Saving Small Credit Unions
Industry leaders say the heart of the CU movement keeps shrinking and suggest how to keep small CUs alive.
“Small credit unions are at the heart of the movement, and we need to find a better way to preserve them, instead of consolidating them,” NCUA Board Chair Todd Harper said nearly a year ago when the federal agency approved a proposed new rule that would require all federal credit unions to have a succession plan.
Since he made that statement, the heart of the movement has continued to shrink. Over the first three quarters of 2023, the NCUA approved 107 mergers and most of the credit unions consolidated were small, managing assets of less than $50 million.
While concerns over the consolidation of small credit unions has persisted for decades, over the last three years, awareness of and alarm over this issue has appeared to grow, as more people ask what it means to the future of the movement and whether the merger tide can be stemmed to help save some small credit unions from extinction. Despite many initiatives by CUSOs, national and state trade groups, the NCUA, organizations and individuals to help small credit unions keep their doors open, there are other competitive and complex factors forcing small credit unions to merge.
Nevertheless, credit union leaders and organizations argued the industry needs to step up its collaborative efforts, not only to save the heart of the industry, but also to preserve the tax exemption.
The banking industry has continued to lobby for the elimination of the tax exemption because small credit unions are disappearing and being replaced by large-asset-size credit unions. According to estimates by Glenn Christensen, who heads the CEO Advisory Group in Bonney Lake, Wash., the average credit union size was $450 million with a median of just over $50 million in 2022. By 2030, the average credit union size is projected to be $1.2 billion, and by 2040, $4 billion.
Denise Wymore, who began working as a teller for a small credit union after she graduated from high school, is one of the many avid advocates for the survival of small credit unions.
She argued small credit unions are critical to keeping the tax exemption that is regularly the target of aggressive attacks from the banking industry lobby.
Wymore, who is currently a marketing manager for the Burbank, Calif.-based, machine learning-focused credit underwriting company Zest AI, pointed out that of the 4,686 active credit unions as of June 30, about 417 are billion-dollar cooperatives and approximately 3,000 have less than $250 million in assets.
When it comes time to fight back against the bank lobbyists to retain the tax exemption, credit union advocates can point to the 3,000 small credit unions.
“I’m not saying that large credit unions don’t do good things in their community, they do,” Wymore said. “But there’s nothing more special and nothing more unique than a mill workers’ credit union in remote Washington [State]. That’s the credit union difference. And so those 3,000 need to stay around to help those 417 avoid taxation. So in some weird way that’s a different way to look at it and it flips the narrative.”
One of the issues that has surfaced to the forefront this year is whether succession planning can help small credit unions survive.
According to an NCUA analysis, “poor management of succession planning” was either a primary or secondary reason for nearly one-third of all credit union consolidations. Harper is a proponent for a proposed regulation that will require all federal credit unions to develop and implement a succession plan.
When Wymore made a post on her LinkedIn page in August highlighting a CU Times report that said seven of the 36 mergers in the second quarter received the NCUA’s approval to merge because they were unable to find a CEO and/or board members to stay in business, it sparked a lively discussion. At the end of the third quarter and the first quarter, there were two and three credit unions, respectively, that could not find a new CEO, bringing the total number this year to 12, according to the report. In 2022, there were 11 credit unions that were approved to consolidate because of their “inability to obtain officials” – the phrase used by the NCUA.
“What is happening today that didn’t happen for 80 plus years … how is it we lose so many small credit unions to merger due to lack of succession planning?” Wymore wrote on her LinkedIn post.
Her question received nearly two dozen comments, almost 50 reactions and 11 reposts.
Megan Pieper, a 2023 Governmental Affairs Conference Crasher and vice president of marketing and ecommerce for the $245 million WestStar Credit Union in Las Vegas, wrote in response, “And there are so many of us who want to be CEOs and be mentored. The lack of succession planning seems to just come off as laziness to me.”
Kentucky Credit Union League CEO Jim Kasch wrote that in his experience it’s not always about a lack of succession planning, but also about the fact that being the CEO of a small credit union brings unbalanced levels of risk and reward.
“The position comes with tremendous responsibility and little pay,” he wrote. “Many bright, young credit union professionals may rightly pass up the opportunity because it’s just not worth it. They know how difficult it is to run a credit union and how much hands-on experience is required. Who can blame them for preferring a mid-level management role with a larger institution that pays better and has one-third of the responsibility?”
In an expert opinion piece published by CU Times earlier this year, Harper wrote that too many small credit unions fail to adopt and implement a succession plan, which makes them vulnerable to the whims of outside interests and the potential for a merger to be their only option when senior leaders leave.
“A succession plan allows an organization to prepare for the unexpected and thereby minimize service disruptions during management transitions,” he wrote. “A credit union board’s failure to plan for the transition of its management could come with high costs, including the potential for the unanticipated merger of the credit union upon the departure of key personnel.”
When the NCUA board approved a proposed new rule to require all federal credit unions to develop a succession plan, it drew 26 public comments. Eight of them were from multi-billion-dollar credit unions and most of them have leveraged consolidations with smaller credit unions for growth opportunities.
