CU 2.0 Podcast Episode 240 David Martinez CIO Arlington Community CU on How Mid-sized CUs Can Thrive

Arlington Community Federal Credit Union - headquartered in Arlington VA and with assets just shy of $500 million - thought it had its growth plan set.  It would merge with $246 million First Federal Credit Union (headquartered in adjacent Alexandria VA). But then the First Federal members rejected the plan.

So we invited David Martinez, CIO at Arlington Community, on the show to address a fundamental question: is there life for a $500 million institution?

Sure, the vast majority of credit unions are smaller than Arlington Community - but increasingly experts say that the minimum viable size for a credit union is $1 billion.

Spoiler alert: Martinez is here to tell why he believes Arlington Community has a bright future and it starts with knowing the community and serving that community.

Yes, that is the historic credit union success formula but listen to Martinez and he tells that it still is the way to success.

It’s an upbeat show.

Martinez also talks about being CIO at a credit union Arlington Community’s size. Yes, an institution that size just about always will be on the buy side of the build or buy question when it comes to tech but Martinez is convinced his institution has the tech it needs to satisfy members’ needs. Does it have the latest and glitziest - an AI chatbot for instance? It does not - although Martinez admits he has his eye on some possibilities involving non fungible tokens (NFTs) but probably that implementation will be delayed for some time. His point is that an institution can satisfy its members with good, reliable tech that does the job that members really need and want. It’s a good reminder to deliver the basics and do them well.

How is tech recruiting going at Arlington Community? There, Martinez has good news.  Reports had been that credit unions were finding tech recruiting to be a tough slog but not at Arlington Community, not now.

If yours is a smaller credit union - anything under $1 billion - be sure to tune in for what will be a feel good show. Martinez is realistic but he also is optimistic.  

Listen up..

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Find out more about CU2.0 and the digital transformation of credit unions here. It's a journey every credit union needs to take. Pronto

