It took more than 50 years for Pentagon Federal Credit Union to reach $1 billion in assets. But every year since 2001, the Alexandria, Va.-based credit union has been generating an average of approximately $1 billion in assets per year.

And it's set to reach $20 billion in assets by May 1, making it the third credit union in the nation to reach that milestone. The Vienna, Va.-based Navy Federal Credit Union is No. 1, with $73.2 billion in assets, and SECU of Raleigh, N.C., is second with $31.8 billion in assets.

In a recent interview with CU Times, 49-year-old PenFed President/CEO James R. Schenck said the key to the credit union's explosive growth has been and continues to be its lower-than-peer operating cost structure, which has enabled it to compete on product pricing for its 1.3 million members.

Lower operating costs have also allowed PenFed to build a reputation as a destination employer to attract and retain talent and become a leader in giving back to the communities it serves through the PenFed Foundation and many other charitable initiatives.

In addition to lower operational costs, however, PenFed's investments in acquiring residential and commercial firms throughout the country in 2012, 2013 and 2014, as well as credit union consolidations, have made substantial contributions to the credit union's revenue generation.

penfed growing “At PenFed, we run at about 130 basis points of operating expense,” Schenck said. “The top 10 [credit unions'] average is about 235 basis points.”

According to NCUA financial performance reports, PenFed's operating expense to average assets is 1.43%, which is well below the peer average of 3.23%. Its operating expense to gross income is 36.03% compared to the peer average of 67.45%.

“We like to keep our operating expenses lower than all of our peers so we can compete in any rate environment, a low rate environment, falling rate environment or a rising rate environment,” he explained. “If you can control your operating expense above your peers, it doesn't matter where the external rate market is, you have the competitive advantage. It's that simple a formula. If you have the competitive advantage in operating expenses you can redeploy that advantage into price no matter what the rate cycle is.”

Schenck also said the credit union's culture includes strong streaks of frugality that closely watch both sides of its pennies before they're spent on vendors, partners and marketing.

More importantly, however, adding assets and members at a much faster pace than employees and brick and mortar locations has enabled PenFed to keep its operating costs lower than its competitors.

Over the past 10 years, from 2005 to 2015, PenFed's assets and members increased by 140% and 106%, respectively, while its workforce of full-time and part-time employees grew by 60% over the same years, according to the credit union's 5300 call reports.

However, during the last five years, from 2011 to 2015, its assets and members grew 29% and 28%, respectively, while its full-time and part-time workforce jumped by 38%.

“We are predominantly doing business through mobile, our website and phone,” he said. “Americans have become very comfortable with purchasing products online.”

penfed growth Citing PenFed's strong package of products with competitive rates as the credit union's best feature, MyBankTracker.com named PenFed the best credit union in the U.S. for the first quarter of this year.

However, MyBankTracker noted the credit union's mobile banking platform still has room for improvement.

Nonetheless, T.V. Johnson, PenFed's vice president of corporate communications, pointed out MagnifyMoney.com recently named the cooperative's mobile app as the No. 1 mobile app in the large credit unions category.

On the revenue side of PenFed's balance sheet, real estate loans that primarily include first mortgages and lines of credit have soared from $9.2 billion in 2011 to $13 billion in 2015.

Its portfolio of unsecured loans increased from $1.7 billion to $1.8 billion during the same time period, and PenFed's other loans rose from $2.4 billion in 2011 to $2.7 billion in 2013, and returned to $2.4 billion in 2015.

Though Schenck plans to invest more resources to grow web, mobile and phone channels, he is not abandoning the expansion of its branch network.

He noted, however, that the credit union's small footprint of about 30 branches worldwide gives PenFed yet another huge operational efficiency compared to its multibillion-dollar peers.

The $73.3 billion Navy Federal Credit Union in Vienna, Va., operates 278 branches worldwide; the $31.8 billion SECU in Raleigh, N.C., has 256 branches; the $14.4 billion BECU in Tukwila, Wash., manages 42 locations; the $11.7 billion SchoolsFirst Federal Credit Union in Santa Ana, Calif., maintains 46 branches and the $9.6 billion The Golden One Credit Union in Sacramento has 80 locations.

“People like that physical presence and there are people who do like to do a lot of transactions at the branch,” he said. “That's where branches are very important. We're going to add some branches. We added five branches roughly in the last 12 months and this year we'll probably add four branches in strategic locations where we have a high density of members. But most of the growth is going to come through members joining us online.”

Its low operational costs also have allowed PenFed to invest more resources in its workforce of more than 1,700.

“Everything I talk about with my employees is about the member experience by taking perfect care of the member,” Schenck said. “That means constantly giving them the best price, constantly giving them great service. In exchange, we're going to take perfect care of our employees and that means they stay with us, they have pay raises, good healthcare, a good place to work and also have the time to do things by staying involved because we want employees to live and breathe the credit union spirit of helping others.”

Indeed, according to Glassdoor.com, a popular jobs and recruiting site, current and former employees gave PenFed high marks. On a five-star scale, employees gave the credit union an overall 3.7 star rating for compensation and benefits, career opportunities, work/life balance, culture and values, and senior management.

In addition, 61% of employees said they would recommend a friend to apply for a job at PenFed, while 77% said the credit union has a positive business outlook and 88% approve of the CEO.

And while PenFed continuously strives to take perfect care of members, Schenck conceded it sometimes misses the mark.

penfed growing As a standard practice, member complaints are emailed to PenFed Board Chair Ed Cody. After the complaints are reviewed and researched, Cody personally responds to the member.

Sometimes systemic changes are made when numerous members voice the same complaints.

“We're not perfect,” Schenck said. “We make mistakes, but whenever we make mistakes we always try to err on the side of the member. We call the member back, we apologize and we move on. That singular focus on the member is the whole reason why we exist, and if you take care of your members the rest falls into place.”

Instant Insights /

Low Costs Drive PenFed to $20 Billion Asset Mark

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