Pentagon FCU is the third-largest credit union in the U.S. by assets with nearly $23 billion at the end of 2017. S&P Global recently sat down with President and CEO James Schenck at the company's Tysons Corner, Va., headquarters. Among the topics covered was the National Credit Union Administration's recent vote to refund $735.7 million from the corporate credit union stabilization fund back to credit unions in the third quarter.
Schenck estimates that PenFed paid about $95 million into the stabilization fund even though it had no exposure to corporate credit unions. PenFed estimates its 2018 rebate will be between $10 million and $11 million.
The following is an edited version of the interview.
S&P Global Market Intelligence: There seems to be growing concern about losses in taxi medallion portfolios and the potential impact it could have to the share insurance fund. How concerned are you?
James Schenck:
So PenFed was OK with the fund's normal operating level being moved to 1.39%?
We think it's higher than it needs to be, but we can live with it. I hope they will look at that again in the future. We think it's a little bit excessive to where it needs to be long term, and even based on Congressional legislation where it should be. So I think it's above where it should be. But in the short run the fund should be well capitalized, and we're OK with it.
I think PenFed announced eight mergers in the last two years. What does 2018 look like?
[Fewer mergers in 2018]. We believe in organic growth and think that when you stream value on your loan side or your deposit side to your members you should grow organically. So we're expecting 90% to 95% of all our growth to be organic. There's some merger activity but we're more focused on delivering world-class pricing to our members. If you're not growing organically you're dying. The banks that you see with all growth through acquisitions usually fail.
Are most of your merger calls inbound or outbound?
We are currently not seeking out other institutions. We've had strong growth in the past six months without mergers.
But what does an ideal merger target look like for PenFed?
I'd say assets of $200 million to $400 million would be an ideal merger target if we were to do one. The credit unions on the smaller end need to partner with their neighbors. For example, two $20 million-in-assets institutions that serve a very specific field of membership could merge. On the other end of the spectrum, the 300-plus institutions that are above $1 billion are typically pretty well capitalized and have the ability to compete. It's that smaller, mid-tier group that wants to be part of something bigger. And we can bring better pricing and technology and more community investment to their situations.
What was your take on the NCUA's rule asking for more transparency in terms of executive compensation in mergers?
PenFed believes, as most credit unions have said through the public comment period, that the current rules are fine. We don't believe new rules are necessary. The NCUA reviews each deal individually and makes the decisions that are in the best interest of the credit union community.
How important is growing PenFed's asset size to you?
The only thing that's important is growth in the sense that there are 11,000 credit unions and banks out there, and on any given day our members can choose to go somewhere else. So growth is nothing more than a proxy where members are voting with their wallets. PenFed added 234,000 new members last year, which shows that those people believe our products are valuable. It's the institutions that try to be all things to all people that are struggling.
Would you look at buying a community bank?
Not really. The culture in the banking system is different than the credit union space. So in the next three to five years I just don't see it.
The NCUA wants large institutions such as yours to do your own stress testing. Do you like that idea?
We love it. It's the most important thing we do. We look at our balance sheet each and every day.
Senate Finance Committee Chairman Orrin Hatch recently questioned the credit union tax exemption. How do you react to that?
I thought he took the talking points literally from the American Bankers Association. Unfortunately it's misguided. Not a single one of my 1.6 million members would vote to become a bank because the bank CEOs' No. 1 goal is to return value to the shareholders. It's a different business model. Tell Sen. Hatch that a bank can become a credit union, but the reason they don't is that the investors want them to squeeze their customers to return value to [investors].
