Declining Auto Loans, The Quest for Deposits, and The Silent Killer of Small Credit Unions
Auto loan portfolios are shrinking, the quest for deposits is becoming increasingly competitive, and poor succession planning continues to plague small credit unions.
In this episode of Grow Your Credit Union, hosts Joshua Barclay and Becky Reed are joined by Jon Hernandez, president and CEO of CalCom, Mattel, and Nikkei credit unions to talk about some of the most pressing challenges in the credit union landscape and offer actionable solutions for leaders navigating these turbulent times.
Declining Auto Loans—Are Credit Unions Too Reliant?
Let’s face it: The auto loan market is in free fall, with record declines in new and used car loans. Interest rates are high, consumer habits are shifting, and younger generations are opting out of car ownership altogether.
Credit unions that have historically leaned heavily on auto loans are feeling the pressure. The challenge? Finding ways to diversify portfolios without sacrificing stability. From HELOCs to small commercial loans, leaders are exploring new opportunities to replace lost revenue.
Becky Reed put it bluntly,
"Are credit unions over-reliant on auto lending? Many are. They mostly do autos and real estate—and that is the very definition of concentration risk."
The Quest for Deposits—Unconventional Approaches for Tough Times
Competition for deposits has never been tougher. High rates are driving retention challenges, while unconventional ideas like cannabis banking, small business lending, and cross-selling are being floated as solutions.
The real issue? Many small credit unions are struggling with their cost of funds, lagging behind larger institutions offering higher dividends. This lag has left some credit unions upside down, forcing them to reevaluate their strategies for staying competitive.
Jon Hernandez emphasized, "We lost the opportunity to write loans at higher rates because we didn’t have the funds to do those loans. That behavior of lagging isn’t acceptable moving forward."
The Silent Killer of Small Credit Unions
Succession planning is the elephant in the room for small credit unions. Boards are reluctant to pay competitive salaries, and CEOs are often overburdened, leaving little room for preparing the next generation of leaders.
This lack of foresight often leads to closures, mergers, and a loss of independence for credit unions unable to adapt.
Jon Hernandez shared his perspective, "It’s not just about replacing a CEO. You need to have a credit union succession plan in place for the entire institution. If things get tough, you have to be ready to act."
Becky Reed added, "Boards don’t want to pay market salaries for CEOs, but people aren’t going to take these roles for what you paid someone 30 years ago. It’s your fault you’re in this position."
Innovative approaches like fractional CEOs, lending executives from larger institutions, and rotational leadership programs are emerging as viable solutions.
By shifting away from traditional methods, credit unions can build resilient leadership pipelines and maintain their independence.
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FULL TRANSCRIPT
Intro
Joshua Barclay: Hello, credit union community. Here are your topics for today's show. First up, auto loan portfolios are taking a nosedive. Is it time for credit unions to rethink their entire auto lending strategy? Next, what options are available for credit unions to attract new deposits? And finally, closures and mergers are shaking things up in the credit union landscape. As always, one of the major culprits: poor succession planning.Today, we will talk about how to do succession planning the right way.
Welcome to Grow Your Credit Union, the podcast where credit union leaders gather, learn, and grow. I am your host, Joshua Barclay, and I am joined by my co-host, the DeFi queen straight out of Texas, Becky Reed. What's up?
Becky Reed: Howdy, y'all.
Joshua Barclay: Becky, before we begin today's show, I want to talk about what you're hearing at events. It is event season, and one of my favorite things is to just be a fly on the wall and ask people: What are the topics that you're interested in? What are the trends that have you excited? And then I try to find some commonality—like, what am I hearing about the most? So I know you're doing the event touring.
So I'm wondering, what is the one topic or trend that you keep hearing about at every event?
Becky Reed: Small credit union survival.
Joshua Barclay: I feel like we've been talking about that one for a hot minute, Becky.
Becky Reed: Yeah. I think, though, that I'm seeing it start to really gain momentum, right? A couple of years ago, it was kind of a thing—people were talking about it—but it's grown to the point now where I don’t think I can attend a conference without it being talked about or asked.
