Credit unions need to be focused on value creation, growth strategies and maximizing the very thin margins available to them as they head into this year's strategic planning season.

Those were just some of the messages from four consultants who work regularly with CUs, who warned credit unions they are under increasing pressure from hard-charging big banks as the Great Recession and the "Occupy Wall Street" movement fade deeper into memory.

Sam Kilmer, senior director for Cornerstone Advisors, Scottsdale, Ariz., said there is a dichotomy between "ambitious" credit unions and those that "just want to engage their board and have a pleasant meeting." Kilmer said CUs need to ask what he described as an "interesting" question at a non-profit: What does value mean?

"Credit union strategic planning is not wholly about earnings growth or economics," he observed. "At a bank it is largely earnings-driven. At a credit union there still is a focus on the mission."

According to Kilmer, the first focus of a strategic planning session needs to be value creation. "Not just differentiating in some way, but identifying the brutal truth about the credit union's current situation: Are we growing or shrinking? Gaining or losing market share? Is there risk from all of our lending being concentrated in indirect auto lending? Where are our opportunities?"

In many cases, Kilmer asserted, if credit unions do not make changes, there are risks associated with simply staying the course. He advised those in planning sessions to look to fight stagnant thinking by asking key questions, such as: Where could we be/where should we be?

"Have a brainstorming session that looks to come up with four ways to be different in the marketplace," he advised. "Look out two to four years and think tactically."

Membership Growth, Biz Dev, Outreach

Dr. Brandi Stankovic, a Las Vegas-based credit union consultant with the firm Mitchell, Stankovic & Associates, who also works part-time at $537 million Boulder Dam Credit Union in Boulder City, Nev., said the majority of the strategic planning sessions MSA has conducted so far this year have focused on growth, especially growth in lending.

"Credit unions need to be maximizing their very thin margins," she said. "One way to accomplish this is by examining enterprise risk management in order to lend to those who need it most."

Other areas of strategic focus at CUs need to include growth in membership, business development and outreach, Stankovic counseled. "We are seeing several institutions seeking expansion of services and charters, or they are seeking mergers or avoiding being merged. Sometimes lost in the shuffle – but shouldn't be – is growth by leadership development. Credit unions should look at strategic planning as a time to be creating a high-performing board and executive team."

Doing 'All Right' No Longer Enough

Tony Ferris, managing partner, Rochdale Paragon Group, Overland Park, Kan., identified three areas in which he believes CUs "really need to hone in on and lay the groundwork for the next five years."

1) Governance. Ferris said every credit union's board and supervisory committee "must become more strategic and more involved and have more understanding of the risk/reward ramifications of the strategic direction of the institution."

2) Digital. CUs have got to find a way to be able to offer the services in an electronic way that their members are requiring, Ferris said. "We are not losing market share to each other or to community banks – big banks are taking it all. Credit unions are going to have to figure out scale, outsourcing or collaboration to keep up."

3) CUs really, really need to look in the mirror and build intelligent systems and institutions. "We have made a lion out of loan management, but there are many other systems that have risks for the institution and we handle them independently," he noted. "We have to be getting good intelligence out of everything we are doing."

According to Ferris, much of operating a credit union comes back to risk/reward: What are we spending? What are we getting? What risks are we taking on the strategic level?

"Another good question is, is the supervisory committee fully engaged and understanding the direction of the credit union? We no longer can do 'all right' going forward, we need to know our competition and know more about ourselves than our competition knows about us."

What Do We Do That Affects Lives?

John Gregoire, principal of The ProCon Group, said he and his team typically ask three questions of a CU, the first being: Who do you serve?

"Many credit unions try to serve everyone in the community equally, but they have to play to their strengths," Gregoire said. "Police and fire credit unions typically are very successful because they have a bond with those individuals, and they have a bigger differentiation than other credit unions. For community credit unions, they need to find out where they are strong and leverage that. They should focus their marketing efforts on those strengths."

The second question ProCon Group consultants ask credit unions to consider is: What do we do that really affects lives? "If you focus that way, you get past the grind of dealing with regulations, which can stifle creativity," Gregoire said.

The third question is: How are we different? According to Gregoire, "If you got the first two questions right, the answer to the third one is easy."

Just About A Year Ago

ProCon Group's Gregoire said many of the issues facing CUs have been the same for a long time, but he warned against complacency.

