So You Want to Start a Credit Union?

A group of Whidbey Island residents is doing what Americans have done since 1933 when they’re not satisfied with the financial services being offered to them—they’re starting a credit union. And not just any credit union. Whidbey Island Community Federal Credit Union would be a cooperative financial institution chartered to serve the approximately 65,000 inhabitants of the 50-mile-long island.

According to chief organizer Beverly Rose, the majority of the island does not have access to a credit union, and the banks are not interested in putting people before profit.

“All of the profits taken in by the island’s other financial institutions do not stay on the island,” Rose said. “There is a movement on Whidbey that seeks to make the island sustainable and self-reliant. This credit union will help us succeed.”

Rose has no illusions about where the credit union will start. In the beginning it will only seek to be a savings institution specializing in micro-loans of less than $5,000 until it becomes established and possibly begins offering other products and services.

Before any of this can move forward, however, Rose and her fellow organizers have to receive charter approval from the National Credit Union Administration (NCUA), the federal credit union regulatory agency, a process filled with requirements that have dampened the enthusiasm of more than a few credit union organizers.

“Part of getting regulatory approval requires us to secure $200,000 in donated, unsecured core capital,” Rose said. “If we have one, this could be our stumbling block.”

This same stumbling block is what impeded the organization of CUVashon, a community-based effort that was seeking to charter a state credit union on Vashon Island for reasons similar to those causing Whidbey Island residents to want to start a credit union of their own.

Why Form a Credit Union?
“Our motto was ‘Our Community – Our Money,’” wrote CUVashon organizer Rex Stratton in an email. “The initial thrust was to find a way to make loans to assist local residents in making energy efficient improvements to their homes. The three national bank branches were not loaning money on Vashon in nearly the proportion of the deposits being received.”

According to Stratton, the effort was a way of supporting Vashon’s local economy and was not a waste of time whatsoever. The CUVashon group collaborated with an established credit union, Puget Sound Community Credit Union (PSCCU), to launch a branch. The new partnership allows the island to begin meeting its sustainability goal.

“We asked for and got three seats on the PSCCU Board of Directors; we got a commitment to make energy efficiency loans to marginal borrowers—who usually are the ones that need the help most; and we got a commitment to make unsecured loans up to a certain limit to borrowers who needed insulation only, loans which cannot be collateralized by a UCC 1 financing statement,” Stratton wrote. “We are still working on MBL lending programs. Many of our small businesses are fed up with the national banks and want an alternative, one that accepts business deposits and makes secured business loans.”

Based upon the surveys, projections were that CUVashon would have opened its doors with $5,000,000 in deposits. And according to Stratton, PSCCU projected the branch serving 300 members and capitalized with $2,500,000 of island dollars at the end the first year.

“In the first eight months, I believe, the Vashon Island (PSCCU) branch exceeded 1,100 members and over $10,000,000 in deposits. Now that is a pleasant surprise,” added Stratton.

The 358 surveys filled out by Whidbey Island residents interested in joining a new credit union, according to Rose, project about $800,000 in initial deposits once the credit union is chartered.”

“These are pledges by 358 ordinary people,” says Rose “With a base of 65,000 island residents, we expect that figure to rise once we get established.”

While it seems the only significant hurdle for the start-up credit union is raising core capital, it is the one step that is the least dependent on organizers. Even when the credit union organizers have completed the fundraising process, life beyond the chartering phase is not easy for a small credit union.

Small Credit Union Decline
At the June Annual Meeting of the Maryland and D.C. Credit Union Association, NCUA Region III Director Jane Walters said that while most credit unions have experienced unusually high share growth recently, credit unions under $10 million have been losing shares.

“Every year for the last five or six years, we’ve seen shares go down,” Walters said. “So far in 2011, half of the credit unions under $10 million in assets are losing shares.”

Walters’ statistics are echoed in Washington and Oregon, where, since the end of 2010, total shares have declined at 14 of the 36 credit unions with less than $10 million in assets—eight of 18 in Washington, and six of 17 in Oregon, with two of those no longer existing.

Over the years, however, not all boutique credit unions have left the less-than-$10 million category by disappearing. In fact, most have left the roll due to growth. Nonetheless, trends show a rapid decline in their numbers.

In 1990, 57 percent of Washington credit unions and 65 percent of Oregon credit unions reported less than $10 million in assets. As of June 31, 2011, the totals are 16 percent and 19 percent, respectively—an aggregate decline of about 85 percent since 1990.

Lessons for Success
A lesson or two in operating a newly chartered, $2 million credit union can be learned down the road from Whidbey Island in Olympia, Wash. Chartered in 2003, Tulip Credit Union, named for Thurston Union of Low-Income People, has seen its share of challenges, especially as a low-income credit union. Board Chairman and de facto manager of Tulip, Eric Bowman, anticipates rough seas for Whidbey Island Community Federal Credit Union but offers three bits of advice to help smooth the sailing:

  1. Work with credit union service organizations (CUSOs) for lower prices and better service;
  2. Actively participate in the credit union system, because its cooperative nature will provide a network of professionals and resources that will help the credit union succeed;
  3. Research alternative business models and explore partnerships with larger credit unions, because there may be something out there that will help them better serve their community.

“I believe in the low-income mission,” Bowman said. “I also believe that new credit unions should be able to start… But (some people in the industry) don’t know how we survive at $2 million. Frankly, neither do I.”

Despite the odds working against the Whidbey Island organizers, Rose is confident that Islanders will step up and support the locally-focused financial institution. Rose is also confident that she will get support from what could be her biggest group of cheerleaders—other credit unions.

“With credit unions’ tradition of helping each other, of course we are hoping for some financial support from the broader credit union community, but it goes much deeper than that,” she said. “Our vision has us seeking a partnership with another credit union to offer consumer transactional products that Whidbey Island Community Federal Credit Union will be unable to offer, like checking accounts and credit cards.”

Rose envisions what she calls a dual citizen partnership that automatically makes Islanders a member of the partner credit union when they join the Whidbey Island Credit Union.

“We think that will be win-win,” she added.

 

Questions or Concerns? Contact Matt Halvorson, Anthem Editor: mhalvorson@nwcua.org.

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