Joshua Barclay: Well, Becky, I think if people are listening to this show, we're probably going to give them some really good advice on how to deal with all that stuff.
Becky Reed: 100%.
Joshua Barclay: And more. Today, we welcome the president and CEO at CalCom, Mattel, and Nikkei. Yes, today’s guest is the CEO of multiple credit unions, John Hernandez. John, welcome to Grow Your Credit Union.
Jon Hernandez: Thank you, Josh. Thank you, Becky, for having me.
Segment 1
Joshua Barclay: Credit unions are seeing record declines in their auto loan portfolios, with both new and used car loans showing the steepest 12-month drops in over a decade, according to a CU trade group report. Why does this decline matter? I think it matters because credit unions hold 31.6 percent of the nation's total car loan portfolio.
So what I’m wondering, John, with such heavy involvement in the auto loan market, it kind of raises this question: Have credit unions become too reliant on the auto loan market?
Jon Hernandez: Well, that’s the matter that we’ve been talking about lately. We were looking at our stats—not only ours, but other smaller credit unions as well—and we are seeing a decline in lending to vehicle loans and actually having a little bit less dependency on it. I hope, in our case, we started looking at home equity lines of credit as an option to replace some of those loans that we would have allocated our assets to otherwise, to vehicle loans.
It’s hard to compete when you have the manufacturer rates that are being offered to consumers. And if you were to try to do that, you’re just not going to have the margin. So we have partnered with other car locator companies, rather than just trying to work with local dealerships, so that we can expand our network for consumers, being able to fund more vehicle loans.
But again, that has been tough for us, and even over the past couple of years, not just the car itself, but just the consumer not purchasing vehicles because the rates were so high. And that’s when we started having less dependency on it and looking at other avenues to replace those loans that we would have allocated to vehicles otherwise.
Joshua Barclay: I like that strategy, John. And I think it’s a good move. I also listened to an interview with a gentleman—I forget his name—but he was one of the biggest used car dealership owners in America. He made the comment that Americans just aren’t buying cars like they used to. They’re not trading them in; they’re keeping them years longer. Now, I forget what the average trade-in used to be on a make and model, but now it’s much longer. So I see that decline probably continuing. Becky, I want to push this question on you because I like it—it’s controversial, and it kind of forces credit unions to confront things. And those things are: Are credit unions over-reliant on the auto loan market?
Becky Reed: I’m going to tell you, not surprisingly, that I have a little bit of a different perspective on this. What frustrates me sometimes with some of the stats you just threw out is that, hello, interest rates go up. When interest rates go up, I am not going to trade in my car that I’m paying 2 percent for, for a car that might be a little bit better, but I’m going to have to pay 6 percent for. That’s just not happening.
So prepayment speeds go slower when interest rates go up, right? There’s an inverse reaction there. Interest rates go up; people pay their loans off slower. When interest rates go down, they pay them off quicker. I promise you, if interest rates start going down, everybody’s going to go out and buy a new car.
So this is not surprising to me. Credit unions should not be going, "What’s happening? Why are car loans going [down]?" No, no, no. Now, the problem is that your loan portfolio, unfortunately, is underwater, right? Your loan portfolio—the car loans you made two years ago that you were reliant upon replacing every two years—are now extended to 36 months or 38 months or 42 months, and you’re sitting 300 or 400 basis points below market. And so that’s the problem.
It’s not like making car loans is a bad thing. The problem is the car loans we made are sitting on the books and they’re not paying off because consumer behavior is opposite to paying them off.
Now, that being said, are we over-reliant on auto lending? I would say many, many credit unions are way over-reliant on two kinds of lending. They mostly do autos, and they do real estate, and that’s it. And that is the very definition of concentration risk.
Jon Hernandez: Part of the thoughts that we have—we looked at some stats. The younger generation also doesn’t seem to be purchasing cars as much as, I guess, the Gen X and older. It seems like Gen Y, even the younger ones, because there’s Uber options and there’s now working from home. So the need to have that vehicle is less than what it was for, I guess, Gen X and the older folks.
