Community development credit unions must be resourceful when it comes to technology, compliance and other issues if they wish to survive.
These institutions are vital to their communities because they provide affordable financial services to consumers who are often overlooked. But they also face a number of issues, such as paying for compliance and keeping up with technology demands from consumers.
Pacoima Development Federal Credit Union in California is an example of this. The institution, with just $2.7 million in assets, last month merged into Gain Federal Credit Union in Burbank, Calif., after hitting some roadblocks, including the loss of its sponsor, Valley Economic Development Center.
“It is a shame we couldn’t continue as a standalone credit union,” said Roberto Barragan, who served on Pacoima DFCU’s board since being part of its founding in May 2005 and led the search for a merger partner. “We have been looking to merge for two years because the loss of the VEDC meant a loss of back office support. Since we lost our sponsorship we have been struggling to stay afloat. We have been experiencing some level of loss since then.”
There were more than 300 community development credit unions as of September 2018, up 8% from 2016, according to data from Inclusiv. These institutions held more than $105 billion in combined assets and had 10.2 million members, according to Inclusiv, which was formerly called the National Federation of Community Development Credit Unions.
But their growth seems to be slowing. The number of community development credit unions increased by 43% from 2012 to 2016 and by almost 63% from 2008 to 2012, according to data from Inclusiv. (Note, however, that these are four-year periods while the most recent data covers less than two years.)
‘How do you compete?’
There are numerous challenges facing CDCUs trying to survive in today's marketplace, such as dealing with compliance, paying for technology and keeping up with digital payments options. These issues are especially acute for smaller CDCUs, said Pam Owens, senior vice president of organizational development and capacity building for Inclusiv.
“Everything is expensive, so how do you compete? For a smaller institution everything that costs money costs money,” Owens said, offering remote deposit capture as one example. “Smaller credit unions don’t have the resources to add every new app that comes along. These credit unions want to upgrade their technology and stay compliant, just like every other credit union.”
CDCUs have small staffs, so when they need to send people for training they have to deal with having fewer people in the branch. Owens said this and other problems create a need for financial assistance. She said most development credit unions are well-versed in finding sponsorships and grants that give them opportunities to add new services.
“Small credit unions and community development credit unions are very good at finding resources to bring all the technology they can to their membership,” she said. “Sometimes they have to be almost entrepreneurial in their resourcefulness.”
Valley Economic Development Center sponsored the opening of Pacoima DFCU in 2005 and had helped pay for some of its operating expenses. But the partnership ended in early 2017. Barragan declined to say why.
Besides no longer having its sponsor, Pacoima DFCU also lost its largest business loan. The credit union has struggled financially recently, losing roughly $255,000 in the first half of the year and about $47,000 in 2018.
Management spent two years looking for a merger partner because other credit unions wanted to close its office in Pacoima, Calif. Barragan wanted to keep the location open because the city of Pacoima is a working-class suburb of Los Angeles with a population of 100,000 and only three financial institutions – “us and two banks.”
Helping this underserved community was “the reason I founded the credit union in 2005,” Barragan said. “Gain said it would be willing to merge us, keep our location open retain all our employees, so that was an offer we couldn’t say no to.”
Gain FCU did not respond to several requests for comment. The $348 million-asset institution chose a manager for the Pacoima DFCU branch – and it was someone who grew up in the city, Barragan said.
It is difficult to say if what Pacoima DFCU experienced in its search for a merger partner was typical or atypical, Owens said.
“It really depends upon the location and the area,” she said, adding that when a credit union is going to merge, the management team needs to make sure its members are going to be served. “If the credit union wants a branch to remain open it is a longer process, but it makes a world of difference to that credit union and that community.”
Brandi Stankovic, chief strategy officer for CU Solutions Group, said executing any successful merger requires “many moving parts.”
“The process can become even more arduous when you are a humble institution focused on the needs of an emerging or underserved demographic,” she said.
It is prudent to be proactive and prepared with the right management at the helm to develop and execute the M&A plan, Stankovic said. She suggested CUs consider drafting specific language in the merger agreements to protect the operations of its branch or branches.
A study by the National Credit Union Administration found 68% of credit unions included negotiated terms during a merger, with 36% including the retention of staff and 46% stating they wanted branches maintained, Stankovic said.
Barragan said he did not seek a seat on Gain FCU’s board, but he plans to stay involved in the credit union movement.
“Credit unions change people’s lives. My experience is something I have really enjoyed,” he declared.
CDCUs can be viable going forward because of their determination and desire to serve, Owens said. But that could require more collaboration.
“They have a bright future, but it is so important that community development credit unions come together and talk about the challenges and opportunities they all are facing. They can strategize together on how they can offer services to their members. That is the reason for the Inclusive conference. They can find strategies that offer benefits to their members. Some are tiny and some are a little bigger, but they all share the same spirit.”
