lots of credit unions focusing on balance sheets and reallocating their balance sheets. Why don’t we start with the strategy for Patelco’s balance sheet, Richard?

[01:51] Richard Wada: Sure. So thanks for having me, Vince. I’ve been at Patelco now for six years. And since I’ve arrived, Patelco has really been on a mission to create greater diversification of its loan portfolio for a couple of reasons, one is to provide a more diverse set of offerings to our membership, and the second is, from a financial perspective, to better position our balance sheet for various economic cycles.

[02:21] Richard Wada: When you start to think about diversifying the portfolio, you start to think about meeting members where they are as well, because mortgages tend to be heavily reliant on a loan officer distribution model, and auto lending can tend to be sourced very heavily through indirect auto dealers.

[02:41] Richard Wada: So along with this diversification strategy came a need to build our, I’ll call it our acquisition, our loan acquisition capabilities by going direct to our members or prospects through greater targeting capabilities so that we could create prospect or member segments that we would want to specifically target with higher likelihood to opt into our loan products.

[03:41] Richard Wada: So building that data and analytics and modeling discipline came to the forefront, as well as creating new fulfillment channels. And you may see in the FinTech world the check my rate capabilities, so we fully built that out in those years, allowing the soft pull and presenting offers and allowing a member to complete the loan 100% digitally.

[03:42] Richard Wada: We also did that same work on the deposit side, and that’s becoming, obviously, increasingly important as-

[03:50] Vince Passione: That’s right.

[03:51] Richard Wada: … the war for deposits has intensified, as the rates and the yields on deposits have increased. So it was really fortunate that we’ve made the digital progress over the last five, six years because an increasing percentage of our new checking and deposits are actually coming digitally.

[04:12] Vince Passione: Makes sense. So on the balance sheet on the mortgage side, it looks like looking over the last three years, so it’s a nice growth in the mortgage portfolio. It looks like you closed out 2023 with about 19,000 residential loans on the balance sheet. It’s slowed a little bit though in ’23. I’m curious, when we think about the rate environment and the rate cycle, how did that affect the mortgage book for you?

[04:38] Richard Wada: I think we’re not immune from the big downturn in demand for mortgages because in 2020 and ’21 when Fed funds were effectively zero, most folks had refinanced into three, 3 1/2% fixed 30-rate loans. We were early to say, “Hey, we’re exposed, potentially, to some duration risk on these very low fixed rate 30s.” And we started to get cautious in late ’21 when the portfolio was churning. So the economics of that churn weren’t favorable to begin with, and we were taking on duration risk with those new originations knowing that rates weren’t going to stay this low forever.

[05:37] Richard Wada: Vince, what I think I’m getting to is that this sort of deceleration on the mortgage side was very purposeful with the mind towards sort of managing the interest rate risk once rates started to go up. So we effectively, in ’22, I think we decreased our mortgage originations by more than half from 21. And then, in ’23 we’re down probably another 40% off of that. And so, we’ve been just very cautious.

[06:09] Richard Wada: On the flip side, in terms of payoffs or refis out, that activity has been at historic lows for us because there just isn’t much origination volume happening in this high-rate environment. So from a balance perspective, we are still holding and growing slightly, but we’re going to be holding these three, 3 1/2% fixed rate mortgages for a while.

[06:38] Vince Passione: Now, Richard, any chance of selling any of that book?

[06:43] Richard Wada: Great question, Vince. I think that’s in our future. In hindsight, we just don’t have the outlet right now. We do sell conforming mortgages to Fannie, but that is in our future, is to create greater sophistication in terms of our outlets because we have such a great market here in the San Francisco, Bay Area, it’s a terrific housing market. And our originations engine is very successful. So it is in our future to create greater diversification of our outlets.

[07:29] Vince Passione: Yeah, look, it seems like the entire credit union industry is trying to get there, right?

[07:32] Richard Wada: Yeah.

[07:32] Vince Passione: To figure out how to become a great originator and learn how to sell on a regular basis. We [inaudible 00:07:38]-

[07:38] Richard Wada: You’re seeing that? Yeah.

[07:40] Vince Passione: Yeah, the auto side, right?

[07:41] Richard Wada: For sure.

