How to save your small credit union (without merging)

To best serve their members, credit unions must offer a broad range of well-priced services, grow along with their communities, and remain financially sustainable. For many institutions, accomplishing all these goals can seem a daunting task. And for smaller credit unions in particular—those with, say, below $100 million in assets—that task can feel all the more difficult. Often, merging may appear the easiest solution, however, there are also other options worth considering that may better suit your institution.

What follows, then, is a roadmap of sorts outlining steps small credit unions can take to better serve their members and, as a result, accelerate their growth to not only remain relevant, but indeed flourish.

Embrace the Credit Union Difference

Small credit unions encompass a broad variety of institutions and experiences. Some are thriving. Others are struggling.

Those that are succeeding, small and large alike, typically combine competitive risk-based interest rates on loans, high loans per assets ratios, and inclusive loan portfolios. Through this combination, these institutions best serve the credit needs of their entire communities and provide abundant interest income with which to fund other valuable services to members.

Such credit unions prosper and experience higher asset growth rates, which in turn must be maintained through the following: (1) expanding fields of membership, to ensure there is a large pool of borrowers available; (2) above-average marketing expenses, to inform members of their offerings; and (3) above-average ROAs, so their capital maintains pace with their growing assets.

Unfortunately, despite the many thriving credit unions of all sizes, there are still far too many smaller credit unions that struggle. These institutions often combine low loans per assets ratios, high capital per assets ratios, and restrictive fields of membership. Such credit unions are not necessarily short of funds with which to lend, or short of capital with which to grow. Instead, very often, these organizations simply need to reset their operations, and embrace the credit union difference all the more.

These credit unions also commonly report struggling to find candidates to whom to lend. Institutions with low loans per assets ratios should therefore strongly consider field of membership (FOM) expansions to broaden the pool of potential borrowers. They should further leverage their high capital ratios, thus increasing outreach to members with weaker credit histories, i.e., approving more risk-based loans.

Opposed to rejecting potential borrowers because they are not prime borrowers, such credit unions should make more loans at interest rates that will be higher than those for prime borrowers, but that are still lower than what many borrowers could obtain elsewhere.

Struggling credit unions with high capital per assets ratios additionally need to leverage their capital, temporarily accepting net income levels of zero, and using those resulting funds to provide members with more attractive interest rates as well as to invest in their operations and marketing.

To recap, thriving small credit unions, with high loans per asset ratios and lower capital ratios, likely need more funds with which to lend and more capital to support the growth that results from their quality offerings.

In contrast, struggling small credit unions, often with low loans per assets ratio and high capital ratios, do not have the same short-term needs. To better serve their members and broader communities, these credit unions first need (1) to deepen their lending commitment to members with weaker credit histories; (2) to engage in large expansions in their fields of membership to broaden the available pool of borrowers; and (3) to refocus on marketing efforts to inform potential borrowers of their offerings.

Next, we will explore some of the tools smaller credit unions, both thriving and struggling alike, may use to raise funds with which to lend, raise capital, and, at the same time, deepen their commitment to their social mission.

Attain a Low-Income Designation (LID)

Becoming a low-income designated credit union is not only a great way to underline commitment to underserved members of your community, it also grants several benefits that can help smaller credit unions better serve their current FOM as well as attract new members.

A low-income designation may be assigned by the National Credit Union Administration (NCUA) to any federally insured credit union “serving predominantly low-income members.” More specifically, over half of an institution’s members or field of membership must qualify as “low-income members” based on their income or whether they are a student or member of the military.

The designation entails four key benefits, the first being an exemption from the statutory cap on member business lending, which allows expanded access to capital for small businesses along with the opportunity to further diversify an institution’s portfolio.

Second, LID credit unions may receive grants and low-interest loans through the Community Development Revolving Loan Fund (CDRLF), an NCUA program designed to help institutions extend member services and improve overall operations.

Third, these credit unions may accept non-member deposits from any source and, lastly, they may also use secondary capital (or subordinated debt) to meet their capital requirements.

Each of these advantages should be of particular interest to smaller credit unions, as they all carry the potential to help reach a larger, more diverse consumer base. In particular, access to secondary capital and non-member deposits can prove especially influential as sources of funds with which to meet the credit needs of their members and community.

The NCUA has historically carried out campaigns assessing whether credit unions qualify for a LID and then notifying them of their eligibility. However, as populations, income levels, and fields of membership change over time, a credit union may either gain or lose eligibility. It is therefore important to be both mindful of and monitor the eligibility criteria internally.

Further, at times relatively minor changes to a credit union’s structure and field of membership parameters can lead to eligibility for the designation, and often an institution is unaware of just how close it is to meeting the threshold. 

Become CDFI Certified

Certification as a Community Development Financial Institution (CDFI) is another means through which credit unions can meaningfully improve and focus their service to their members and community.

The certification is conferred by the Department of the Treasury’s CDFI Fund, and specifically recognizes a financial institution as specialized in serving low-income communities and those without access to financial services. To qualify, an institution must have a primary mission of promoting community development as well as serve at least one specifically defined “target market,” both standards many credit unions will already inherently meet.

