Despite 20 mergers under its belt since 2015, Pentagon Federal Credit Union’s latest deal could be a considered a head-scratcher.
The McLean, Va.-based institution, the nation’s third-largest credit union, recently announced a proposed
James Schenck, president and CEO of the $26.3 billion-asset credit union, said in an interview that PenFed plans to keep up its rapid growth in the years to come, but much of that is expected to be organic rather than driven by mergers.
Schenck recently spoke with Credit Union Journal about PenFed’s growth plans, his views on mergers across the industry and the state of regulation.
The following is an edited transcript of that conversation.
Why is PenFed interested in picking up a small credit union in Wisconsin?
JAMES SCHENCK: Several things. When the leadership of Post Office Credit Union reached out to us, we were interested because Madison is known as the [heart] of the credit union movement. So you have a credit union with 3,000 members saying that if we partner, we can do more together, and we found that to be extremely true. By partnering with us, they are able to stream better dividends, better online and mobile technology and better savings account products. It really gives their members something they couldn’t get alone.
What will the challenge be in terms of managing that operation from a logistics standpoint?
It’s no challenge at all. PenFed is a national credit union that is in New Mexico, North Carolina, Guam, Hawaii and Texas, among other places. We have branches around the world, and it’s easy to manage a decentralized location in Madison and grow it.
What do you like about the Madison market, and how might you be able to grow your presence there?
We have a high concentration of branches down the East Coast and across the southern border all the way up to California. I see Wisconsin as the breadbasket of America, and it gives PenFed the opportunity to grow our brand in the Midwest.
Might this deal be one part of a broader series of moves that puts PenFed in more communities across the country?
We have no specific or targeted merger outcomes contemplated. But we plan to grow double digits organically through increased outreach to the communities we serve. We have added 350,000 members just this year organically.
Do you feel that you need to find ways to take advantage of the credit union’s open charter?
Not really. If you try to be all things to all people you provide no value to anyone. We stay razor-focused on supporting the mobile needs of the military and Department of Defense community. If you can build products and services that take care of an audience that moves every two or three years, then our platform is suitable for all of America. We have a strong IT platform that processes more than 100 million transactions a month, and it’s extremely scalable. We’re not branch-intensive at all, with about 95% of our business done remotely.
How has the pandemic impacted your branching plans?
We went into the pandemic with a strategy we called “80-15-5.” So about 80% of PenFed’s business is done on a mobile phone or website, 15% is handled through phone calls to our calls center and 5% is done in branches. We’ve been able to set up about 95% of our workforce to work remotely since the pandemic. But our growth this year — which is about 20% in loan originations — is basically all through the online and mobile channels.
Back to Post Office CU. Do you know if they looked at a local partner first?
I would assume we were their first choice because they chose us, but I’m not sure. I’m sure they did their homework and saw that we’ve done 20 other mergers over the last five years. We have a perfect track record of taking good care of the acquired members and employees. But I don’t know who else they compared us to.
Are you hearing from more small CUs looking for partners given the current environment?
We are, but it’s not just small institutions. We are hearing from credit unions of all sizes.
Is there an asset size that is a sweet spot for PenFed in terms of mergers?
It depends on the institution. It takes the same amount of work to do a $100 million conversion as it does a $1 billion conversion. So we look solely at whether we are adding value to the memberships of both institutions.
More broadly, are there geographic markets you’d like to enter as part of PenFed’s expansion plans?
Our philosophy is “hammer down.” We have an incredible growth engine because we have very low operating expenses and we can scale our platform across all 50 states. I do think that PenFed will continue to show double-digit growth, but most of it will be organic. We have 10,000 competitors with other credit unions and banks, and if you are not growing you're dying. We are a growth organization, but we’re not growing just to grow.
Have you seen any change in the way regulators are looking at mergers since the pandemic started?
The only thing I’ve noticed is that there are so few mergers, and I find that a little bit troubling. … The FDIC has a very good template to merge small, struggling banks out of existence so that they are not impacting the assessment to all the other banks. Saving institutions is fine but you are better off trying to find a strong partner early than to wait too long, because you can vaporize not only the members’ assets but the investment in the [National Credit Union Share Insurance Fund]. If the NCUA really wants to protect the fund I’d think they’d be more aggressive in trying to find partners with like-sized fields of membership. They need a more streamlined template and need to be more aggressive in encouraging the [Camel-rated] threes and fours to find the right partners.
Would PenFed buy a bank?
It would really have to be the right one. If you are buying a bank, you’re going to pay a premium and you are buying resources that come from a different culture. When you merge with a bank, you don’t get quite the same cultural fit, so I’m very hesitant to even look in that direction when there are so many great credit unions that bring value to one another as partners. But we look at all opportunities that have value to our institution.
I’m sure you saw the news about
We need stability in regulation. So the U.S. Chamber of Commerce put out a good report [recently] talking about the pendulum effect between administrations. From over-regulated to under-regulated, back and forth like regulatory Ping-Pong balls. What we would look for – what I think all credit unions would look for and all businesses in America look for – is consistency and fairness in the application of all rules and regulations. That's all. There are plenty of laws on the books. Let's ensure that everybody from the $20 million credit unions to the $120 billion credit unions stay in compliance, that we're all focused on helping our members and we're all keeping the institutions safe and sound. And as my former general counsel used to say many years ago, less is more sometimes.
