By Helen Mickel
My credit union, Tongass Federal Credit Union in Ketchikan, Alaska, recently completed a merger with another regional credit union in Southeast Alaska. It was an emotional experience for me, I am a strong industry advocate. I want to see credit unions grow and thrive and continue serving the unique needs of their members. I do believe our merger was the right thing for our members, employees, and our credit unions. Nevertheless, it got me thinking more about how we as the credit union industry can help preserve, support, and uplift small credit unions and slow the pace of contraction.
We all know the number of credit unions is dropping precipitously. In just the 10 years between June 2012 and June 2022, the industry has gone from 6,961 to 4,853 credit unions, a 30% decline. The good news is that credit union membership has continued to increase in that same period, from 93.1 million to 132.6 million, a 42% increase.
The High Cost of Relevance
Credit unions are providing essential and affordable financial services that are valued. However, with increasing regulatory burdens, rapidly changing technical advances, and the high cost to stay relevant in the financial services space, small credit unions are struggling to keep up. And. frankly, many of these hard-working credit union employees and volunteers are simply tiring out.
The “wearing of many hats” we are all familiar with in small credit unions just continues to multiply. Volunteers, management, and employees are wearing down under the many challenges that are placed on them to provide what their members are demanding in modern services.
Complying with the pressures and costs of regulatory burdens like improved cybersecurity and vendor management controls, along with the usual concerns of compliance and risk management, liquidity, capital adequacy, loan loss reserving, and more are stacking up to a point where it can be overwhelming for a small credit union team.
It is easy to forget that when you have a staff of six, and one is out on maternity leave and two more call in sick after testing positive for COVID, you have just lost 50% of your staff. Imagine losing 50% of your staff in a large credit union and hopefully your small-credit-union empathy quotient increases.
Contraction is Inevitable, But…
There are current options for survival and relief. Credit Union Service Organizations (CUSOs) are often offered as options. Other more unique options include CEOs overseeing more than one credit union, or the example of a Connecticut credit union offering mergers while retaining the branding and locations of those merging credit unions.
Another option introduced in this article, below, is Transition Teams.
Credit union contraction is inevitable to some degree, but with more options available to small credit union boards and management, perhaps the contraction can slow. CUSOs have long been part of the solution. CUSOs for back office, core computer systems, accounting, lending, and more are all available right now. They are often affordable and can provide valuable support to small credit unions.
Additional Options
Another option is using a fractional CEO. This option retains the unique identity of credit unions while scaling on an executive level and back-office support to oversee more than one credit union.
In California, Jon Hernandez serves as CEO of CalCom ($82.3 million in assets), Mattel ($29.3 million in assets), and Nikkei ($90 million in assets) credit unions. In this model, resources are shared, including personnel. Each credit union is unique, and as Jon points out, they cannot be run the same; but there are similar back-office functional areas that are served by one employee each including tech, marketing, compliance, collections, and accounting. The credit unions all use the same core system, and an operations officer runs the day-to-day activities in each.
Overall, Jon Hernandez has 44 employees running 6 branches, serving 16,000 members with combined total assets of $202 million. He does not recommend merging his credit unions. You can hear more about Jon’s work as a multi-credit union CEO in this Western CUNA Management School "Frogcast".
Another Model
While not avoiding merger, $61.6 million America’s First Network Credit Unions (AFNCU) led by President/CEO Nick Moalli has established a model of preserving the integrity of small credit union identities, while providing back-office support to help them survive in today’s market through a unique merger model. A merging credit union becomes a division, preserving its brand identity. They call it a “hybrid merger model.”
With this model, they can scale on back office, compliance, finance, marketing, insurance, and core processing, while keeping location, names, branding, and personnel. Members retain the comfort of their known financial institution and employees can preserve the unique culture each credit union possesses. You can hear more about this state chartered, multi-SEG option at this CUNA Podcast link.
Succession or Transition Planning
The NCUA is leaning into requiring succession plans as an answer to help preserve credit unions into the future describing the process as one “…through which an organization helps identify, develop, and retain key personnel to ensure its viability and continued effective performance.”
