ALEXANDRIA, Va.–Leaders of smaller credit unions were offered some reassurance, chastised for making some common mistakes that only make a challenging environment more challenging, and urged to lean on NCUA and other CUs for help and assistance during a webinar hosted by the agency.
While it may run counter to how the federal regulator is often perceived, one NCUA official said during the webinar, “We have seen too many small credit unions merge over the last 30 years and we would like to stem that tide.”
Noting two-thirds of all credit unions are at $100 million or below in assets, NCUA hosted the webinar seeking to address some of the “challenges” facing smaller CUs and how to best respond.
In introducing the hour-long session that featured more than a half-dozen agency staff members, Chairman Todd Harper said smaller credit unions play a “vital role in providing safe, fair and affordable financial products and services in communities of color in rural areas and in underserved communities around the country. Yet smaller credit unions often face some challenges to their long-term viability, including lower returns on assets, declining membership, high loan delinquencies, increased noninterest expenses and, perhaps most of all, a lack of succession planning for boards and key personnel.”
Indeed, as CUToday.info has been regulatory reporting, the majority of CUs involved in mergers are smaller in size, and many cite those factors in their disclosures to members over why they need to merge.
With new actors and fintech firms regularly entering the market, Harper said there must be a “sustained commitment” across the credit union community to help smaller CUs to survive and prosper, and that includes at NCUA itself. Harper cited the agency’s office of Credit Union Resources and Expansion (CURE) and the grants it makes available as among the ways NCUA is seeking to play a role.
That is also the reason it hosted the webinar, the chairman said.
NCUA staff who participated in webinar.
What Was Discussed
Here’s a look at some of what was discussed.
There are five common challenges faced by small credit unions, according to Nicole Whaley, problem case officer in NCUA’s Southern Region, and Lisa Cebolla, an examiner in the same region.
Those challenges include:
Succession Planning
“A strong board or manager is often the determining factor in determining whether a small credit union is successful,” observed Whaley.
Whaley said the agency’s examiners often find at smaller CUs:
- No or limited succession plan
- Retirements that leave gig questions not only over who can replace the retiring exec, but who can apply for the vacant position
- Difficulty attracting experienced staff
- Difficulty filling vacant positions and the resulting need to determine why people are not interested.
“Applicants use compensation and benefits to make career choices, which are sure to impact the applicant pool,” Whaley stated. “Similar challenges also exist with filling vacant board positions. Credit union boards have a tremendous fiduciary responsibility without the benefit of compensation and sometimes without proper recognition. The pressure of serving as a volunteer can be high and the inability to recruit new members can result in an imbalance of skills.”
Whaley said at many small CUs there are too many longstanding board members and the resulting absence of fresh thinking, energy and external focus combine to “stifle” credit unions.
Technology
“Sometimes we see unwillingness or inability to purchase technology,” Whaley said. “With limited staff already in multiple roles, having to learn, implement and maintain new or existing technology may appear to be a daunting task. Sometimes smaller credit unions are unable to compete with larger banks and credit unions in offering…services tech savvy members will use.”
Strategic Planning
When it comes to strategic planning, what Whaley said the agency often finds at smaller CUs are:
- No Limited Strategic Plan or Budget. “Member needs are changing. You need to plan out how and when to address them. Wait too long, and members leave. Add to early and there are too many bugs.”
- No/Negative Growth and Declining Trends.
“Failing to plan is planning to fail. This is a warning sign,” said Whaley. “Please remember you are not developing a plan to satisfy your examiner but to chart the course of your credit union’s future.”
Operations
According to Cebolla, what NCUA often encounters at small CUs when it comes to operations are:
- Limited segregation of duties
- Weak financial condition
- FOM disruptions or declining membership
- Limited products and services
- Accounting/recordkeeping struggles
Cebolla acknowledged segregation of duties is a special challenge at smaller credit unions where the size of the staff is limited. In those cases, she urged CUs to address the issue with their examiners.
“Remember, one person should never have all of the keys to the castle,” said Cebolla.
Cebolla said the agency recognizes that factors that include the lack of capital to acquire new technologies, the inability to hire employees as the result of a lack of competitive pay and benefits, aging memberships, struggling or closing sponsor companies all coupled with “intense” competition from larger credit unions puts tremendous pressures on the leaders of smaller CUs.
“Gain perspective,” recommended Cebolla. “Is your leadership team all rowing in the same direction? Has your field of membership been disrupted or is it declining? What is your credit union’s speed limit for growth? … Some credit unions have recognized the need for a speed limit on growth and have built a plan to survive, thrive and move forward.”
