How To Cross $10 Billion And Keep On Going

Amid planning for compliance and interchange hits, credit unions can count on a little help from their friends.


Growth is a major goal for most financial services providers, but there’s one milestone that can turn good growth into too much of a good thing.

That milestone is hitting $10 billion in assets.

Crossing that line brings a credit union or bank under the oversight authority of the Consumer Financial Protection Bureau. That means a new set of regulations and regulators and an additional examination aside from the NCUA, FDIC, or OCC.

Check out the NCUA’s recommended reading for credit unions approaching $10 billion in assets.

For credit unions, that also means increased scrutiny from the NCUA’s Office of National Examinations & Insurance. That’s because their size makes them “systemically important” to the NCUSIF. Among other things, the credit union regulator requires balance sheet stress testing for these cooperatives.





© Callahan & Associates |
# Name State Assets (In Millions) Five-Year CAGR
1 Navy VA $78,497.78 11.5%
2 State Employees' NC $34,299.75 7.9%
3 Pentagon VA $20,655.67 6.5%
4 BECU WA $15,661.80 10.1%
5 SchoolsFirst CA $12,681.46 7.6%
6 The Golden 1 CA $10,355.82 6.9%
7 Alliant IL $9,381.61 3.4%
8 Security Service TX $9,351.33 7.4%
9 First Tech CA $9,293.56 13.1%
10 Star One CA $8,622.09 8.2%
11 America First UT $8,038.84 9.4%
12 Suncoast FL $7,851.98 9.8%
13 San Diego County CA $7,731.13 7.7%
14 Randolph-Brooks TX $7,594.07 10.6%
15 Digital MA $7,377.23 12.9%

As of Sept. 30, 2016, six credit unions had crossed the $10 billion threshold and another nine had $7 billion or more.

Source: Callahan & Associates.

There are other impacts, too, not the least of which is a reduction in the debit interchange cap and an increase in compliance costs. One prominent CEO says it can be more difficult to find and keep senior executives, whereas another industry veteran highlights the exposure to eventual taxation.

Here, several industry leaders share their experiences and recommendations on what to do as the $10 billion mark approaches and afterward.

Andy Keeney, Attorney, Kaufman & Canoles

Craig Roy, SVP Retail Lending, Digital FCU

Hank Sigmon, CFO, First Tech FCU

James Schenck, CEO, Pentagon FCU

Vincent Hui, Senior Director, Cornerstone Advisors

The Impact Of $10 Billion


Pentagon FCU
Data as of 09.30.16

HQ: Alexandria, VA
ASSETS: $20.7B
MEMBERS: 1,464,400
ROA: 0.98%

According to Vincent Hui, a senior director with Cornerstone Advisors, the three biggest impacts of hitting $10 billion in assets include a reduction in debit interchange income, the one-time investments in technology and other third-party providers to meet new regulatory requirements, and the higher run-rate costs to keep up with compliance going forward.

For PenFed ($20.7B, Alexandria, VA), hitting $10 billion in assets had unintended consequences in the C-suite.

“There’s something about crossing $10 billion that makes every head hunter in the credit union and banking industry want your top managers and executives,” says James Schenck, president and CEO of the Virginia-based credit union. “Someone running a credit card or mortgage department or a deposit program for a $10 billion firm is extremely marketable to all organizations that are slightly smaller than them. And that’s nearly everyone.”

Kaufman & Canoles attorney Andy Keeney, who has represented hundreds of credit unions, says being under the CFPB umbrella increases a credit union’s exposure to liability lawsuits.

In an era of increased regulations, it's easy to run afoul of complex, outdated ones. Read "Why Credit Unions Need To Beware The TCPA."

“There’s a trend underway for class-action liability litigation,” Keeney says. “And legal fees can sometimes amount to millions of dollars.”

That’s true even when the individual claims can be as small as the cost of a single drink on a Southwest Airlines flight, but that’s not the only warning Keeney issues.

“I personally believe the $10 billion asset line is going to become the threshold for taxation,” he says. “The government is going to be looking for money and is going to listen to the argument that asks, ‘What’s the difference between Navy Federal and some large national bank?’”

The Prep Work Behind $10 Billion


First Tech FCU
Data as of 09.30.16

HQ: Mountain View, CA
MEMBERS: 457,100
12-MO LOAN GROWTH: 16.6%
ROA: 1.25%

Hank Sigmon, chief financial officer at First Tech FCU ($9.5B, Mountain View, CA) says the West Coast credit union expects to cross $10 billion in the next six months — and it’s ready to do so.

“We’ve been thinking about this for the better part of two years,” Sigmon says. “We’ve been focused on compliance, and we’re going to have external firms that have some former CFPB people working for them do a CFPB-like exam here.”

The big California-Oregon credit union also is putting together a rigorous, testable capital plan and is assessing how it can make up income lost to the Durbin cap.

Across the country, Digital Federal Credit Union expects to reach $10 billion perhaps in late 2019. A CEO-appointed committee has been studying possible impacts for approximately one year ago and the New England-based credit union also is getting a little help from its friends.