[07:41] Vince Passione: I think you’re up to the 12th auto securitization. So it’ll happen, it’s just taking time.  So staying on the mortgage front, you signed a relationship with myCUmortgage last year, can you talk a little bit about that?

[07:56] Richard Wada: Yeah, I think it does come in the context of really trying to stay relevant with our product offerings to members and to the various partners that we work with to source mortgages, so realtors, builders, et cetera. So where we saw a lot of value in myCUmortgage is the ability to offer products that we wouldn’t necessarily want to hold on our balance sheet so that don’t necessarily meet conforming or conventional underwriting standards when it comes to FICO or LTV. So the advantage with myCUmortgage is that it allows us to offer to our business partners and to our membership, the various government guaranteed loan programs that are specifically tailored to meet, perhaps, lower moderate income or provide greater flexibility when it comes to FICO or LTVs, so think VA, FHA, USDA, government-insured. We don’t hold that loan, so myCUmortgage will fund that loan or purchase that loan and then sell that in the secondary markets. So it does meet that criteria for us of being able to offer a broad array of products to our members and our partners and then not necessarily carry that risk in our portfolio.

[09:36] Margie Click: Hello, this is Margie Click, CEO and President of Agriculture Federal Credit Union. As a $360 million credit union, we’re always looking for ways to innovate and expand our financial solution offerings to attract new members. That’s why for nearly a decade we have been partnering with L&T to attract and acquire new credit union members.

[10:01] Vince Passione: Now, Richard, you touched on moderate and lower income, I didn’t realize, is Patelco a CDFI or it’s not?

[10:07] Richard Wada: We are not, no.

[10:08] Vince Passione: Okay.

[10:09] Richard Wada: Yeah.

[10:10] Vince Passione: And when you think about the demographic, your member base today and where you want to take the membership base, do you skew, in the average like most credit unions, about 50 years old for a member or you skew younger?

[10:22] Richard Wada: We are really skewing younger. The latest data I saw showed our average age is 46, but getting younger, so of our 500,000 members, the average is 46, but of our new members over the last year, it’s skewing closer to 40, 42. So that’s been very purposeful for us, and it’s one of the things I’m really, really proud of is just our ability to stay relevant in a highly competitive, modernized, sort of San Francisco techie market. We’ve averaged about seven or 7 1/2% membership growth, which is-

[11:16] Vince Passione: Impressive.

[11:08] Richard Wada: … really in the top decile of all credit unions.

[11:12] Vince Passione: Well done. Well done. And when you think about this next generation millennials as home buyers and product innovation here… Because affordability is a big issue. We’re just looking in our research and it looks like… Was a California State Farm announced it’s not going to renew over 70,000 policies for homeowner insurance? So this whole cost of homeownership, especially for millennials and Gen Zs, any product innovation that you think of in the industry that people are thinking about that can somehow deal with the affordability issue except anything other than a hundred-year mortgage? Right.

[11:47] Richard Wada: I think it is a brutal nut to crack, especially in the San Francisco, Bay Area. There’s the affordability challenge and the scarcity of inventory that’s unique to our market. And so, the cost of entry is super high as you say. One of the things, I think California State recognizes this problem, so there’s a state agency, the California Housing Finance Agency, and so, we have recently been approved for their programs which do provide down payment assistance and closing cost assistance. But I think that’s an example of an opportunity that is partnering with some of the agencies to leverage some of those programs.

[12:37] Richard Wada: And then, ultimately, down the road, I’d love to think about Patelco considering some of its own grant programs. As we get bigger, I could see a future where we’re beginning to do some of those subsidies that are self-financed.

[12:56] Vince Passione: Understood. Understood. Now, in our research, it looked like you launched ScoreUp Credit Builder back in 2022. What was behind that?

[13:04] Richard Wada: What’s interesting about Patelco is Patelco has really internalized that mission to promote financial wellbeing to its membership. And what I mean by that is creating products that actually promote the financial wellbeing through the use and adoption of that product. So we have multiple products and ScoreUp is an example of that. So by using this product, it was specifically designed to help those who are new to credit or who may have damaged credit restore a stronger credit score.