In addition to receiving the same exemption from the statutory cap on member business lending and access to the CDRLF afforded LID credit unions, a major benefit of CDFI Certification is becoming eligible to apply for various financial and technical assistance grants through the CDFI Fund’s awards programs. The capital gained from such grants—which can reach as high as $5 million over five years—often serves as a direct antidote to a small credit union’s challenges in raising funds and serving the credit needs of their communities.

The data shows more and more institutions are taking advantage of CDFI Certification, with the number of certified credit unions more than doubling between 2020 and 2021, jumping from 224 all the way to 464. Over the prior year, 244 of these institutions received a total of $401.8 million in awards money.

Yet the certification remains underutilized and many credit unions are again unaware of the fact they may either already, or very nearly, qualify for the distinction, even if they have been turned down in the past. From the perspective of a smaller institution, becoming a CDFI is also another way to distinguish a credit union from its peers, while allowing for an innovative service model specifically to facilitate growth.

Embrace the Credit Union Difference, Again

Attaining either a Low-Income Designation or CDFI Certification can prove especially critical in helping smaller credit unions that may struggle raising funds with which to serve the credit needs of their members and community. Credit unions should therefore prioritize becoming designated/certified if they already qualify or, if not, then determining the best path to eligibility.

Once this step has been accomplished, the regulatory relief and potential access to additional sources of capital should be put towards funding the types of initiatives credit unions are uniquely equipped to take on.

Credit unions have long provided financial products and solutions to underserved populations. Targeting these communities that are “underbanked” or have weaker credit histories both helps institutions buttress their social commitment and ensure they succeed financially.

Small credit unions should also work to strategically configure their fields of membership to align with and support their identity and broader growth outlook. This is both a way to make sure an institution can remain true to its original mission as well as maintain LID and/or CDFI eligibility as the demographics (e.g, population and incomes) of their communities evolve.

In addition, collaborating with other credit unions is another tactic to take advantage of, both for increased exposure within the community and to learn from other, like-minded institutions that share similar goals and experience.

Convert to a Truly Open Core Processing System

A digital transformation can be a major driver of growth for any credit union, no matter the size. There are several advanced core processing services available that look beyond individual institutions themselves and focus specifically on making it easier for credit unions to partner with third-party digital banking providers and FinTech companies, thus helping facilitate both investment and growth.

Small credit unions in particular should look to leverage current fintech interest and enthusiasm in the industry by utilizing their core system to identify potentially beneficial partnerships. However, at the same time, such prospecting should not come at the expense of member relationships.

Focus on Attracting and Retaining Top Talent

A credit union’s personnel talent is what will ultimately have the biggest impact on success once you have put the right foundation in place. A credit union will only grow as far as its employees are willing to push it. Finding driven individuals with fresh ideas to add to your team and letting them take on that responsibility is a proven template for success.

Head hunt Crashers! GAC (CUNA’s Governmental Affairs Conference) Crashers are some of the best talent in the industry—reach out to them and see if they can help your organization. Recruit the credit union CEOs of tomorrow and give them both the opportunity to cut their teeth and an accelerated career path.

On average, it takes someone approximately 20 years in the workforce to become a credit union CEO, a timetable unconducive to drawing in ambitious, enthusiastic employees. Small credit unions can obtain Crashers’ talent and energy in exchange for an expedited route to becoming CEO.

Once you have attracted the right people to your credit union, you must likewise work to keep them there, and in order to achieve this, establishing a viable succession plan is absolutely vital. Providing talent a path not only potentially to the CEO role, but to broader senior leadership in general, will instill a growth mentality throughout the entire organization and help combat the potential necessity of a merger.

Marketing and Business Development

Credit unions grow through both cross-selling products to their existing memberships and adding new members. Marketing is, of course, critical to each of these efforts, and should be implemented in a targeted manner, focusing specifically on the people whose financial needs your credit union seeks to address.

Further, many overlook the importance of select employee group (SEG) relationships. Credit unions that have had trouble leveraging SEGs for growth almost universally struggle to communicate the value their credit union provides to the employer. Quantifying the benefit you provide your partners will incentivize them to promote the credit union to their employees, which is critical to a successful business development strategy.

Adding such groups also need not upend a credit union’s overall strategy and mission, nor affect its LID or CDFI status. Under a federal multiple common bond charter, an institution may include both SEGs and underserved areas in its field of membership. 

Final Takeaway

While there are instances in which a merger may be the right decision for a credit union, it is by no means the only possible solution. Further, while mergers may provide quicker, seemingly simpler fixes, the steps laid out here can help smaller credit unions grow organically without diluting their identities or neglecting current members.

Expanding fields of membership is a challenge all credit unions face, and one felt all the more acutely by smaller institutions. The true first step on the path to maintaining and improving member service, and thus to growth and overall success, is making sure you are aware of all available avenues before you act.

After assessing these possible routes, you may well find the answer lies within.