"It was easier to stand still five or 10 years ago," he observed. "Today, even if you are running, you can get run past by your competitors. Technology is so important, especially in the context of reaching out to millennials. I know we all hear about that issue at every conference, but you cannot have a mobile delivery structure that is terrible or non-existent. You have to invest in technology and people."

Rochdale Paragon Group's Ferris sounded a similar warning, stating there is a "false sense of calmness and security" in 2016 versus 2015. He noted many CUs have been able to make quite a few loans over the last year, especially auto loans, making it easy to assume business is going "pretty well."

"But underneath, there are tumultuous trends in the economy," Ferris stressed. "It is getting harder to make loans, and many shops are running into liquidity issues. There are 21 housing markets that are back at pre-recession bubble levels. That does not necessarily mean they are in a bubble, but it feels pretty frothy when you have to put down an offer on a house the day it becomes available. I worry that people think things are pretty good and they are not thinking enough about what happens next."

Cornerstone's Kilmer said there "definitely" is more pressure on payments revenue this year, along with stronger performance from CUs' big bank competitors.

"Big banks are gaining market share on credit unions across the nation, even big credit unions," he pointed out. "Credit union earnings are under pressure. More credit unions are looking to replace systems relating to selling or relationship management, including loan origination systems. Credit unions realize they have to improve their sales and their digital presence. Because of the latter, there is a lot more interest in merger activity by smaller credit unions, who worry about driving value or keeping up with compliance at $100 million in assets."

Fraud, EMV & Core Conversions, Oh My!

CU Journal asked these experts to identify the external factors that are impacting credit unions doing their strategic planning. Stankovic quickly said regulation is – and always will be – looming over the heads of all financial institutions. Her suggestion? "Take the emotion out of the decision. Treat changes in the political/regulatory environment as objective contingencies and conduct scenario planning accordingly."

Massive technology conversions, including changing the core system, switching to EMV cards, adding/changing providers of online banking, or going through a mergers, can "completely consume" a credit union, Stankovic continued.

"Although it seems impossible, these conversions must occur in conjunction with additional strategic objectives," she advised. "The consumer environment will not wait for a credit union to convert. We must keep our eye on growth, serving the membership well and improving the bottom line – even if all of our human resources are weighed down with data migration."

Ferris said fraud and data security are always two of the biggest issues on the minds of those who run CUs, "and rightfully so."

"Fraud is spiking, and data security with all the breaches of the last few years is a huge concern," Ferris said, adding it is easy to "run scared," but much harder to get good intellectual intelligence. He pointed out many data breaches are linked back to third parties, which tells credit unions to focus on their vendor management. However, there also are social engineering attacks, in which employees click on a link in an e-mail, which means training is essential.

"Credit unions spend too much money on areas where the risk is not great, mostly because they do not fully understand the risks," Ferris asserted. "They spend 80% of their budgets in areas where there is only 5% of total risk. Instead of managing IT separately, credit unions need to integrate IT into the strategic management processes that pertain to the rest of the organization."

Parting Advice

The ProCon Group's Gregoire said his best advice to CUs starting the strategic planning process is to "leverage their strengths."

"One of the strengths credit unions have is leveraging their cooperative charter," he said. "They can be a trusted financial advisor. They can find a real benefit in doing so, once they get past financial ratios and regulations. Play true to your purpose – that purpose you had when everyone put $5 in a shoebox. Too much energy is spent on other areas and not enough focus on playing to the purpose."

Rochdale Paragon Group's Ferris said data must come to the forefront during strategic planning sessions.

"Credit unions need to spend time ahead of their strategic planning processes accumulating good information and understanding internal and external issues that affect the organization," he counseled. "Too often, we show up unarmed. We need to have more education at our fingertips if we are going to make good strategic decisions. Don't bring a knife to a gunfight. Be ready to step out there and try something. If it fails, okay, but know what is going on."

MSA's Stankovic said CUs need to "invest in the process."

"Involve the executives and solicit the voice of the middle management," she suggested. "Allow your board and supervisory committee to remain strategic. Utilize subject-matter experts. There are so many tools, resources and experts in this industry who can provide a unique perspective to the process. Facilitators can help the CEO or board chair to challenge the status quo or address a more sensitive topic in an objective way."

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