WASHINGTON-It's no secret that consolidation in credit unions is occurring primarily among those below $50 million in assets. Those that wish to not just remain standing but growing will be best served by identifying specific markets for lending, and then pricing those loans just right.
But first that credit union needs a solid strategic plan.
No one knows that better than Bill Myers, director of NCUA's Office of Small Credit Union Initiatives (OSCUI) and a former manager of a small credit union himself.
Myers' office was created-and he was chosen to lead it-in response to the unique challenges faced by small credit unions; challenges frequently not being met, as the declining ranks of small CUs makes clear.
Those challenges include the lack of efficiencies of scale, limited branch presence, often limited product lines (especially in technology), small to nonexistent marketing budgets, and the universal Catch-22: the CU will grow when more people join, and more people will join when they have more reason to do so.
Despite that, Myers is optimistic that there is hope for the small credit union, provided they find their markets
"If you're a small credit union with a real specialized piece of service, you do great service for those individuals and those communities. That's the beauty of small credit unions," said Myers. "But if that market moves away, it can be hellishly difficult to find a new market for yourself. What we're seeing is those wholesale changes that started out with employer-based groups that downsized and moved and went bankrupt, and credit unions had to find a way around."
The Lack of a Plan
One problem that consistently causes problems for smaller institutions, said Myers, is a lack of effective strategic planning in order to identify where the problems are and how to work within or expand fields of membership.
"It's hard to even imagine, as someone who's grown up in a total SEG environment, how you can capture a wider share of the market," said Myers, the former CEO of Alternatives FCU in Ithaca, N.Y.
Myers noted that NCUA has seen applications from small CUs seeking to expand their field of membership to include an entire state, but "even if you got that field of membership, you'd still have to think much more narrowly to effectively capture that market."
What Myers and his office are seeking to do is work with credit unions to better understand what is limiting their growth. He noted that many small CUs with which the OSCUI works with know they're having problems, but one of their biggest issues is often identifying the root cause.
"Aging membership, products that aren't suitable for youth coming into the credit union, the location, the field of membership, the pricing of the product, the lack of electronic services-you look from inside a small credit union and there's an overwhelming set of problems."
'Impossible to be Profitable'
Myers noted that the low-rate environment continues to particularly plague smaller institutions. "If you're loaned out less than 50% right now," he said, "it's impossible to be profitable."
Part of what holds back small CUs is the inability to achieve economies of scale. But a number of analysts have said that it's impossible for CUs to achieve those economies until they're between $500 million and $1 billion or more in assets. Economies of scale are achievable for small CUs, said Myers, but they're not going to get them alone.
"If you look at the use of CUSOs and the use of collaborative solutions, oddly, they fall away steeply for CUs under $50 million, and that's where they need them the most," he said. "You don't have to be huge to have economies of scale. It's the back office that creates economies of scale, and there are a plethora of examples of small credit unions that outsource parts of their back office."
For its part, NCUA is working to increase collaboration among small CUs with its Collaborative Grant Initiative, which recently awarded a $50,000 grant to three small South Carolina CUs to combine back office processes through a CUSO. Myers said more of that kind of assistance will be on the way later this year, when NCUA plans a second round of those grants.
The cost of compliance remains one of the primary complaints for CUs of all sizes, but it can have a prohibitive effect on growth at small institutions. The OSCUI director said that NCUA looks to provide exemptions for small-asset CUs when possible, "but that only goes so far. There are still compliance issues for small credit unions. Obviously the small ones can't afford to have their own compliance officers, so collaboration seems like the way to go. There's already a lot of activity in that area, but we're concerned that even with all of that activity, the price point still doesn't reach far enough to the asset size to get small credit unions what they need."
You Can't Do Everything
Compounding the challenge is that unlike many larger credit unions, which have the marketing resources and sophistication to move more members to make them their PFI, many smaller CUs have not, and often have just an unprofitable deposit relationship with a member.
"Part of the misdirection of a lot of the marketing is saying 'We can do everything,'" said Myers. "Small credit unions have to pay more attention to that and say 'I have to focus on the members and I have to speak to them directly so that they understand me.'"
He noted that back when many of today's small CUs were SEG-based they had the luxury of being able to speak directly to members and at a low cost.
"You understood what it was like to work in the factory, how often you needed a car, and that focus on the market was really successful for credit unions."
Whether it's expanding card programs, upgrading to smarter ATMs, or back office collaboration, Myers explained that one of the major factors holding back small credit unions isn't the tasks themselves, but the sheer volume of them.
"It's not that these services are difficult and take a lot of management attention," he said. "It's the fact that there's a lot of them and you can't do them all at once."
The key, he said, is to build a strategy around prioritizing each new initiative and then expanding to the next step in the plan as each new service begins to make money for the institution.
