5 Things To Master To Become A Billion-Dollar Institution

Now at a turning point in its history, MECU looks back at a transformation that has been 20 years in the making.

Two decades ago, MECU of Baltimore, Inc. ($1.2B, Baltimore, MD) had just $300 million in assets and was only a quarter of its current size. Now the fourth largest credit union in Maryland by assets, MECU recently said goodbye to the man considered to be the chief architect of this phenomenal growth, former president and CEO Bert Hash, who retired in June after a 17-year tenure. His successor is the cooperative’s chief lending officer Gary Martin.

The change in leadership is significant and marks a turning point in the credit union’s history. Under Hash’s guidance, MECU’s policies and culture evolved to help the credit union become the thriving billion-dollar institution it is today. No segment of MECU’s structure, from operations to financials to governance, was left untouched. Even plans for Hash’s succession weren’t left to chance but were mapped out years ago. This is the story of one credit union’s journey to becoming a billion-dollar institution and what it had to master along the way.

Modernizing Operations

Seventeen years ago when Hash took the helm, MECU had more than its share of shortcomings. Although it had 50,000 members, the cooperative which originally began in 1936 serving Baltimore City employees and retirees had just one branch with seven tellers. Some basic services also were missing. The lone branch, for instance, did not issue cash.

Withdrawals were done by check, forcing members who needed cash to visit a bank or a check cashing service across the street. Member deposits were limited to just $500 in the branch per month. MECU also had no ATMs and just one computer, which the marketing department used.

We’re talking about 1996, 1997, Hash says. Most children were playing with better computers than what we had at the office.

Besides the dearth of technology, MECU also had few loan products to choose from. At that time, 80% of its loan portfolio was in unsecured loans, with limited mortgage or auto lending.

We sort of shot ourselves in the foot in that we only provided certain services, Martin says.

Clearly, the credit union had to modernize. Six months after Hash came aboard, MECU began offering cash transactions to members, putting the check casher across the street out of business. That same month the credit union added ATMs and computers, and started hiring more employees. A few years later, the institution added a second branch.

We had a committed membership, 50,000 people waiting for us to make changes, and they wanted us to stay, Hash says.

One priority involved training employees to give better service, a process greatly streamlined by the new computers the credit union brought on site. At the same time, Hash began growing and diversifying the credit union’s loan portfolio to the point that real estate loans, which accounted for only a small piece of the pie in 1997, now make up its largest portion today. More recently, MECU also expanded its member business loan footprint after purchasing Advance Bank in early 2013.

Today, the credit union continues to improve its banking and technological capabilities, including enhanced features like offering remote deposit capture on mobile devices. Nevertheless, Hash says, most members still prefer to use the telephone or speak with an employee in person.

As a result, MECU strives for the right balance of modernization, adopting just enough new technology to keep pace with an evolving financial industry but avoiding options that its members do not necessarily want or need.

Ultimately, members expect you to provide them with the products and services that best benefit whichever stage of their lives they are in, says Chris Lumley, the credit union’s vice president of information systems.

Diversifying A Portfolio

In some ways, MECU’s small size and limited products were assets for Hash, allowing him to gradually grow the institution by choosing how he wanted to expand. The credit union was also willing to take smart risks, especially when opportunities presented themselves.

One area targeted for expansion was its mortgage portfolio, whose uninspiring balance sheet fell far short for an urban institution in the 26th largest US city. Hash points to a lack of convenience as well as limited product offerings as the reason.

People need convenience; they need access, he says. So we had to start shifting our thoughts about how we were going to deliver our services and products.

Although its real estate lineup already included fixed and adjustable rate mortgages, Hash chose to add balloon and other hybrid loans to help diversify the credit union’s lending portfolio.

In the first quarter of 1998, the oldest data available in Callahan Associates’ Peer-to-Peer analytics, adjustable rate loans accounted for 97% of MECU’s real estate lending. In 2014, that figure was just 15%, with 80% of the portfolio spread out among fixed first mortgages and balloon or hybrid loans.

To make more loans, MECU also needed to attract more deposits, so the cooperative began adding money market and share certificates to the regular shares, share drafts, IRA, and Keogh accounts it already offered. The resulting increase in deposits eventually helped MECU’s total shares grow from $421 million to $1.06 billion today.

Working together, these strategies allowed MECU to fundamentally transform its lending approach. In 1998, when MECU held just north of $225 million in loans, its portfolio was distributed with 51% in noncredit card unsecured, 24% in autos, 17% in first mortgage and other real estate, and nearly 6% in credit cards. Today, the credit union’s loan portfolio breaks down much differently with 58% in first mortgage and other real estate, 25% in autos, 12% in noncredit card unsecured, and 4% in credit cards.

