Banking

NCUA’s proposed succession mandate draws concern of overreach

The National Credit Union Administration is gathering feedback on a potential rule that it says would preserve the viability of small credit unions in the U.S., but executives worry that additional regulation would do more harm than good.

The proposal would require federal credit unions to have a proper succession plan in place. It stems from a concern that many small credit unions are looking to merge as a last-ditch effort to continue operations after their leaders retire.

Top regulators at the NCUA voted 2-1 in favor of advancing the proposed rule in January and opened the 60-day comment for credit union C-suites and other professionals to provide perspective about the potential impact it would have on institutions of various asset sizes. The comment period closes on Monday.

“At its core, this rulemaking is about federal credit unions of all sizes — especially smaller credit unions that do not already have succession plans — planning for their futures, so they can continue to serve their members for generations to come as independent entities,” Todd Harper, chairman of the NCUA, said in a Jan. 27 speech. “Small credit unions are at the heart of the movement, and we need to find a better way to preserve them, instead of consolidating them.”

Experts within the Credit Union National Association and the National Association of Federally-Insured Credit Unions have said that the regulator’s quest to make succession planning a requirement would disproportionately impact institutions with smaller economies of scale.

One alternative would be to offer credit unions access to resources and tools to aid in the planning process, without piling on the costs of regulatory compliance that come with a formal rule, according to Aminah Moore, regulatory affairs counsel for NAFCU.

“The actual rulemaking that smaller credit unions are going to have to comply with would create a burden for them, [and] we just think that there are other means to achieve the same outcome if their goal is to help [them] and prevent consolidations,” Moore said.

“Small credit unions are at the heart of the movement, and we need to find a better way to preserve them, instead of consolidating them,” said Todd Harper, chairman of the NCUA.

Bloomberg

Others have stated that the issue of succession planning is not as widespread a cause of M&A activity as the industry perceives it to be.

“In some instances, [succession planning] could be key to the continuation of a credit union, but I don’t know if we can say that across the board,” said Luke Martone, senior director of advocacy and counsel for CUNA. “Oftentimes, there are no issues with succession planning that lead to the eventual merger of a credit union…and sometimes that is the case.”

Opponents of the NCUA’s proposed rule are concerned that the agency is attempting to dissuade credit unions from exploring mergers as a way to serve broader fields of membership.

If the members and the board of a credit union decide upon a course of action that abides by all relevant rules and regulations and is in the best interest of the institution, neither the credit union nor the NCUA should micromanage that choice, according to Jeffrey Olson, president and CEO of the Dakota Credit Union Association.

“DakCU appreciates the intent of NCUA’s proposed rule is to strengthen current succession planning efforts being taken by credit unions, and to require others that have not yet done so to commence their succession planning process … [but we do] not believe another layer of rules and regulations is the best approach,” Olson said in a written comment to the NCUA.

Longtime credit union executives who originally anticipated retiring prior to the COVID-19 pandemic remained in their roles to help steer their institution through uncertain markets. Now that enough time has passed — and operations have improved — executives feel more comfortable with stepping down.

Robert Voth, managing director for the New York-based management consulting firm Russell Reynolds, explained that the diversity he sees within talent pools for executive roles at banks isn’t present within the talent pools for credit unions.

“Credit unions have become parochial by nature, where individuals tend to stay there two to three times the amount somebody at a traditional bank would stay in a role,” Voth said. Anyone the credit union could hire with the proper experience would probably be nearing retirement as well, Voth said.

Data from Russell Reynolds found that those in CEO roles across the top 50 credit unions in the U.S. average almost 11 years in their position, with a tenure of more than 20 years at the same credit union. Additionally, less than 15% of those in senior leadership roles at the same institutions have cross-functional experience outside of their current position.

“They’re ensconced in their communities and it’s not easy for them to pull up their families and their relationships because of the idiosyncratic nature of a credit union … so if you go out and try to take a CEO from another credit union, that’s a tough road to hoe,” especially when considering the buyouts for their supplemental executive retirement packages, Voth said.

For those who favor the addition of such a rule, past experiences have shown the benefits of succession planning and its necessity for prolonging institutions of all asset sizes.

Steve Foley, president and chief executive of the $98 million-asset Bragg Mutual Federal Credit Union in Fayetteville, North Carolina, joined BMFCU in August 2018 after its previous CEO retired with no plan in place to find a successor.

“There are a lot of retirements coming up in the executive leadership of credit unions, and some may have not prepared for the exit or retirement of the leadership team and anything else that might come along into play on that … we’re a small credit union and we’ve had that challenge,” Foley said in an interview.

To help the credit union better prepare for any possibilities, Foley worked with BMFCU’s board to draft and put into place a succession plan to designate current executives as potential candidates.

“[When putting together the plan] we defined the roles of the C-suite team and from there, worked to select who would be their designated successor should something happen to them,” with all staff aware of what continuity is in place should something unforeseen happen, Foley said.



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