Mergers are just one of the options for credit unions.
Credit unions are caught in a perfect storm, being buffeted by competitive, financial, technological, staffing and regulatory waves. Can they survive without being absorbed in mergers or absorbing other CUs? A lot of smart executives, consultants, regulators and vendors are doubtful.
But maybe there’s a way. CUES member Chris Bower didn’t see the gloom-and-doom memo. “We’re confident there will be a place for us,” says Bower, president/CEO of the aptly named Endurance Federal Credit Union, Duncan, Oklahoma. Mergers come up in strategic planning sessions, and “we’ve been approached a couple times,” he reports, “but our board is not interested in merging with a larger CU. We might take in a smaller one if they’re in the right location and have the same member focus we do.”
Endurance FCU is sticking to a traditional strategy and role: that credit unions thrive by offering a conspicuous focus on being a good neighbor. The credit union attracted some attention last year by giving each of its 35 employees a $50 gift card and telling them to pass it on in the community—to a local charity or a needy person. Their choice. That’s $1,750, but well spent for the goodwill it builds and the reputation it earns Endurance FCU, notes Charlsie Harty, chief marketing officer.
“We’re very active, very visible in our communities,” Bower concludes, “supporting school and civic activities. That sets us apart. That gives us roots and staying power.”
The rationale sounds good, but what about meeting the five big challenges: margins, technology, talent, growth and net worth?
Since 2008, Endurance FCU has grown from $79 million to $190 million. Margins are squeezed, Bower concedes, but the credit union operates in a swath of rural southwestern Oklahoma. “We don’t have all the competition that some CUs face. We have to price competitively, but we may not feel as much pressure as some.”
Talent is currently manageable. “Our location gives us some insulation from all the resignations that are happening nationally,” he observes. “We don’t see much poaching of our top people. Turnover in the front line is about the same as usual.”
Bower recognizes that succession planning is expected—that the National Credit Union Administration is pushing it—and Endurance FCU has such a plan but no sense of urgency. “It may need a little tweaking,” he concedes.
Tech is not seen as a problem since a 2020 core conversion to Jack Henry Symitar. “We’re set up well for the future,” Bower declares. “We can serve members effectively through our two branches (Duncan and Elk City) and through our digital platform.” Net worth is solid at 10.67%.
With just two branches and a lot of rural geography, Endurance FCU is using its upgraded technology to expand its field of membership east from Elk City, along the I-40 corridor toward Oklahoma City. “Our strong technology lets us enter markets without brick and mortar,” Harty observes. “We’ve been focusing on Clinton and Weatherford, and we have plans to expand to the west. Other players are fighting it out over the hot spots. Our strategy is to go to more rural areas and build loyalty there.”
Management, Board and Strategy
Is Endurance FCU a special case? No, insists former bank regulator Ancin Cooley, CIA, CISA, principal of Synergy Credit Union Consulting and Synergy Bank Consulting, Chicago. “Any credit union can survive if it has the right management, the right board and the right strategy,” he says. The problem for many is that they try to mimic and compete with banks, then lose their original identity as an organization. That identity is their differentiation and what will enable them to survive.
Credit unions that followed an expansive retail banking strategy as a way to compete and survive may have taken a wrong turn, warns Stephen Morrissette, visiting professor of strategic management at the University of Chicago Booth School of Business.
“Too many CUs forget their charter advantage and try to look like a retail bank,” he says. But even though customer satisfaction rankings for CUs have fallen, “there’s still a public perception that credit unions are more trustworthy than banks. CUs need to own that high moral ground and let it show.”
Going for a proliferation of products and channels is expensive. “The generalist vanilla retail bank model has created too many look-alike financial institutions,” notes CUES member Maurice Smith, CEO of $3.4 billion Local Government Federal Credit Union, Raleigh, North Carolina. “There’s now a strong case for doing a few things well. Many credit unions thought community banking would be a rose garden. They’re discovering that it’s a lion’s den.”
Cooley couldn’t agree more. The key to credit unions’ survival is leveraging their brand, their branches and their marketing resources to bring joiners to a cooperative movement—to use values and mission more than rates, he says.
Death from margin compression is somewhat self-inflicted, Cooley suggests. “You can’t win by competing on rate. Someone will always offer a lower loan rate or a higher deposit rate. You have to own who you are and let the true believers find you,” he says. Someone with an 800 credit score needing a $600,000 mortgage can always find a lender with low rates and white-glove service, he notes, but that person may choose a local credit union instead because they believe in the CU’s mission. Altruism still works. “So set your loans to get the spread you need and then market and send the message that you’re different, that you care about individual members and local communities.”
Thin-spread management is something bankers do, and they’re good at it, Cooley points out. “Credit unions will always lose when they try to imitate. Lead with your mission and get your story out. Digital and video technology and social media provide new tools that CUs can use creatively. It can level the playing field,” he says, “and make David look like Goliath.” Credit unions win through emotional connections to their brands that transcend transactional relationships.
But sticking to tradition is a false choice, counters Rodney Hood, a member and former chair of the NCUA board. Business diversification has been necessary for credit unions to survive once employer sponsors ceased to exist and local economies withered.