Honestly, a simple succession plan is not too hard to write--put down on a couple of pages your plans to promote and/or hire to fill the next vacant CEO role and top management,--but they don’t always work out. One small credit union CEO shared not long ago that he had identified a great candidate to mentor for his position. When he shared his thoughts with that employee, the employee remarked, “I don’t want your job.”
One problem with preserving “viability” and “effective performance” is competition in the job market. Salaries and wages have grown dramatically in the last couple years. The pressure is on to pay top dollar if you want top talent.
Fading in the Sunset
Dedicated CEOs in the sunset of their careers that have given years or decades of their lives to the mission and purpose of their credit union have often taken a step back on wages. That works until their retirement and when it’s time to hire their successor, the reality is, the funds aren’t there for the talent needed. At this point many credit unions simply sit back and merge.
Another option would be to make a strategic change that could potentially provide a reset for the future – enter Transition Teams.
Transition Teams
Rather than just a succession plan, small credit unions should create a transition plan. Many small credit unions have lost their base. Their SEG no longer exists or has aged out or has moved or changed and the relevance of the credit union is suffering. On the flip side, there are groups trying to start de novo credit unions. The task is substantial. The barriers are many. It can take years to get a new credit union established and sadly in some cases just a few years later that hard won credit union is merging into a larger credit union.
The future of a small credit union may be able to refresh and update what is already in place or it might be time to take a strategic turn toward a new SEG or target market.
A Transition Team from a sister credit union could be the answer to lifting up and expanding on a foundation in place. At credit unions we all have our origin stories. And they are all essentially the same - the credit union started because people were underserved. Those people may have been factory workers, mill workers, teachers, truckers, or church members. Now the underserved may be Indian reservations, low-income communities, rural or agricultural communities, students, single parent households or, …fill in the blank.
What is Involved
A Transition Team from a sister credit union would include more than just a fractional CEO, it would include leadership team members with expertise in lending, operations, marketing, finance, and tech. Ideally the sister credit union would be on the same core operating system as the Credit Union they would be assisting.
The Transition Team could review or analyze any areas of concern posed by the credit union. Based on their specialty, leadership team members would assist in refreshing areas identified by the CU board or employees. Policies could be reviewed, marketing could be updated, compliance could be evaluated, finance procedures and processes could be strengthened.
The Transition Team could make recommendations for new products or services. The fractional CEO and leadership team could lead strategy meetings with the board and update and renew strategic plans.
The Time Frame & More
Essentially, the small credit union would have a leadership team for a period of 6-24 months assisting with management level duties and strategic planning priorities.
A Transition Team would be part of the credit union’s succession plan. With the departure of a CEO, the Transition Team fractional CEO would fill the role and could assist the board with hiring a permanent replacement. The Transition Team could also support a new CEO in their initial employment period.
The Transition Team would be paid by the credit union in an amount mutually agreed upon, but generally the amount would be the budgeted cost of the replacement CEO. Transition Team duties would be identified and agreed upon with the Credit Union and more could be negotiated.
Core processing companies could choose to maintain a list of credit unions willing to act as Transition Teams. This could be a value-added convenience for small credit unions.
The Boots on the Ground
CUSOs and consultants also offer similar services as proposed for a credit union Transition Team. And that may be a good option. However, a sister credit union offering these services is living the day-to-day life at a credit union. They are “boots on the ground,” living daily real-world credit union experiences and they have a breadth of team members with varying areas of expertise to support the needs of a credit union.
Many credit unions thinking of merging have opportunities to breathe new life into their organizations. The help they need is available through CUSOs, consultants, fractional CEOs, Transition Teams and more. There are young professionals dedicated to the industry willing to work to keep the credit union movement strong, read more about that in this article by Rachel Guyselman.
‘I’m Willing to Do It’
Transition Teams are another tool that could be available in the industry (I’m willing to do it!). Teams available now for a credit union with management and board members that are just plain tired - they want their credit union to survive, but the pandemic knocked the fight out of them, their SEG shut down, or they still can’t find a CEO replacement, or their current CEO is retiring and there is no one qualified to promote.
One of the things I love about credit unions is we are a cooperative movement. We help each other, we share policies and best practices. We even share space! We can share our resources in an even greater way, by offering Transition Team services to sister credit unions to help build up and empower them for a future of success.
Helen Mickel is president/CEO of Tongass Federal Credit Union.