Transcript

SPEAKER_00: 0:00

This is the CU2.0 podcast with your host, Robert McGarvey. Big new ideas about credit unions. Big new ideas about credit unions. CU2.0 podcast. Arlington Community Credit Union, headquartered in Arlington, Virginia, with assets just shy of$500 million, thought it had its growth plan set. It would merge with$246 million first federal credit union headquartered in adjacent Alexandria, Virginia. But then, then the first federal members rejected the plan. So we invited David Martinez, CIO at Arlington Community, on the show to address a fundamental question. Is there life for a$500 million institution? Is there life for an institution that size? Sure, the vast majority of credit unions are smaller than Arlington Community. But increasingly, experts tell me that the minimal viable size for a credit union is$1 billion. Spoiler alert, Martinez is here to tell why he believes Arlington community has a bright future. And it starts with knowing the community and serving that community. Yep, that is the historic credit union success formula. Listen to Martinez and he tells that it still is the way to success. It's still a success formula that will get you there. Know the community, know what it needs, deliver on that. It's an upbeat show. Martinez also talks about being CIO at a credit union Arlington community size. Yes, an institution that size just about always will be on the buy side of the builder buy question when it comes to tech. But Martinez is convinced his institution has the tech it needs to satisfy members' needs. Does it have the latest and glitzy as an AI chatbot, for instance? It does not. Although in the show, Martinez admits he has an eye on some possibilities involving non-fungible tokens, NFTs, but probably that implementation will be delayed for some time. His point is that an institution can satisfy its members with good, reliable tech that does the job that members really need and want. It's a good reminder to deliver the basics and do them well. Give them what they want, they'll be happy. How is tech recruiting going at Arlington Community? Probably you'd think the answer would be tough sledding. Many institutions would have said exactly that a few months ago, but not right now. On that point, Martinez has good news. Reports had been that credit unions were finding tech recruiting to be a tough slog, but not at Arlington Community, not now. If yours is a smaller credit union, anything under$1 billion, Yep, we're going to call that smaller for the purpose of the show today. Be sure to tune in for what will be a feel-good show. But know this, Martinez is realistic, very realistic, but he also is optimistic. The two can come together and help build a credit union that succeeds, that serves its community, and keeps on succeeding. Listen up. What's your asset size? We're about... About 480, I believe, right around that, 440, 490. And are you still a CIO there? Yes. What does that comprise, this credit union? I oversee our entire IT environment. So that's hardware, software, security considerations. All right. The reason I ask is in credit union land, there's a lot of... ambiguity of that CTO versus CIO. And the jobs often seem indistinguishable to me. Yeah, I think traditionally BTOs are more hardware oriented and network oriented. Is that your understanding? Yeah. Versus CIOs that may be more like they're focused on the information. So where does data reside, data security, things of that nature, data in motion. I think if you, yes, I think you're right there. Although credit unions make up their own languages, they go along. And you've been in credit union land a long time because you worked at the partnership for 10 years. Yeah, yeah, I sure have. So I think all in, it's over 15 years at this point. So at 480, does your credit union have a future? I think we do. Yeah, I absolutely think we do. And the reason I ask, I mean, it's strange because in credit union terms, you're a pretty big guy. But I talk with many people who say, oh, you have to have at least a billion to survive, a billion in assets. And I don't think that's true. But I want to hear from you about your perspective about why you can survive at 480. I think, you know, can we survive? Yes, asterisk. So at 480, I think you've got the size and the resources, even as cost and regulations and complexity continue to get added to survive and thrive, probably with a pretty good runway. You look at regulations, most of the real, most challenging regulations, they're putting pretty large asset caps on it. So no complex ones. are, they're size-based or asset-based. There's no question that there are other considerations coming down the road, like you have all these states coming out with their own privacy requirements, and there could be a burden on that depending on what states do individually. But jumping back to the most basic piece of it, you've still got credit units out there that are$50 million. And Are they thriving? No, but they're surviving and they're able to get on. I think you pare down the services. You are what you