The Shrinking Pool of Small Credit Unions: Why It Matters & What We Can Do About It. - Henry Meier, Esq.
For as long as I’ve been around the industry, I’ve heard
concerns about the demise of the small credit union. But I’ve come to realize
it’s a lot like the weather: Everyone talks about it, but no one does anything
about it. This is unfortunate. We need credit unions of all shapes and sizes to
survive, and if we don’t take action soon, it will be too late.
Fortunately, there are steps the industry can take to
potentially decrease the rate at which small credit unions are disappearing by
making it viable for credit unions to survive by getting larger credit unions
interested in making the necessary investments to keep the small ones
alive.
First, does it matter if the industry is increasingly
dominated by larger institutions? From a purely economic standpoint, the answer
is no. Consolidation within an industry is an inevitable consequence of its
growth. The largest and healthiest credit unions are growing and taking their
share of members interested in investing in the movement. There are few
industries that operate on margins as thin as the financial service industry
does. Scale provides opportunities for growth that simply cannot be replicated
any other way.
But there is more than pure economics at stake here. Small
credit unions, which I generally define as any institution with $100 million or
less in assets, play a vital role in making the industry unique. No doubt that
larger credit unions can, should, and do continue to provide a wide range of
services, including assisting those persons of modest means, but there is
something intrinsic to the small credit union’s story that is vital to keeping
the credit union tax exemption, and indeed the whole rationale for
not-for-profit financial institutions alive in the first place.
As Jason
Stverak, the chief advocacy officer for the Defense Credit Union Council,
recently noted, “They prove that financial services can put mission over
profit, day in and day out. And importantly, they demonstrate to lawmakers and
the public that credit unions exist to serve people of modest means, not to
build empires. Every time one of these small credit unions vanishes, our
industry’s narrative loses a bit of its authenticity and moral high ground. If
the current wave of consolidation continues unchecked, we risk a future where
only a few massive credit unions remain and the core values and
community-driven principles that built this industry become little more than a
memory.”
One approach that I have talked about previously is to
encourage multiple credit unions to merge, but maintaining to the fullest
extent possible the separate identity of each institution. This could include
the boards of directors of the merging credit union active in advising and
running their institution. Think of it as a bank holding company model for
credit unions. Many local community banks are today owned by larger financial
institutions, but at least they have not completely lost their identity or any
connection they have to their membership.
After I wrote that article, I had a conversation with the
CEO of a small credit union. While he was intrigued by this model, he pointed
out that, as the CEO of a small credit union, he can only offer his top
executives slightly more than a branch manager would make at a larger credit
union. In other words, changing the structure of credit unions might help, but
what are we going to do to attract and retain the type of talent needed to
sustain and grow a small credit union?
A solution might be for multiple credit unions to share the
costs of hiring and employing a CEO by making greater use of fractional
leadership agreements, pursuant to which a single person could be the CEO of
multiple smaller credit unions. To take full advantage of this approach, the
NCUA would have to adopt an expansive view of interlocking agreements, which
have traditionally been used as stop gaps while smaller credit unions search
for a permanent CEO. Instead, the multiple credit union CEO could be a viable
and effective career path for the young and aggressive executives of the future
who are looking for a leadership position in a consolidating industry.
For example, a small credit union in upstate New York could
pool its resources together with another small credit union in Pennsylvania to
put together a package of benefits and salary that make the job more
attractive. In addition, both credit unions would get the benefit of a highly
motivated CEO who becomes intimately familiar with the unique challenges of
growing a small credit union. This approach is generally one of the ideas being
touted by Credit Union Shared Services (CUSS), which has worked with both small
and large credit unions over the last year on creating a series of
recommendations for helping sustain smaller institutions.
To be clear, this approach can only work with a little
flexibility from the NCUA and some creative thinking on the part of boards, but
if the approach takes hold, no credit union will have to disappear simply
because it can’t find a qualified replacement for its erstwhile CEO.
A second problem identified by CUSS is that small credit
unions lack the resources to provide higher-end retirement packages that larger
institutions use to attract and retain the best talent. Specifically,
Select Employee Retirement Plans are a way of providing your top executives
with benefits that cannot be offered to the rank and file employees. The
administrative and back-office costs of administering these programs could be
dramatically reduced if the plans are executed by a single CUSO that handles the
compliance and legal complications of one of these programs.
These plans are not without their risks, however, and they
can be expensive. But with a little regulatory flexibility and in pooling their
money to make these packages more cost-effective, small credit unions would
have far more means of attracting and retaining the most qualified people to
grow and run their institutions.
Encouraging greater collaboration in the employment of top
executives is not a panacea. Technology costs are continuing to rise and larger
institutions will always have an advantage when it comes to providing the
cheapest products and services. But the idealist in me says that there still
are some credit unions with viable business plans that could survive and grow,
along with the expertise of new leadership. It’s time for small credit unions
to more creatively approach CEO searches, and for larger credit unions, to pool
together their resources to make the CEO job for all credit unions more
attractive.
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