[13:40] Richard Wada: And so, the way it works is you basically take out an installment loan anywhere from 12 to 36 months, and rather than depositing the proceeds or dispersing the proceeds to the borrower, it goes into a savings account and every payment is applied towards that savings account, so you’re building your credit. And should you fall behind or be at risk of delinquency, we’ll close down the loan and disperse the savings back to the member.

[14:11] Richard Wada: So what we’re trying to do here is create a savings account because once you’ve fully paid off that loan, you have a fully funded savings account, so you’ve created savings. And you’ve also helped build your credit score through consecutive on-time payments for the duration of that installment loan. And then, what we’re seeing is about 65% of our members are showing an improvement in their credit score after three months. So it’s working as designed and as an example of creating a financial wellbeing benefit through use of the product.

[14:54] Vince Passione: And demographically, is it younger members that are building credit or it doesn’t sort of fall into any specific age category?

[15:01] Richard Wada: It’s both, but that is a really valuable opportunity for that segment. So-

[15:05] Vince Passione: I imagine.

[15:06] Richard Wada: … our frontline team members are really positioning it as a way for someone new to credit, such as a younger person to really be able to build credit in a responsible way.

[15:21] Vince Passione: Now, so you touched on the youth piece, and we’re looking at the stats on sort of opening up primary checking accounts versus just looking at payment methods, looking at PayPal and others. When you think about your payment products, those debit cards, how do you view that when you’ve got a consumer comes in and that’s the relationship? Is that the primary relationship for you? Is that the way you look at it, or is it still that checking account with that direct deposit of a payroll?

[15:49] Richard Wada: I think this is an evolving space. If I step back, I think when deposits were easy to come by for 10 years following the great crisis, I think we sort of lost sight of the appreciation of an operating account. Back in the old days of banking, it was a primary banking relationship through checking. So I think today, that’s probably morphed into a primary operating account for payments. And so, it’s not just a paper check, but it’s Zelle, it’s whatever kind of in and out, money movement, transactional account is needed.

[16:33] Richard Wada: So we’re really looking at that transactional account as being primary for us and putting more muscle into how do we round out that value proposition so that we have higher likelihood to own that operating account and all the money movement associated with it, be it debit card, peer-to-peer, whatever type of money movement that member might desire.

[17:04] Richard Wada: So to answer your question, I think it is closer to a checking account versus debit card. Debit card is just one payment rail, but ultimately, we need to have a hub for that member that serves all of the payment and money movement needs that that member may have.

[17:24] Vince Passione: Great. So we’re getting close to time here in our segment, but you started your career in marketing at Saatchi and Saatchi, and then you had roles at American Express, and then, you and I worked together when we were at Citi. And obviously, you’ve made this transition over to credit unions, although I beat you, but just want to make sure you know that. But when you think about… What is the most critical marketing lesson that credit unions need to learn based on these past six years, your experience at the credit union?

[17:57] Richard Wada: I’m trying not to sound cliche on this one, Vince, but I really think it is just to be eyes wide open that consumer behaviors shifts so quickly. And it is imperative for a credit union to keep an eye on what’s happening in terms of shifting consumer behaviors and to react accordingly. And that’s a way to draw in new members, to stay relevant with your current membership. And so, when we were just talking about things like buy now, pay later, it’s a behavior that’s happening. You’re seeing greater adoption of that product and particularly among a younger segment of the consumer base. And so, how does the credit union make sure that it is participating in those types of behavioral shifts to stay relevant and continue to build a vibrant membership that is financially sustainable because it’s growing.

[19:06] Vince Passione: Yeah, relevance. It makes a lot of sense in the world. I don’t think that’s cliche, I think it’s common sense.

[19:12] Richard Wada: Okay.

[19:12] Vince Passione: Well, thank you Richard. I really appreciate the time.

[19:15] Richard Wada: Yeah, thank you Vince.

[19:16] Vince Passione: As always, another 22 Minutes in Lending has flown by. Richard, thank you for taking the time with us today. And thanks as always to our listeners. Don’t forget to subscribe so you can enjoy future episodes. And I’ll meet you back here for our next 22 Minutes in Lending.

[19:30] Narrator: Thank you for listening to the 22 Minutes in Lending Podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.