Let the Truth be Told - Why a New NCUA Rule Could Jolt Credit Union Innovation

The National Credit Union Administration has finalized a rule to improve board and executive succession planning within the credit union industry. This strategic move aims to curb the trend of mergers driven by technological stagnation and poor succession strategies, ensuring more credit unions maintain their independence and enhance their technological capabilities.

By Ken McCarthy, Manager of marketing communications at Tyfone

Credit unions are merging out of existence because of an inability to invest in technology, the National Credit Union Administration Board wrote when introducing its now finalized rule on board succession planning. The regulator now requires credit unions to establish succession planning for critical positions in their organizations. But it’s likely to have even wider effects, such as preserving more independent charters and shaking up the perspectives of those on credit union boards.

“Voluntary mergers can be used to create economies of scale to offer more or better products,” the NCUA wrote when it proposed the rule in 2022. “However, the [NCUA] is also aware of numerous instances in recent years where federally insured credit unions merged because of a lack of succession planning, [which was] either a primary or secondary reason for almost a third (32 percent) of consolidations.”

Merged credit unions, though, have not invested in technology “even though some had very high capital levels” before the merger, NCUA said. What held up modernizations to the institutions’ banking experience if it wasn’t capital? Its boards that are ultimately responsible for all the operations and functions of the institution. The new succession planning rule may provide credit unions a means of aligning board member interests with the organization’s long-term future.

https://www.ncofcu.org/first-responder-credit-union-academy

NCUA Director Requirements

Aligning Board Members’ Priorities

It’s difficult for a board member to learn about a new digital banking technology when they’re facing health problems. Setting the institution on a firm foundation for future independence also doesn’t align well with board members’ priorities when they need a merger payout to fund their retirement.

Unfortunately, these circumstances are not uncommon for credit unions across the country, according credit union leaders who spoke with Tyfone.

“Many CEOs of smaller institutions plan to merge as part of their retirement and get a payout,” one Ohio CEO said. “I would estimate at least 60% of the older CEOs of credit unions under $500 million (of assets) plan to merge as part of their retirement strategy.”

Another CEO based in Texas said he wonders if some of the larger credit unions that “do things right” don’t want the smaller institutions to have succession plans “because they are easy pickings without one.”

However, many executives believe that the rule could help in forcing reluctant board members to step down.

An Arizona CEO told Tyfone it is incredibly difficult to get some of the older, long-time board members to talk about when they plan to relinquish their seats, let alone discuss who is going to replace them or have the board as a whole plan for their departure.

“I had a board member who was 83 with heart problems who, when asked when she was going to step down, had no plans to do so and stated they would have to wheel her out on a stretcher,” the CEO said. “And no other board members spoke up to address the problem she presented. I believe at least 50% of credit unions have a board member like this.”

What is it about those board positions that make directors so unwilling to step down?

“There is something about volunteer, non-profit boards that attract people on power trips,” the Ohio CEO said. “They are there for a monthly free meal and the trip to Orlando for their league annual meeting. And many folks don’t think the credit union can run without them.”

Aaron Goff, president and CEO of the $608 million-asset Embold Credit Union in Milwaukie, Oregon, told Tyfone that the credit union has a detailed succession policy and plan document that it updates regularly and that he discusses with the board semi-annually.

“We also have a Board Emeritus and associate board member program — which I highly recommend to any credit union — that functionally goes a long way toward board succession, as we always have one or two folks in the hopper ready to go,” Goff said.

Problems With the NCUA Rule?

Goff also said there are many problems with the rule.

For one, upper-level staff tend to be people that have been around the credit union for a long time, and as the organization grows, sometimes the complexity outpaces the skillset on the executive team.

“Best intentions notwithstanding, maintaining adequate training for the executive and mid-level management team so they are in the best position to succeed their predecessor when the time comes can be a challenge, especially at smaller CUs,” Goff said.

Many commenters on the rule agreed with the regulator that succession planning is vital to the long-term success of a credit union but believe the NCUA should address the issue through guidance and letters rather than with rulemaking that could add to an already growing regulatory burden.

That was especially true for the tiny institutions.

“We believe NCUA is underestimating the true amount of time credit unions will spend on compliance with this rule,” wrote Terri Cone, manager of $6 million-asset Skel-Tex Credit Union in Skellytown, Texas. “The NCUA estimates it will be about 10 hours per credit union per year, but that dramatically underestimates the burden this rule will place on our credit union.”

Matt Selke, president and CEO of Georgia Heritage Federal Credit Union in Savannah, Georgia, told Tyfone the number one thing the credit union requested during his interview was for him to help get a succession plan in place as a handful of senior executives are within a few years of retirement.

Selke in August replaced CEO Dale Taratuta, who retired after leading the credit union for 14 years.

“I think the proposed rule is actually a good idea,” Selke said. “In some credit unions it will force a conversation that some may not want to address or discuss. I will be curious to see how detailed the final regulation is and how the regulators will interpret and enforce it, though.”

A Needed Measure to Prevent Consolidation

The NCUA analysis said a lack of succession planning was either a primary or secondary cause for almost a third of consolidations. Yet, credit union leaders told Tyfone they think that number is much higher.

There were 4,533 federally insured credit unions as of June 30, compared to 4,604 as of Dec. 31, 2023. That’s down from 4,760 as of Dec. 31, 2022.

At the NCUA board’s July 18 meeting, Chairman Todd Harper said the regulator has found that 25% of credit unions either lacked any plan or had an inadequate plan. “Without a rule, we can only encourage credit unions to adopt effective succession plans through exam findings,” he said. “A rule would allow us to require such planning.”

The rules covers planning for positions including the board of directors, the supervisory committee, management officials and their assistants, the credit committee and loan officers.