As Alan Ferling poured his morning cup of coffee, he was already looking ahead to the evening’s Board meeting. Normally, Ferling liked his credit union’s Board meetings; he was chairman, he took some satisfaction from the debates among Board members, and he felt good about the credit union’s performance in the financial crisis. But this meeting was going to be different. He would have to tell the Board it was about to face one of its most challenging tasks: American Flag’s CEO was leaving. Soon. It was more than a year before anyone had expected the departure, and American Flag CU ($387M, Antigo, WI) would have to quickly search for a new leader during difficult times for both American Flag and the nation’s economy.
Although Ferling was confident American Flag would continue to perform adequately given the financial crisis, the credit union had suffered with the economy. The first part of the 21st century had been good. Loan demand was high. The credit union’s membership – now 43,750 strong – had been buying cars and homes in record numbers, credit card penetration had climbed significantly, and the credit card portfolio was healthy. American Flag had merged with four smaller credit unions over the past nine years. It now had more than 70 select employee groups in three states, though 60% of members came from just a handful of SEGs.
The credit union was not based in a Sand State, but the recession was still taking a toll. Loan demand had dropped, and delinquencies had risen. The credit union closed three of its least successful branches over the past seven months, including two outside its home state, and laid off 10% of its workforce. ROA (pre-NCUSIF expense) now stood at 32 bps. The write-off of corporate membership shares further depleted capital to 7%.
NCUA gave American Flag a CAMEL Code 3 rating, and the examiner indicated the credit union might be downgraded to a Code 4. To keep its capital ratio at 7%, American Flag cut savings rates and increased borrowing rates to minimize asset growth. It also increased several of its fees. Ferling fears the credit union is pushing the limit of such a strategy and further action could soon damage the credit union’s “putting-our-members-first” reputation that it worked decades to establish.
And now American Flag was in the market for a CEO. Ferling and the Board had hoped the CFO would be able to step into the CEO position within a year, but she left six months ago when her husband’s employer transferred him to Europe. The replacement CFO is young, ambitious, and hard-working, but she is new to the credit union industry and, of course, to American Flag. The EVP-Marketing has been with the credit union for two years, a hire from one of the mergers, but has been slow to step up to the broader responsibilities required in the American Flag culture.
Any new American Flag CEO would have his or her hands full. The problems the CEO would face are not merely technical – such as bolstering ratios – but human. Layoffs made everyone jittery, and some employees left for other jobs. More than a few of American Flag’s SEGs are in industries whose employment will not grow -- some will likely decline -- over the next several years. Moreover, the banks, which have been quiet during the past year, are attempting to boost their market share. In this time of change, the credit union needs to reinvigorate the American Flag brand.
Ferling is worried about the hiring process. Owing to the mergers, the variety of SEGs, and the geographic diversity, the Board is more a salad bowl than a melting pot. Throughout the past year, consensus was hard to come by, and two members seem to be contentious no matter the issue. Ferling fears any outstanding candidate will have misgivings about taking the job after a full Board interview.
Ferling wonders if the Board should consider a merger as a way to bring in leadership. The area contains several smaller credit unions that hold some promise. A $250-million credit union is well-run, but it follows a traditional business philosophy. Two billion-dollar credit unions from out of state want to gain a bigger footprint in the quad-cities market, but a bigger footprint could damage American Flag’s local brand.
Taking a sip of the steaming hot beverage, Ferling wonders what the future holds. He is curious not only about the Board meeting but also about what the upcoming months have in store for American Flag. He downloads the day’s paper and walks out the door to start his morning commute. Today is going to be a long day. The future looks even more exhausting.
Questions to Consider
What are the first steps the Board should take to address this situation?
How should the Board address the leadership gap during the CEO search and transition process?
Should the Board reach out to other credit unions to see if merging might be an option?
What, if any, external resources might the credit union utilize in this process?
American Flag has several options it can explore. Callahan & Associates presented this case study to five industry consultants. Read their responses in this feature package.
Six credit union industry leaders weigh in on Ferling’s questions. Click through the Feature Package: Searching For A New CEO articles below to read advice and opinions from Rhonda Cooke, Chip Filson, Tony Ward-Smith, Susan Mitchell, John Redding, and Richard Kamm.