Growth this significant doesn’t come without some risk, and in fact, delinquent loans grew steadily from 1998’s 1.26% to the current 1.77%. That risk, however, was necessary. For years MECU had a below-average loan-to-share ratio, limiting the potential for what the institution could lend or earn. In 1998, this metric was just 53.37%. Now, it is at 67.78% and rapidly approaching the national average of 69.2%.

Fostering Professional Growth

An organization is only as good as its weakest link, and as credit unions get larger adding more employees and new levels of management the potential for weak links grows. Part of what differentiates MECU today from other large credit unions is that it invests heavily in developing employees from all levels.

Executives and lower-ranking employees alike are trained in leadership culture and institutional processes. In addition, MECU encourages and often provides financial help through its tuition assistance program, which allows employees to develop their careers by earning master’s degrees, attending workshops, or joining committees and associations.

The program provides reimbursement for up to 100% of the cost for business-related classes, with a cap of $3,000 for full-time employees and $1,500 for part-timers.

At MECU’s encouragement, three senior-level employees even attended the CUES CEO Institute. And as a result, these executive team members are well-prepared to advance within the credit union, says chief branch officer Patricia Roberts.

Best of all for employees, they can take that education with them, says chief financial officer Adrian Johnson, who has taught at University of Phoenix and the University of Baltimore in his spare time.

It’s portable because it’s yours.

The downside of this investment is that some employees may leave for new opportunities elsewhere, but that’s a price MECU is willing to pay.

We would rather educate you and have you leave than not educate you and have you stay, Hash says. We’ve lost some good people, but we’ve also retained a lot of good people because of the opportunity to advance their career.

This employee-oriented philosophy is hardly surprising, given that Hash knows the first names of every one of his nearly 300 employees and even finds the time to eat lunch with them.

Employees, too, will take the time to recognize each other’s good work by bestowing an informal Whatever It Takes award to a colleague who goes the extra mile in the name of member service.

MECU also hands out a series of more formal awards for outstanding service at its annual meeting.

Increasing Transparency At All Levels

MECU would not have become what it is today had it not been for an especially warm relationship between Hash and Chief Herman Williams, a former fire chief and commissioner of transportation for Baltimore City. Williams became chairman of the board in 1991, six years before Hash arrived, but the two men soon discovered they shared a similar vision for the credit union and worked together to make it happen.

Their relationship led to a culture of low board turnover and increased transparency between the board and senior management. Twice a month, MECU’s leadership team meets with the board to discuss strategy, products, and finances as a way to keep everyone up to date and on the same page.

You could talk to hundreds of credit unions and I don’t think you would see the cooperation between the staff and the board that we have here at MECU, Williams says.

That cooperation and mutual trust has enabled MECU to make some bold moves over the years, including its recent acquisition of Advance Bank, which significantly expanded the cooperative’s Baltimore presence.

MECU has since been able to reach 16.99% of its potential membership compared to 10.66% and 10.62% for its state and asset-based peers. Over the past year alone, the credit union has also achieved a membership, share, and loan growth rate of 5%, 3.82%, and 8.46% respectively.

Another nonfinancial barometer of MECU’s success has been smaller attendance at its annual meetings, an indication that members are satisfied with the credit union’s direction. When Hash first arrived, members regarded his banking background with suspicion, fearing he would try to convert the credit union into a bank. As a result, they attended annual meetings in far greater numbers to keep a wary eye on him.

They were the most outspoken in the first two years, Hash says. Today, however, the 100-person average turnout is considered a vote of confidence.

Planning For A Replacement

Credit unions don’t easily replace long-standing CEOs who have had as transformative an effect as Hash did, and his decision to retire left many employees anxious about his replacement.

Employees have a personal relationship with him, says Michelle Williams, vice president of human resources. He set the tone and we appreciate the culture that he helped establish.

Although board members felt confident they would find a successor at MECU, they weren’t opposed to looking outside the organization. After hiring a consultant who conducted a nationwide search, the board whittled a list of 60 candidates down to 10, four of whom were MECU employees.

A committee of six board members met weekly, reviewing and discussing candidates before calling them in for an interview. The internal candidates especially impressed board chair Herman Williams, who attributed their preparedness to the fostered culture of professional growth that Hash had established.

When we interviewed them you could really see the results of the training that [Hash] had put into their success, he says.

In the end, the committee selected chief lending officer Gary Martin as the new CEO. Martin first began working at MECU as a part-time loan reviewer 42 years ago. Back then, the credit union was only $100 million in assets, which means Martin knows first-hand what went into MECU’s transformation.

More importantly, he is someone who will maintain MECU’s corporate culture, an important factor that figured heavily in the committee’s decision.

MECU is a well-oiled machine and our culture is second to none, says Williams, who as board chairman is optimistic that the transition in leadership will be a simple one. It’s not as if someone has to come in and start making changes.

June 27, 2014

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