Although all of them said succession planning is critically important, most large financial cooperatives were against the proposed rule or had concerns about making it a regulation.
“In our view, a targeted approach would satisfy the proposal’s stated goals by focusing attention on credit unions facing operational challenges while avoiding the imposition of additional regulatory compliance burdens and increased subjective scrutiny on credit unions who have not demonstrated operational deficiencies,” wrote Chuck Purvis, a credit union veteran who recently retired as president/CEO of the $4.9 billion Coastal Federal Credit Union in Raleigh, N.C.
Seven state leagues, CUNA and NAFCU also wrote comment letters opposing the proposed rule.
Only two small credit unions and the National Council of Firefighter Credit Unions wrote comment letters in support of the proposed new rule.
“We are a small credit union and did not have one in place prior to my arrival as the new CEO,” Steve Foley, president/CEO of the $109 million Bragg Mutual Federal Credit Union in Fayetteville, N.C., wrote. “The two previous CEOs left without a plan in place, and that created many problems for the credit union to struggle with during, before and after hiring replacement CEOs. We have a plan in place now, and our board understands the steps to take in the event of an unexpected vacancy or an expected change in the leadership.”
Michael Daugherty, president of the $25.4 million Community Plus Federal Credit Union in Rantoul, Ill., said he supports the proposed rule, but noted the rule by itself can only do so much.
“As someone who has worked in small credit unions for over 30 years, I believe the biggest benefit to credit unions is that it (succession planning) will require them to plan ahead,” Daugherty wrote. “This may force credit union boards to have difficult conversations they have been avoiding. In addition to the NCUA there is a huge network of resources in the form of state/national associations, vendors, voluntary collaboration networks and larger credit unions whose resources can be marshalled to support small credit unions in this.”
John McKenzie, president of the Indiana Credit Union League, wrote in his comment letter that strengthening credit union succession efforts would be better served through guidance, tools, education and financial support.
“Specifically, we believe credit unions would benefit from recruiting assistance, resources to help retain individuals who are strong performers in these critical areas and a variety of educational tools to help credit unions manage operations and member services with the small staff sizes that are the norm,” McKenzie wrote.
Credit union veteran Walter Merkle of Savannah, Ga., is a consultant who specializes in serving Low-Income Designated and Minority Depository Institution credit unions.
He said he believes the industry needs to create a new business operating model for small credit unions that can help keep their doors open.
“Given that each small credit union has limited internal capacity, they need to supplement their internal capacity with external capacity by working with strategic partners,” Merkle said. “One way of doing this is to outsource back-office functions such as data processing, accounting, IT, ALM reporting, compliance, marketing, HR and benefits administration as examples. By doing so, a small credit union can increase its operating capacity to ensure that all that is required of it can and will get done and done in a proper manner.”
Merkle also suggested establishing a collaborative nationwide program to train up and coming executives could help small credit unions with grooming future leaders; this would include creating a national database of qualified candidates with which to match small credit unions in need of a successor CEO and/or who can serve as interim senior executives until a permanent replacement can be secured.
Wymore is president and board chair of the CU De Novo Collective, CUDNC, which has established a foundation with a grant program for “at-risk” credit unions to provide them with resources to buy themselves out of bad vendor contracts and capital to help them remain competitive. The foundation also is developing a new CUSO that will deliver back-office operations, technology and other services at sustainable prices for small and de novo credit unions.
While there are a number of other CUSOs that are enabling small credit unions to stay afloat, newly formed organizations are also on a mission to help leaders of small credit unions survive.
For example, in 2021 the Credit Union Women’s Leadership Alliance was established to support the growth of female small credit union CEOs through collaboration, education and mentoring/coaching opportunities (women are significantly more likely to lead smaller credit unions). The new organization has already attracted more than 150 members.
Earlier this year, Lily Newfarmer, one of CUWLA’s founders and president/CEO of the $118 million TCCU in Fort Worth, Texas, announced the women’s organization has forged a partnership with Filene Research Institute to participate in its Innovation Group initiatives.
“The group’s focus will be on utilizing Filene’s innovating methods to identify solutions to the challenges facing many small credit unions, such as succession planning, development, staffing, talent recruitment and capacity to name a few,” Newfarmer wrote in CUWLA’s August newsletter. “We are super excited to be part of this initiative and hopeful our research will help find solutions to the issues continually facing small credit unions.”
Although there is a prevailing assumption that small credit unions are barely surviving, that assumption has been debunked by the Filene report, “The Puzzle-Solving Approach That Enables Small Credit Unions to Thrive.”
Between 2005 and 2021, despite the Great Recession, a low-interest rate environment and the COVID-19 pandemic, the highest-performing credit unions with less than $250 million in assets outperformed the industry at large in assets, loans and member growth, according to the report. What’s more, in 2021, the highest performing credit unions with less than $250 million in assets had effectively the same ROA as the peer group of $5 billion credit unions.