are and you attract a base of customers that may not be looking for what the larger institutions offer. They're willing to make trade-offs for the sake of what a smaller institution offers, be that the touch point, the human component, the feeling of being small, the tailoring to the community. That's something that you tend to see better in smaller to medium organizations versus the big ones. just by the nature of who they serve, they are able to provide products and services and even communications and interactions that are tailored to whoever their seg or community may be. In our case of being focused on Arlington and Northern Virginia, there is a bit of nuance to that that I think we're able to really thrive in, both in the way that we volunteer and serve in the community, but also the awareness of what's happening, the needs of the members in the community more widely, and how we can support them. So there is value to that, which I think can attract and retain business, even if we don't have the latest and greatest technology or rate differentials that maybe aren't quite as competitive as the big boys. Right now, present day, I think We do a good job on both of those ends. We're offering competitive rates and competitive technology, but over time, as cost increases, complexity increases, there's always the chance if we don't grow that that may become more difficult. Now, what's your field of membership? Our field of membership is people that live, work, or worship in Arlington, and then there are a few other local communities that we support. such as Alexandria and a few other Northern Virginia communities. Who do you compete with, members or customers? Everybody. Nowadays, with how easy it is to join, the real answer is everybody. In this immediate area, you've got some of the big boys like PenFed. Obviously, there's a pretty big government presence in Northern Virginia, so a lot of them are able to join PenFed. You've got Institutions like Northwest that are more regional and have a big presence here, your Apple. So there's a lot of institutions. Your traditional banks are always going to be your players. Your online banks are always players. Although my initial response seems more of a joke, it's true. I mean, really, the way consumers shop nowadays, we're competing with everybody. Particularly younger generations who, of course, are the future of any credit union. To them, it's perfectly natural to have a financial relationship with an institution where they've never set foot in it because it might not even have a place to set foot in. How do you go visit PayPal? I mean, I'm sure they have corporate offices, but I've never been there. Absolutely. So it's tough. Now, do you see your institution offering glitzy things like Bitcoin? You know, it's a conversation that we have. And at this point, I think we're observing and testing sentiment. We don't yet see broadly that there's a lot of demand for it or that we can offer a value to custodian, being a Bitcoin custodian over what consumers are able to onboard with right now, like Coinbase. But it's obviously a very interesting space that's evolving and changing. And we'll see what regulations come out this year after FTX and how consumers feel for the most part. That was the small segment of our membership that we see doing purchases that we can clearly identify as being from cryptocurrency companies. So the demand isn't there yet. I just checked my Bitcoin balance. And for the first time in months, I'm actually... positive. That's plus 1.69%. I'm shocked, actually. I'm speechless. Personally, I'm very interested in crypto. I've been in it and tracking it for a long time. We've got some pretty big barriers to get your average consumers in. When I talk to people, there's a lot of the same messages that we hear just about whether or not it's trustworthy, what's the value. They hear headline stories of fraud or situations like FTX and failings. A lot of consumers buy on the way up and sell on the way down small amounts, and then that leaves a pretty bitter taste in their mouth to begin with. It'll be interesting to see the broad adoption comes there, but if you look back to the early days of adopting the internet where people talk about what the Underlying value of the technology is you can find plenty of news articles about, oh, there's no way the Internet's ever going to be used on this broad scale that people are talking about. And it's just a matter for the engineers to get in there and build out the infrastructure so that it is easily onboarded to and has the bandwidth and features that really support that greater vision. So I could see cryptocurrency taking a similar path. Hey, I went online in the first time in 1984. And really exciting times was when you'd access the card catalog of the university library. Yeah. I mean, I can't tell you how many hours I spent flipping through card catalogs at universities I had never visited and had no borrowing rights. And so I can't make fun of people for watching, telling me, no, man, because I did more mindless stuff than that.