Management and board expertise issues include limited or no training programs, limited corporate governance, and a weak supervisory committee, according to Cebolla.
“The least effective process is no process at all,” she said.
Remedies for Success
Karen Gottesburen, a problem case officer in NCUA’s Western Region, said remedies for success for smaller CUs include:
- Developing a succession plan
- Being proactive
- Networking and building lasting relationships
- Using qualified support systems
“We have seen too many small credit unions merge over the last 30 years and we would like to stem that tide,” said Gottesburen. “Be proactive. These relationships could help you in the event you have a sudden short-term vacancy, such as an illness or family emergency. Other credit unions, both small and larger credit unions, may be willing to lend staff to help out. We have seen this happen time and again. Contact your league for support to help find qualified replacement staff to fill vacancies and to help advertise for those replacement.”
When it comes to the board, while it’s a sensitive issue, Gottesburen recommended putting term limits in place or allowing officials to become emeritus members of board.
“Expand everyone's knowledge base. There may be someone internally or an official who could be cross-trained as a backup for the manager position,” she advised.
Technology
As was noted several times during the webinar, technology, or the lack thereof, is among the most significant of challenges facing small credit unions.
“You must still do the required due diligence prior to implementing any new programs or services, including developing appropriate policies, completing vendor due diligence and ongoing risk assessments,” said Gottesburen. “Don't wait until after you have implemented the program or service.”
Other Recommendations
- Always get a legal review of large contracts. “It may be far more difficult and far more expensive to leave once you have signed on the dotted line no matter what the salesman has indicated.”
- Are you prepared to cancel a service that only a few members are using? “Determine the true demand for a product (and don’t offer) just because the big boy credit union is offering it. Remember that when asked if they would like a new service, most members will say yes, but that does not always mean they will sign up at your credit union. They may already be using that service someplace else.”
- Complete a cost analysis—whether converting to a new system or adding a new product and determine the impact. Consider the hard costs, the cost of the contract itself and the recurring cost. “How much do these cost scale with the number of people who will use the service? Consider the soft costs. How much employee time will these new services require? How much training will staff need? You cannot overtrain, but you can definitely under train.”
- Review how revenue will need to be added to offset the new costs and how long before you can expect to break even.
“Make sure the Backoffice has thoroughly planned for what’s necessary to handle new products. This can’t be emphasized enough,” said Gottesburen, who advised seeking out the experiences of other CUs when going through any conversions with a vendor.
Looking to Other CUs
Justin Trosclair, and examiner in the Southern Region, concurred, adding that smaller CUs should never look to “reinvent the wheel” and should instead always look to other CUs that have “already achieved what you want to achieve.”
In looking to other CUs Trosclair said a credit union should review its balance sheet components and the services it offers.
“I would suggest starting the plan by starting with your field of membership and its trends into the future,” he said. “Remember that many business problems are a symptom of an aging or shrinking potential field of membership. Nearly everything else in your plan is dependent upon your field of membership. For some credit unions it is a critical problem that must be solved. Is your field of membership large enough to support the kind of credit union you want to be. If you have already penetrated your field of membership, no amount of advertising is going to attract new members.”
Trosclair said the best CU strategic plans he has seen are generally three-to five pages with a clear action plan and a limited number of goals.
“Only prioritize the most critical goals,” he recommended. “Adding too many wish list goals distracts resources and focus.”
Trosclair said when he is reviewing a credit union’s proposed budget, “I always ask, why will the numbers in this budget come true? A realistic budget is better than a budget that shows a positive bottom line.”
He added that while they are required, he urges CU management to look at annual audits and reviews as “value-added functions. Try to find an auditor who can help you to refine your processes.”
Training Resources
Margaret Williams, a principal examiner in NCUA’s western region, urged CUs to look to resources for assistance, including NCUA’s learning management system courses, NCUA’s YouTube Channel, CU associations, other CUs, and the district examiner.
Communications
The final component NCUA said can help address challenges to smaller credit unions, especially as related to dealing with examiners, is communication.
Heather Phelps, virtual exam program officer with the agency, called on CUs to establish communication preferences, including identifying points of contact, means and frequency. She also urged “transparency” with examiners.
“It's important to remember communication does not have to stop what your examination has concluded,” she said. “Actually, it's best if communication continues between exams. Your examiner can provide direction guidance and best practices if you're planning on offering a new product or service. If you have questions about your examination findings or need clarification on outstanding documents of resolution, you should contact your examiner rather than waiting until your next scheduled examination. Finally if you have any questions when preparing for an upcoming examination, don't hesitate to contact your examiner.”