Now, there are some stats showing that, but I think that still remains to be seen because they could have been in that category where they were not in the market yet to be buying cars because it was the pandemic, and then the rates were high right after that. So I guess it remains to be seen, just like what Becky said. And we did kind of think the same thing—that when the rates go down, we’ll see how the auto market goes at that point.
Joshua Barclay: Becky, you know, you’re right. Interest rates are high now. And when they do go down, I will purchase that Lamborghini Diablo that I have on my bedroom wall. But no, in all seriousness, let’s just say that rates don’t go down dramatically and that the auto loan market—we’re going to be in a lull period for the next few years.
John, you said something earlier that really caught my ear, which was you’re thinking about how to replace—you’re thinking about what are the other products that we can use to sort of, I don’t want to say replace, but fill in the gaps, if you will, of your auto loan portfolio. And you mentioned the HELOC thing, but sort of what ideas have been swimming around your head? In the event that the auto loan market doesn’t go back to the golden years that we’ve seen in the past?
Jon Hernandez: Well, clearly, the HELOC can be two or three, four times more than a regular vehicle. Although nowadays, $48,000 is the average vehicle, at least in California. But so, it’s either HELOC, or we are looking into maybe small commercial loans in the future. And when we’re talking small, we’re talking $100,000 or less.
As a small credit union, we’re not equipped to be able to do anything more than that. But these are like dental offices or small businesses that would just need machines or equipment or furniture in their offices. So again, we’re looking at potentially doing that in the future, maybe up to $100,000. So that’s another avenue that we’re considering in case we can’t rely on the vehicle market in the future.
Joshua Barclay: I like that. Becky, let me put you on blast. If you had to think of something right now in terms of a replacement product, what would you be thinking about right now?
Becky Reed: Well, I believe that small business lending is a niche area that most banks who are really good at commercial lending don’t fulfill because that small $100,000—even a community bank—really is not interested in making that loan. And I think the challenge for credit unions is business services in general.
We do a terrible job at business services on the deposit side. So if we can’t attract those business deposits, it’s going to be even harder for us to lend to them. But I would agree with John that I think that is a really good place to start.
Segment 2
Joshua Barclay: Last month at the Jack Henry Connect event in Phoenix, I asked attendees their thoughts on the best ways to boost deposits. And here are the three responses that stood out. Number one: Increase small business lending. Number two: Cross-sell more effectively. And number three: I even heard this—get into cannabis dispensary banking.
John, which of these three do you think is the most effective approach credit unions can take to attract new deposits? And also, I want to give you a ripcord. If you think that any of these three are not the ticket that you want to cash in, you can come up with something on your own that is not one of these three.
Jon Hernandez: So we are looking at, again, opening up business services. So that’s already one that we’re considering. But the funny part is that when we initiated that process, all we were getting was inquiries for loans—not necessarily looking at us as an interesting institution to put their deposits.
Now, granted, it could start with a loan product and then eventually, consequently, bring in the deposit. But it doesn’t seem like it’s going to happen overnight, right? So that being said, not really relying on that. The third thing you said was cannabis. So we actually have considered that, but that takes a lot of serious consideration because of the compliance part of it.
I feel like some of my peers that have initiated that—it’s kind of mixed. There’s one that is trying to get out of it. There’s one that’s trying to continue with it. So if both of them were continuing with it and they both felt like there’s a lot more to share, then I think our board would have moved forward with the potential cannabis banking.
But the one thing that we actually looked at as a small credit union—we noticed after the pandemic, when the rates went up, there’s quite a few of us, and not just small credit unions, but even midsize and large credit unions, that had to offer high rates just to be able to retain these deposits, right? So it’s not even the recruitment of the deposit that you’re referring to—just trying to retain them, right?
Then we looked at it a little closer, and what we realized is that when you look at a cost of funds of most small credit unions—and I’m referring to California; I don’t know about other states—but unfortunately, a lot of small credit unions in California, our cost of funds are not even half of what the cost of funds are for the larger credit unions or even for smaller credit unions that are having asset growth.