UNKNOWN: 12:25

I mean.

SPEAKER_00: 12:25

That's great. Yes. And with Netscape and the World Wide Web, it really changed completely. That was mid-90s, and it started to become kind of useful. Until then, it was just truly geek land. Now, Arlington is a reasonably affluent community, isn't it? That's what's interesting. Yes, it absolutely is. I think it is probably one of the more affluent cities. in the U.S., but at the same time, there is a pretty big base of folks that are not. Whether they're commuting and working here or living, there is quite a bit of folks in the area that are underserved, and we really focus on them as well. That's where we probably spend more of our time as far as volunteering and giving back and trying to create opportunities. According to the Arlington government's webpage, 41.5% of Arlington's population are persons of color. That's a big number. And then again, Washington, D.C. has to have a higher number than that of people of color. So it's community activities. That's a way, do you see that as a way to get new members? It has been. That's really not the primary goal. goal of going out and doing it, but it certainly has increased our visibility, given us a platform to share some of what we do and make valuable connections. So yes, it has onboarded members, but a big part of that is just the culture of our organization is to partner with and support our community, all members of our community. And we have a whole community involvement division that is focused specifically on that, creating partnerships with nonprofits. There's a lot of volunteering that's done by our staff. We encourage it, we reward it. We create lots of events and opportunities with some of our partners to do give back days. So that's just a big part of our lifeblood. Now, would you say your member-facing technology is equal to the member-facing technology or customer-facing technology of, say, a Chase? In some respects, yes, it is. I think being the size that we are, we have to be a bit more selective. So the products that we have, like our online banking and our mobile banking and the subproducts and features within that, I think, yes, very much so. And as a matter of fact, we have some of our people on staff that bank at Chase and we've held the apps up side by side as an example and very, very similar. But at the same time, Chase may be able to justify other technologies. Like we currently don't have a member-facing AI chatbot that may help members resolve something more quickly. So we fully rely right now on our members working with our staff, which is great. Our members, I think, in some ways appreciate that. And certainly you can talk to people two different people that have two very different opinions about whether or not they love or hate AI chatbots, but there are some technologies that we just need to be more selective on. But we do, I think, a good job of staying connected to what technologies are coming down the pike. Even though we may not always be an early adopter, we stay abreast of the latest and greatest that's out there. There's a lot of and although we have a dedicated department that's responsible for that, it's something that all of us do in our specific verticals. And we stay open to what makes sense for us. And we do also do quite a bit of polling of our members' feedback on our current products, as well as just sentiment surveys on what they're hearing or seeing that they may be interested in. I assume your technology technology primarily is bought from vendors rather than created in-house. Am I right? Correct. Yep. Well, I think one of the cool things is that the vendors have created better products than were available even 10 years ago in many cases. Agreed. Yeah. Agreed. Come a long way. And so I, you know, I do think, I mean, my credit union is, which is a bigger institution than yours. Everything is washroom vendors. And it's fine stuff. This has allowed many credit unions to actually compete against the chase. I think so. Yeah, I think so. And that's how we've felt as well. Do you need the latest and greatest? Do you need an AI chat box? No. need is no you don't need it you don't might it might it be nice to have yeah it'd be cool to have if you have the money to spend but it's that to me that's not a necessity right now that's exactly it's really focusing on what is absolutely necessary what are those core technologies that are to make or break between large spots do you remember wanting to bank with you versus elsewhere Now, I assume your membership skews old? Yes. Typical, pretty much all credit unions. Correct, yeah. How successful are you getting young people to join? I think we're probably on par with average. I believe as an industry, we've got a ways to go to really attract and retain the younger demographics. I agree, but I do think Credit unions are really well positioned to get younger people because credit unions have going for them a lot of the values that young people say that they themselves have. It's like a community orientation and stuff like that. Geez, a lot of credit unions really walk that talk. They say it and they do it. Now, I assume you're not going to offer non-fungible tokens? Not currently. I think we're looking at that under the whole bucket of crypto. And as a matter of fact, I've had some brainstorming sessions with some of the folks that I met at TU2.0 just about how could credit unions leverage non-fungible tokens or NFTs, whether it is introducing our own or providing a service for being a custodian, just like we could for crypto. So it's been an interesting thought exercise. But at this point, it's not on our roadmap. Is there anything on your roadmap that would surprise me? That is a great question. No, no, no. I wish that there was. But I think that We're taking a very calculated approach. And at this point, the sort of things that may surprise you, just there hasn't been the demand or justification to be able to introduce anything. So we're really focused on much more of the core