Digital FCU
Data as of 09.30.16

HQ: Marlborough, MA
MEMBERS: 603, 484
12-MO LOAN GROWTH: 15.3%
ROA: 1.15%

“We’ve been talking to other credit unions who are beyond that mark or who are approaching it in the short-term, and they’ve been a valuable resource for us,” says Craig Roy, senior vice president of retail lending at DCU. “That’s part of the beauty of the industry we work in.”

The Impact Of Lower Interchange

According to Sigmon, First Tech is forecasting a $10 million hit as a result of the Durbin cap. But the credit union plans to let organic growth make up for that.

“Growth can cure a lot of ills, including a hit to interchange income,” the First Tech CFO says.

Roy at DCU expects interchange to drop approximately 45% from $16 million to $9 million. Hui says that’s par for the course.

“We’ve seen revenue loss of $5 million to $10 million depending on the size of the debit card portfolio and volumes,” the Cornerstone Advisors research director says. He adds that credit unions tend to get hit harder than banks because they typically rely more on consumer rather than commercial banking as key revenue sources.

Of course, growing the debit business itself can offset the lower take per transaction.

PenFed can speak to that. Its 2016 debit interchange was up 30% year over year — a nice bump even if it isn’t dependent on that source of income in the first place.

“We’re certificate hawks, so that’s a much bigger part of our business,” CEO Schenck says. “We’ve always felt we would be able to pivot and adjust to regulatory changes by working to grow business with our members.”

The Impact In Compliance Costs

CFPB oversight brings with it at least 17 new rules. That and ONES oversight are requiring credit unions crossing the $10 billion mark, or looking to anytime soon, to beef up their staff and systems. That’s expensive.

“We’re probably looking at $5 million to $10 million just to build the infrastructure to support the post-$10 billion world,” says SVP Roy at DCU. The credit union also might have to add 50 to 75 positions that require sophistication and education.

“We’ve already talked to someone with a PhD for our ALM team,” Roy says.

There are also soft costs, like the time and resources needed to accommodate the 50 to 75 examiners on-site when NCUA and CFPB examinations have occurred at the same time, says Schenck at PenFed.

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How NCUA Compares With The CFPB

Sigmon and Roy say they’re preparing for the ONES examinations well ahead of when they think they’ll be subject to the stress testing and other enhanced balance sheet expectations. First Tech is even using its regular NCUA exam in 2017 as a “dry run” two years before the credit union thinks it will be examined under ONES, Sigmon says.

That’s good practice for what can be describes as a predictable – albeit possibly stressful — process.

“There’s nothing mysterious about CFPB examinations,” says And Phyllis Mariam, PenFed’s senior vice president of compliance. “They stick to their published guidelines. I tell other credit unions to follow those blueprints for each area and to assess themselves beginning with compliance management systems.”

Credit unions also can use their existing relationships with the NCUA to build on the skill set needed to meet the new expectations, but one industry veteran says don’t expect the same collegiality from the CFPB.

“The CPFB has approximately 1,800 employee,” Keeney says. “Sixty to 70% are attorneys who are looking for activity.”

Avoid Or Embrace?

After hitting $10 billion in assets, a credit union can expect interchange income to shrink and compliance costs to rise, making the need for growth even greater. But that growth won’t necessarily be easy.

“No one wants to be at $10.1 billion with assets growing 3 to 5% a year,” says Cornerstone consultant Hui. Institutions want to move quickly past the $10 billion line once they hit it, he says, and the fastest way is typically through mergers and acquisitions.

“That avenue is open for credit unions, but it’s much harder to execute,” Hui says. “That could make credit unions between $10 billion and $13 billion less competitive with similar-sized institutions like banks.”

That said, the Cornerstone advisor doesn’t recommend avoiding the line.

“I think that’s a disservice to members,” Hui says. “Credit unions need to continually reinvest to meet member needs, whether that’s lending or new delivery channels.”

He adds that because credit unions can’t typically access public markets for capital, they need to grow earnings to support that investment.

“To be clear, I’m not suggesting credit unions grow for the sake of growth, but there are clearly business and member service results that can only be achieved through growth,” he says.

That’s what’s happening at First Tech, which began planning for the $10 billion line when it hit about $8 billion.

“We ran the math and initially discussed trying to avoid it,” CFO Sigmon says. “But we looked over a three-year time horizon and saw we were going to be able to build some pretty significant cumulative capital even with the Durbin hit. “So, we made the decision to keep growing.”

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Jan. 30, 2017


  • A very timely and well written article Marc, and I noted in particular, Mr. Schenck's comments pertaining to the attraction and retention of key staff. Our clients are pushing us very hard to orchestrate the design and function of their operations spaces and workplace in general, to support the demands of today's financial "knowledge worker" if you will. Collaboration, communication and activity based working, are but a few terms that are used by great organizations to help promote the performance of their staff. When viewed solely from a cost and investment perspective, employee and operations costs largely outweigh the costs associated with regulation, especially in a large organization.
    RW Saunders
  • Thanks for your observations, Bob.
    Marc Rapport