Jon Hernandez: The problem is, when we’re looking at our cost of funds on a peer-to-peer basis, we look great because we’re comparing ourselves to each other’s statistics. But when you start looking at those couple of small credit unions that are having great asset growth, you realize it’s their cost of funds. And then, when you look at it more closely and ask, "Why are they doing that? Why is it so high?" you start seeing that, oh boy, the larger credit unions are at that level.
For instance, 1.8, and we’re paying less than 0.5. A couple of credit unions are paying 1.4—they’re not even at that market—but they’re more than double what we’re paying. So, we talk about service. We talk about all these things that we do, especially, you know, a lot of credit unions say that we get the best rates. Maybe we’re saying the loan rates, but perhaps we’re not talking about the deposit rates.
The real issue, Josh, is if we have to pay that dividend, that cost of funds, most of us small credit unions won’t have that ROA.
Joshua Barclay: Mic drop. That’s what I’m talking about. Okay, Becky, John raises a good point. Let’s start with the first question, and then you take it wherever you want to go, which is the quest for deposits. Becky, how do we get there? And please do address John’s concerns about cost of funds, because I don’t think it’s talked about enough.
Becky Reed: Well, what I’m going to say about what John just said is, shame on us for not understanding ALM 101, people. Okay, what I saw when interest rates started going up was people—because we get surveys, right, John, you know this—we look at surveys, we look at what our competitors are doing, we look at what the bank across the street is doing from a rate perspective, and we use that information to be competitive. That’s what we do.
And when interest rates started going up from a deposit perspective, deposits started running out, which we hadn’t seen in 25 years, right? Because rates hadn’t moved much, and deposits just sat there when you were paying nothing for them, basically. And I’ve talked about this before, but a 300–400 basis point spread is really what you need to have a decent ROA, especially at a small credit union size where your operating costs are a lot higher than at a larger credit union that is able to spread that across larger assets as economies of scale, right?
A smaller credit union can’t do it. So operating costs are always larger in a small credit union. That takes a bite out of that spread I just talked about. Well, credit unions didn’t raise their interest rates on loans quickly enough. And I just talked about portfolio turn, right? It takes 24, 36 months for your loan portfolio to change.
So when interest rates change, there’s a lag because the lower interest rates are sitting on your books for longer, because consumers are not paying those loans off as quickly anymore. They like the rate they have now, so they’re going to wait before doing another loan because rates are higher. So you’re not making as much money on your loans.
The new loans you’re putting on the books are not replacing the lower-priced loans that are rolling off like they did before. And then credit unions immediately—just to keep deposits, because they got upside down really quickly because deposits were running out so fast—they rushed to raise dividend rates on their deposits without appropriately raising rates on the loan side.
And I talk about the reason why this is. It’s because most leaders in credit unions today cannot remember a time when interest rates were as high as they are now. They didn’t learn appropriate ALM—asset liability management is what ALM stands for. So they didn’t learn that, and we had to learn a hard lesson. And unfortunately, those decisions we made when interest rates started going up are going to have lasting consequences for years. For years. And it’s, unfortunately, causing some credit unions to have to merge because they made bad decisions four years ago.
Joshua Barclay: So what I’m hearing then from both of you is credit unions are still giving better loan rates, but the dividend they’re paying out is lower than the competition. So does that mean—I’ll point this at you, John—does that mean we have to get a little bit less friendly with our loan rates in the credit union space? Is that what this means? Does that mean that we’re not going to be beating the Chases by several points on a loan? Is that what we have to revert to? Or are we just honestly going to have to give people higher loan rates? Is that what it comes down to?
Jon Hernandez: Just to clarify, when I was referring to the cost of funds being low, it’s not the larger credit unions. It’s mainly the smaller credit unions. So just so that we’re clear. But yes, I do agree with that. And just to echo what Becky said, I think the attitude of lagging like we’ve done in the past—we can no longer afford that.