technologies, core solutions, spending a lot of time on service and training and internal initiatives that we feel are going to have an outsized impact compared to flashy technology at this point. I think that's the way to... Focus, really. Now, in terms of the CIO, is there stuff you want to do that's on your roadmap that you're hoping to persuade the institution to go along with? Yes, there is. I think so far as where we are this year, I've not had to do that much convincing. We're using the anticipated recession as an opportunity to pause and polish. That is really across the organization. In my vertical, that is really creating the documentation, the systems and infrastructure that will hopefully carry us out to that when we get back to really focused on expansion and growth that we're well poised for it. Long-term, there is a program that we have internally that I spun up when I first joined called the IT Ambassador Program. When I first joined this credit union, I had a number of employees approach me that were interested in careers in IT. They didn't know how to onboard. And of course, in our industry, one of the jokes is that every entry-level position is asking for two years of experience. So you have some interest out there, but folks don't know how to break in. So I developed the IT Ambassador Program, which is a volunteer program internally where staff are able to join and it gives them access to me and the IT team. We set them up with training, some self-guided training. We give them exposures, do shadowing and various social get-togethers as well, where we just slowly give them exposure to the inner workings of IT as much as we can without obviously providing more access or visibility than we should. But it's been a really good way to help these folks understand what a day in the life of IT is, the various areas. We've had some success stories. We had one gentleman who started in the program, ended up actually joining our IT team permanently and then recently even earned a certification. So it's a program that I hope to continue to develop and expand, and there's a lot of ways that that can happen. But that's something that I hope we continue to, are able to continue to put time and resources behind in the next year or two. In my mind, I see many credit unions as essentially tech companies. Do the CEOs agree with that? No, but I think they are essentially tech companies today. Interesting. You may be able to say that for a lot of industries. Sure. I know Exxon, the biggest oil company, actually had a campaign where they were trying to convince college kids that they were a tech company. And why? Because they thought the best and the brightest were going to work in Silicon Valley, and they wanted to get some to work for them. And they are a tech company, fundamentally. You don't have those fancy company cafeterias, I don't think, that you do in Silicon Valley. There might be more to it. But yeah, a lot of companies really are tech companies. And I think a lot of consumers now, their relationship with the financial institution is essentially technology-based. Personally, I've never been physically in my principal credit unit. I have never been in it. And I now live over 2,000 miles from the nearest branch. And it doesn't bother me. Everything happens online. It's a wonderful thing. And I'm an old guy. I'm not a 21-year-old. So I do think that it is technology. And if your institution is going to survive and thrive, then it will be because of technology more than anything else, I think. Yeah, there's no question, especially if you need to expand your reach and efficiency, that's second to none. So you remain optimistic about the future of your credit union? I do. I think specifically for us, we are very growth-oriented. We've got plans and backup plans on how to continue to grow so that our size is never a limiting factor for us. But even absent that, I think where we are today... if we, for some reason, did not grow beyond this, could continue to have value and unique purpose for the community we serve and would likely be around for a long time. It's an interesting debate. Organic growth versus growth by merger and acquisition. Right in your neighborhood, there are two different institutions with two very different attitudes. Navy Federal has basically grown organically, whereas Pentagon bought a lot of institutions. Navy's grown more. I'm not intimately familiar with their economics, but they've done really well growing organically. I also am not very familiar with either, how they perform specifically, but there's advantages and disadvantages to organic growth and taking the path of merger. I don't know what sort of engine Pentagon built to execute those. But yeah, I mean, in my experience, I've successfully executed or been a part of four mergers at this point. And there's a certain amount of attrition and cleanup and they can have a long tail. You do them because there's still value and you look at what you're getting from that versus what you think you can get organically over that same period or access or whatever it is you may be gaining from a unique partner, but there's always some amount of attrition and cleanup to follow. So that's a factor. I think some of the best mergers actually involve merging with an institution that brings a skill set that you want, but do not have internally, like business banking, for instance. And that's sort of like just plug and play. Once you do the merger, you have this new income stream. Yeah. Agreed. I think that that is the best approach when you can. It's very similar to the build or buy decisions. Yeah. Mainly you're going to buy though, right? So in terms of technology. I mean, that's pretty typical, even of the biggest credit unions, I think. Yeah. Agreed. Are you having any problems recruiting IT staff? So we've not had much turnover there. I can say broadly, we've been seeing situations where it is tougher to recruit, more situations than I think we would historically where people accept offers