As Sears continues to shutter stores across the country, the final credit union chartered to serve employees of the retail giant has also closed its doors.

More than 70 years after being chartered, Sears Spokane Employees Federal Credit Union will merge into $77 million-asset PrimeSource CU effective Nov. 19. Based inside a Spokane, Wash., Sears retail location prior to the merger, the credit union held about $3.5 million in assets and served 528 members.

Sears filed for bankruptcy last month after struggling financially for years. As part of this filing, the chain is expected to shutter 142 unprofitable stores by the end of the year.

As of Aug. 4, 2018, the company operated 866 total stores, including 360 Kmart stores, 482 full-line and 24 specialty Sears Domestic stores. In 2005, when Sears merged with Kmart, they had a combined 3,500 retail stores in the U.S., including 2,350 full-line and off-mall stores, and 1,100 specialty retail stores.

Between Jan. 28, 2017, and Feb. 3, 2018, Sears Holding laid off more than 50,000 full- and part-time employees – reducing the workforce from 140,000 to 89,000.

As the last remaining member of a network of credit unions chartered to serve one of America’s longest-running national retailers, Sears Spokane’s closure marks not just the end of the line for another small CU, but the end of a chapter in American consumer history.

Long time coming

To hear CEO Mark Smith tell it, the credit union’s closure had been in the works for years. Smith explained that he and Sears Spokane Employees’ board had been mulling a potential merger since the time he first joined the credit union seven years ago.

“With the steady decline of Sears Holdings [the parent holding company for both Kmart and Sears], we were having a difficult time attracting new members from the employee base, as they were usually very short-term employees or mostly part-time workers,” he said. “The credit union was actually in the process of obtaining an underserved charter expansion, but with mounting pressure from our regulator over the risk of being located within a Sears store, we began to review our options and just kept coming to the same conclusion: we cannot afford to operate on our own should Sears close the store we are located in.”

With that in mind, two years ago Smith and the CU’s management began looking for potential merger partners.

PrimeSource was selected, Smith explained, because it satisfied a variety of criteria: adequate member service levels, good branch locations, products and services, as well as asset size, net worth and overall management philosophy.

All of the Sears CU’s employees are expected to retain their jobs as part of the merger. Smith will serve as lending manager and also maintain a position as a fraud inspector with the Spokane Police Department.

Smith estimated that the “overwhelming majority” of SSEFCU’s members are retired Sears employees and their families, adding that only about 10 percent of current members are currently employed at the store.

This decline in current employees had been an issue for the credit union for several decades, Smith lamented, and something past management did not account for.

“When I began at the credit union seven years ago, increasing membership was a top priority for me. I began taking the necessary steps to open the field of membership, knowing that it would be a race to reach a sustainable number of members that afforded us the revenue to be able to survive without Sears Holdings,” Smith said.

He explained that he started by trying to add additional select employee groups for the credit union, but those plans did not pan out.

“It did take us a while before we were able to apply for changes to the charter, as there were other issues that took top priority,” he said. The final push came with an application to amend its charter to serve underserved markets, but during that process that process the National Credit Union Administration “began pressuring us about the risk of being located in a Sears store.”

‘Cautionary tale’

At one time as many as 27 credit unions served Sears employees, but over time they were merged out, liquidated or expanded their charters and rebranded.

For example, in September 2015, NCUA liquidated SWC Credit Union of Tampa, Fla. Chartered in 1941 to serve Sears employees, SWC had just 309 members and $1.9 million in assets upon closure.

As CEO of the final Sears credit union, Smith celebrated the possibilities ahead with the merger, but called his CU’s closure “a cautionary tale for any credit union with a large concentration of members from a single employer.”

According to NCUA, as of Oct. 31 there were 653 active federally insured credit unions that had a single common bond charter and were affiliated with an employee group. That figure represents about 11 percent of the total U.S. credit union market, but it is changing quickly. Like many small CUs, Sears Spokane also offered a limited field of products – primarily checking and savings offerings – making growth more difficult due to limited possibilities for interest income.

For single-SEG credit unions, “the growth potential is very limited in today’s world,” said Howard Bufe, president of CU Evolution, a Texas-based credit union service organization that works exclusively with small CUs. And when an institution’s lone SEG is already struggling and losing employees like Sears was, that only further shrinks the pool from which a CU can draw members.

“Fear or a lack of confidence in their future limits borrowing power and desire among the employee group,” said Bufe. “What's more, support from the sponsor to the credit union shrinks as budget cuts occur. If the sponsor experiences layoffs, that affects the capabilities of the employee to pay back loans – this can cause increased charge-offs for the credit union.”

And don’t expect single-SEG institution closures to slow down, warned Onker Basu, senior director at Cornerstone Advisors.

“That’s not necessarily due to the fortunes of the corporations that they are linked to,” he noted. ”Single SEGs will likely keep disappearing for the same reason that many smaller-asset credit unions are vanishing or merging – they just can’t compete as effectively in today’s market.”

Like many small CUs, single-SEG institutions struggle to find new members and grow their assets, and at some point they have to think about joining forces with another entity if they hope to maintain any relevance for their members.

According to Dennis Dollar, a former NCUA chairman and now an Alabama-based credit union consultant, “today’s marketplace pretty much requires smaller to mid-sized single-sponsored credit unions to consider” expanding their fields of membership – including multiple SEGs, associations, underserved areas or a combination of those options – if they hope to keep their doors open. And many of those expansion options, he noted, have been available to single-SEG institutions since the 1980s

“Multiple SEGs, associations and underserved areas – not to mention the community charter option – have saved literally thousands of credit unions over the past 25 years that would have had a tough time surviving as a single-sponsored credit union when the plant shut down, the base closed or the company was sold or downsized," he said.

Out of time

Sears Spokane’s Smith said his credit union attempted to take steps to keep the doors open but ultimately “we ran out of time to complete our expansion. However, we were fortunate to have found a trusted partner that was willing to take in a credit union that, quite frankly, was not the most attractive merger candidate.”

Sears Spokane Employees FCU incurred a net loss of about $33,000 in the first nine months of 2018, after recording a net loss of about $25,000 for the same period in 2017. During that time, membership also dropped from 576 to 528.

Smith said the CU’s remaining members have not yet felt “any impact” from Sears’ bankruptcy filing, “but I am confident we can be an asset to our members if impacted by the Chapter 11 filing.”