The other domino effect with that is we lost the opportunity to be writing those loans at the higher rate because most of us didn’t have the funds to do those loans. So that’s the other kind of consequence of that action. So, I think the lesson learned here is that we need to be quick to respond, and the behavior of lagging like that is not going to be acceptable moving forward. A lot of consequences otherwise.
Segment 3
Joshua Barclay: John, in a previous conversation that we had, you mentioned that small credit unions often struggle with succession planning, and that leads to closures and mergers and all of that stuff. That’s pretty well publicized. The mergers and acquisitions thing—controversial. We talk about it all the time, but what I really want to double down on with you here is succession planning.
I don’t understand why it is so difficult for the credit union industry to get this right. So let’s start by asking you this: Why the heck is succession planning so difficult for credit unions? What is it?
Jon Hernandez: Well, I don’t know the answer to that question necessarily because it’s kind of an anomaly for me. I mean, the way I’ve operated is that I have VPs that are running the day-to-day operation. In fact, we share some of our VPs, who are currently running other credit unions as interim CEOs. They get enough exposure and enough operational skill and strategic skill to be able to run their own credit union in the future.
So I don’t know why I see that quite often, and that’s kind of frustrating. But, and I’m not just referring to a succession plan for having a credit union executive, but also a succession plan for the CEO.
I’m also referring to if the stats don’t look good for your credit union, you should be having that conversation with the selected credit union that you’re potentially merging with. And I’ve had to do that—not embarrassingly, but honestly. I’ve had to actually go to those credit unions and talk to them and say, "Things are not looking good just from a strategic standpoint. As a succession plan, we wanted to make sure that, should we need to merge our credit union, would you consider merging our credit union?" And let them know if they need any data to provide that information.
So, to me, it’s not just a CEO succession plan but also the credit union succession plan as a whole. As a small credit union—one of my credit unions is Mattel—if all of a sudden Mattel decides to move to New York and 90 percent of my members are in El Segundo, it’s probably going to be tough for me to continue the credit union unless I relocated. But that’s going to depend on the dynamics and who’s going to stay. So just that alone makes you wonder what you need to do if that happens.
Joshua Barclay: Thanks for pointing that out, John. I appreciate that. It’s not just about finding a CEO or an executive. It’s about what do I do with this credit union if things get a little hairy. Becky, we’ve talked about this, and I want to put it to rest. Folks, listeners, I don’t want to talk about succession planning again in 2024. We can bring this topic up again. So Becky, let’s lay this to rest.
To me, it’s a no-brainer: succession planning. You figure out who the best people are around you, you talk to them, you train them, you figure things out. Why can’t we figure this out in this space? Please, before I pull my hair out—Becky, I’m going to be hairless by the end of this year talking about succession planning. What is going on? Break it down.
Becky Reed: It’s a problem with the board, ultimately. I think that especially at the smaller credit union sizes, the CEOs at the helm have been doing so much for so long for, frankly, so little, that it’s very difficult to replace them. Most people who would be candidates, coming in from the outside or even internally at the organization, are going to be younger, right?
I mean, that’s natural, right? A retiring CEO is going to be older, and a person coming in to replace them is going to be younger. And frankly, Gen Y, a millennial, or even a Gen Z—a 20-something, which I think a 20-something-year-old would make a great small credit union CEO. Somebody who’s been a department leader—they’re a senior person in their current credit union role. But a millennial is not going to do that job for what that CEO is getting paid today.
They’re just not going to. And most boards, unfortunately—I’m speaking in generalizations; there are certainly exceptions to this—but most boards don’t want to pay them a market salary. Because, "Why should I pay them a market salary? We’ve been paying this person who’s been here 30 years $50,000 a year. What? We can’t find someone to do that job for $50,000 a year?" The answer is no. People are coming out of college making $70,000 a year doing data entry.
And so a credit union CEO that’s a member service representative, a loan officer, and a CFO all wrapped into one, getting paid $50,000 a year—you’ve been getting a deal, credit union. It is your fault you’re in this position. So you can do everything internally at the credit union to make sure you have people prepared to take that next step. But if your board is not willing to do what’s necessary to keep good people or to attract good people, then it’s not going to work.