“Some old-timers remember when a credit union was where you kept a Christmas savings account,” he reports. “Credit unions had to migrate from that old paradigm, had to provide the financial services consumers want. Financial service has evolved. Credit unions are adapting with the times, not imitating banks.”
Credit unions generally are not refocusing their strategies by specializing and exiting unprofitable lines of business, Hood reports. It’s the banks that are now more likely to pick particular market segments they want to serve. But CUs are refocusing their portfolios by using services like loan participations and FHLB (Federal Home Loan Bank) borrowings, he adds.
Finding and Keeping Talent
Survival requires talent, and the talent war is real. “The competition for talent has gotten fierce,” Morrissette observes. “Salaries are going up quickly. The more services you offer, the more experts you need. Full-service omnichannel is expensive.”
The CEO, in particular, is critical to a credit union’s survival. “There are superstars,” Cooley reports, “who come in and put up amazing numbers.” That’s a big achievement, but such a person is a target that other financial institutions—bigger ones that can pay higher salaries—will come after. “The board has to make sure that the policies, procedures, plans and knowledge tied to that superstar have been institutionalized so they’re still there if the superstar leaves. They have to get the recipe from the cook.”
And survival sometimes requires firing as well as hiring, Cooley warns. Executives of survival-bound credit unions need to be decisive, even if it means firing a popular longtime employee who fails to meet performance benchmarks. “If you choose a project, you should then staff it, fund it and set goals,” he explains. If the goals are not met after a reasonable trial, you change the project or change the people. “You have to be loyal to the mission more than the person, even if you’ve been friends for years. You can’t accept underperformance. That will bog down the CU and create situations that you have to work out of.”
Finding and keeping talent may be the biggest obstacle to survival, Hood agrees, but he suggests a solution: Apply the principles of equity and inclusion to recruiting employees and board members. “Minorities are a growing part of our society,” he observes, “but Black colleges and tribal lands may be overlooked as fertile places to recruit and develop talent. Boards often need fresh blood, and younger people and racial diversity could broaden and invigorate credit union boards.”
Sometimes sharing talent can turn around an apparent lost cause—it just takes the CU spirit of cooperation. Local Government FCU has proved this with a $250,000 infusion and a lot of talent. $23 million Florida A&M University Federal Credit Union, Tallahassee, was on the ropes, Smith reports. It had been losing money for years and its capital needed corrective action. Its business model had failed. NCUA was breathing down its neck. “But we like underdogs,” Smith says with a smile.
Now FAMU FCU has net worth of 10.5% of assets and 2021 net income close to $1 million, he reports. “The bank examiners are marveling at the turnaround.” To achieve this, Local Government FCU identified where FAMU FCU needed expertise and dispatched some of its own people for weeks-long, on-site assignments and follow-up, he explains.
Though Local Government FCU was able to use its resources to help FAMU FCU last year, it is now feeling the pinch. “Turnover is up,” Smith concedes, “and it’s harder to attract new talent. It was tough enough to compete locally, but now companies from all over are hiring our people, often with work-from-home arrangements. Loss of talent will drive mergers. There’s no question about that.”
Maximizing Member Value
Without shareholders, the mission of credit unions is to maximize member value, says Vincent Hui, a managing director at CUES Supplier member Cornerstone Advisors, Scottsdale, Arizona. That usually will mean merging to gain size, expand the menu of services and improve the technology.
Of course, many credit unions would argue that maximizing member value means continuing to operate independently, with close ties to the local community. How, they ask, does merging away local control maximize member value?
Staying local is the right strategy if it’s working today and will continue to work, Hui agrees. “However, it needs to be based on facts and performance instead of beliefs. Are you gaining net new members? Are you increasing member engagement? Are you getting the top-of-wallet position? If you aren’t, ruling out a merger is an emotional argument, not a factual one.”
Many mergers, Hui observes, are about building a bigger, more resourceful, more enduring credit union within the traditional CU model. Can credit unions expand outside that model? Doing so is a corporate strategy, not just a business strategy. He notes the significant number of CUs buying banks to gain new lines of business, like commercial lending, as well as scale. Fintech partnerships are another example of a “corporate strategy” initiative to transform a credit union’s business model to stay relevant to members.
Credit union service organizations, Hood notes, are another good way for CUs to pool resources and cut costs or support products they couldn’t afford on their own.
Playing the CUSO card can be a good strategy and possibly help avoid mergers, says Charlie Kelly, a partner at Remedy Consulting, New Berlin, Wisconsin. “The big challenge is revenue. If a group of credit unions can charter a CUSO that sells products or services that generate revenue they can share, that’s a new revenue stream,” he notes, “and that can be gold.” But such a CUSO is another vendor with marketing and management expenses of its own, so it’s not a magic bullet.
Ultimately, the case for not merging, Kelly says, is based on keeping the CU responsive to local conditions, opportunities and needs. As a board member of a small CU, he has participated in a lot of discussions about merging or not merging. His conclusion: If the credit union has a young, skilled management team, a clear sense of mission and growth in membership and loans, it has good prospects for surviving independently. cues icon
Richard H. Gamble writes from Grand Junction, Colorado.