and then ultimately rescind. I hear that that's fairly global with a lot of companies dealing with that right now. That had been true, but my guess is, and here it's just a guess, is that that's coming to an end because of the mass layoffs at Google, Facebook, Amazon, et cetera. I think that era when Google would hire anybody with an IQ over a certain number that happened to walk by who didn't run fast enough to get away from them. Didn't have a job necessarily for them, but come on in. Yeah. They're not doing that anymore. And- And I know companies like that were raiding IT staff from credit unions. So I don't know that that will continue because I just don't see them doing that kind of hiring. Yeah, no, certainly the bulk of the layoffs that you're hearing about these days are coming from the IT companies and those that aren't firing seem to slow down significantly. Yeah, yeah. But we've got a small on-staff team. We just recently recruited one individual to that team. And she came from within the industry, actually. But I haven't had enough exposure. But I think you're probably right that with all these tech layoffs, there's probably some opportunities to hire talent where people need it. Oh, sure. Three months ago, you would have had trouble going out recruiting. Now, I think it will be a different story. That was sort of a bubble economy of tech employment in California. And that bubble burst, but bubbles always burst. To me, the future of credit unions has to involve mid-sized institutions. And I do think there's a way to succeed and thrive as a mid-sized institution. It's basically doing what you're trying to do, I think, which is serve your community, your field of membership as best you can, and give them what they want. Yeah. Yeah, I agree. I mean, that's not rocket science, but it's easier to say that than it is to do it, though. Yeah, that's true as well. I mean... To really be able to provide tailored services, you've got to be connected. And it's usually a moving target. So communities change, the need of the community changes. So it is an ongoing initiative, for sure. Now, you've said something about recession. D.C. historically has not been terribly much affected by recession. Has that changed? No, no, we're not expecting much of a downturn or impact to our members or the community more broadly. But generally, as a year of uncertainty, especially from a balance sheet perspective, less so about losses and more so just interest margins, general spending changes, because even in an area like ours, you hear more people saying at least that they're starting to slow down. They're trying to be more selective in where they spend their money. With some of the inflation that's hit with groceries and other things in the past year or two, I think there's just more sensitivity to that, it seems. So with that, obviously, there are certain ways that that would impact our organization or, if nothing else, influence the demand that we may be having for certain products and services. Like real estate is an example. There's been a tremendous slowdown. So I think it's just a matter of using this slowdown in demand from being on a hot the past couple of years to catch our breath, reevaluate, shore up the foundation, and then be prepared for the next one. Because I think most people are not anticipating a recession to last very long in this case. We really want to be ready when we come out the other side. Yeah. Real estate's slow every place, I think. But we're not really seeing prices falling and they're going down a little bit, but it's kind of pocket change decreases. It's not mass decreases. It's not like 2008 where your house, you woke up one day and your house had lost 25% of its value overnight. It's like, Yeah, I don't think we'll see a 2008, but what's interesting is in some ways it's following a similar trend where the hottest areas are seeing the biggest adjustments. So areas like Austin are having a bigger correction than an area like D.C. right now. But I think the 2008 saw... similar thing where you had places like florida that had gotten real hot around that time and people were buying multiple investment properties that's where it turned out it is different where people aren't buying investment properties but i think this time it's really landing in the affordability bucket where you look at rates you look at price you look at how salaries have or haven't kept pace and and that's where i think we're seeing the the biggest uh correction so it'll be interesting to see if everything else kind of sorts out of uh Some of these areas, other areas will follow, but I'm not expecting anything like what we saw in 2008. That was a very different underlying cause. I find it funny people complaining about today's mortgage interest rates. I had a mortgage that was 6.25%, and I remember I thought that was a really good rate. And it was at the time. Money can't be free forever, unfortunately. So you're excited, you're happy, and you think you'll continue in your employment. Yeah. Yep. Hopefully. Good. As I say, I do think this is... Without this, credit unions don't have a future without mid-sized institutions and small ones, too. At least some small ones surviving. You know, if it's just 100... giant credit unions, then do you actually need NCUA? Probably not. It's just put a few extra desks in FDIC, which is not what anybody in the credit union world wants. Before we go, think hard about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What can they do to really, really, really make a difference in the financial scene? Can't all be megabanks, can it? It's my hope it won't all be megabanks. It'll always be a place for credit unions. That's what we're discussing here. So figure out how you can help. Get in touch with me. This is rjmcgarvey at gmail.com. Robert McGarvey again. That's rjmcgarvey at gmail.com. Get in touch. We'll figure out a way that you can help. We need your support. We want your support. We thank you for your support. The CU2.0 Podcast.