Jon Hernandez: Becky, I agree, but I also think sometimes it’s the CEOs. I feel that they’re not taking the time to train or bring in the talent. And you’re right—it’s absolutely tough if you have two or three management folks that require a high salary. But just like you said, you could bring in somebody relatively young, even a few years out of college. There are folks out there that are willing to take a lower salary as long as they get the exposure.
We’ve had the pleasure of having at least four or five of our executives become CEOs of other credit unions, and it wasn’t about the money—you can trust me on that. I think it was more because we gave them the opportunity to learn, the opportunity to have exposure.
And just like I said, we’ve had at least three of them serve as interim CEOs of other credit unions when we got a call from the regulator or from the credit union itself that needed help. I think those exposures and those practical experiences really helped them build the confidence. And as long as everybody else will support each other—in fact, we call them “alumni” when they come from our credit union—we want to make sure they feel supported by a group of people.
Becky Reed: Well, I think your point is well taken in that we do have to think differently, right? Maybe a traditional, full-time replacement is not the right solution. There are some large credit unions out there—in fact, I know a CUSO that is helping to coordinate these things. There are some large credit unions that are willing to lend their executives—maybe a mid-level executive, a director, or an AVP—and lend that person for maybe six months to go run a credit union.
And I think that’s an awesome opportunity because their organization might be flat, and they might not have a lot of opportunity to grow at their existing organization. This gives them an opportunity to do something they would otherwise not have been exposed to. You’re a fractional CEO, right? You are a CEO at three different credit unions.
That option is something that a lot of credit unions would not have considered before. And I think that looking at alternatives and exploring different ways—other than the traditional succession planning route, to your point, John—is a great option for credit unions to consider.
Closing
Joshua Barclay: That brings us to the end of the show. John, talk to me about your final thoughts based on the conversation we had today.
Jon Hernandez: Small credit unions are really, really important in our industry. And it’s really tough to see that a lot of our smaller credit unions are going away. You know, I’ve always said before that I hope when smaller credit unions are thinking about merging, they think about other smaller or midsize credit unions to merge with.
Because it might actually give that economy of scale just a little bit of a nudge for that other credit union. So if that continues to happen, perhaps that could be a consideration. I do encourage everyone to try to get a succession plan set up—not only the succession plan for the CEO but the succession plan for their credit union in general.
Joshua Barclay: And if people want to get ahold of you, John—maybe they heard what you’re putting down today and they’re like, "You know, I want to talk to that man." How could they get ahold of you?
Jon Hernandez: Probably the best way is my email: jhernandez@calcomcu.org.
Joshua Barclay: Awesome. Becky, final thoughts today?
Becky Reed: Well, I love what John said—that succession planning is for the whole credit union. Because at the end of the day, we want the credit union to survive. Sometimes, that does mean, in order to survive, the credit union might have to merge with another credit union. And if the credit union is doing poorly, which is what he talked about before, that has to be an option that you’re looking at.
Now, that doesn’t mean you have to pull that trigger, right? But before you get too far down the road and now you’re at 5 percent capital and the regulators come in and force that merger upon you, why not look at that option? If you’re not able to turn the ship around, then that is a good option.
So succession planning is for the whole credit union because, at the end of the day, we want to make sure we’re there to serve our members.
Joshua Barclay: And Becky, for those people out there that want to get ahold of you, what should they do?
Becky Reed: Well, I don’t know, Josh—maybe LinkedIn?
Joshua Barclay: LinkedIn. Just go to the search bar, type in Becky Reed. You’ll see her. Give her a message. Give her a connection request.
I want to thank you, John, for coming on the show. Becky, as always, I want to thank you for being the greatest co-host in the world. And I want to thank you, our listeners, for continuing to support and listen to another episode of Grow Your Credit Union.
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Thank you for listening. We will see you next time. Take care and bye-bye.