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The CU2.0 Podcast
This podcast explores contemporary, critical thinking and issues impacting the nation's credit unions. What do they need to be doing to not just survive but prosper?
The CU2.0 Podcast
CU 2.0 Podcast Kirk Kordeleski On What to Know Now About CEO Retirement Planning
Back on the show today after a hiatus is Kirk Kordeleski, onetime CEO of Bethpage Federal Credit Union and now a partner in Parc Street Partners where he focuses on credit union executive retirement plans.
Kordeleski has been on the show many times but he always is welcomed back because he has deep insight into what it’s like to be a credit union CEO and also into how to compensate those CEOs appropriately. Here’s a link to the Kordeleski Archives.
What brings Kordeleski back to the show is that much is changing in the retirement planning for credit union CEOs and senior staff. Changing macro economic conditions have triggered significant changes in the retirement plans. Breathe easily. There remain good, stable plans. Kordeleski tells about them here.
Know that appropriate compensation for senior executives is a must at credit unions that want to succeed. And a good retirement plan is a critical part of that package.
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Kordeleski brings us up to date.
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Back on the show today after my A Korolatsky one time COVID. Now partner and Fox Street Partners or Focus design crazy fans. Those are the fans designed to get the channel in place. Koroletsky, of course, has been on the show many times, but he's always welcome back. An autopsy on the opposite of CEOs appropriately. Here's a link to the Korolatsky archives in the show notes. What brings Korolski back to the show today is as much as changing in the retirement five for crazy of the STO and senior staff. Changing macroeconomic conditions have triggered significant changes in the retirement plants. Korolesky tells about them in the show. Know that appropriate compensation for senior staff to start cutting in is a must for those institutions that want to succeed. Koroletsky brings it up to date to what's working now and what will likely work in the future. Listen up. Okay, now you're gonna tell me about what's new, what what's changed in the world of SERP since we last talked, perhaps six months ago.
SPEAKER_01:So let's talk about. So good to be back on the on the air with you. Thank you for uh taking the time to interview me today. And and uh you asked a what is a really intriguing question, um uh which is about where supplemental executive retirement program SERPs are today in the credit union industry. And let's let's take a step back into the the bigger picture. Uh with when interest rates went up, this was really the kind of the last time we spoke in in some detail, interest rates had gone up, and it really exposed a number of challenges in the industry. For the like so many things, like so many types of investments, like so much margin on the business for credit unions, low interest rates had created a long-term environment, 10, 12-year run since 2010, up until well into 2020 and 2021, uh, that allowed for CERPs specifically to be able to be created at a low rate of interest on the books of a credit union. If you remember the model, and I'm sure you do, and I imagine maybe some most of the listeners may, but these are uh life insurance policies that are um put in place to create a retirement, a tax-free retirement uh plan for the executive, typically paying out over 20 years tax-free. And it much like a mortgage loan, the the uh where the house is um put up as collateral for a loan, and uh it's collateralized back to the credit union and in the as the first uh payee in uh time of a sale or or default. Um and then the equity or the value of the that home accrues to uh the homeowner or the member. In these cases, these are loans given by the credit union to purchase a life insurance policy, and that life insurance policy is a loan, becomes a loan on the books of the credit union, and the life insurance policy is in the name of the executive, and the executive extracts that value, in this case, instead of appreciated home value, cash value in the insurance fund during their retirement years. Well, that all worked marvelously for that 10 or 12 years in a low interest rate environment. As interest rates moved up by five and a quarter percent and started to settle into a higher rate of interest for the loans on the books of the credit union, the loan that funded that insurance policy, uh, those loans uh started to become larger and larger because the the rate not only was higher that had to be paid back to the credit union for their loan, to the executive, but also the margin between the dividend rate or the earnings rate on that life insurance policy and the rate on the loan became smaller and smaller. So, in order to create the same value for the executive, the same retirement funding for the 20 years, those products, those loans became much larger, or they carried tax consequences with them. So you have this environment where interest rates go up and it starts to stress the original model of the plans. Our last conversation was about a product that we reintroduced to the marketplace, Park Street. For those of you that have listened to us over the years, OM was our firm for a number of years. Park is our rebranded firm from about 18 months ago. Park went back to the product that had been in place in uh the early 2000s, uh, which allows us to uh put in a an uh insurance product and a loan on the books that does not create the loan at the beginning of the policy, but allows it to accumulate uh premium by premium as it's paid. That has allowed us to not have the tax consequences or the inflation in the in the size of the loan. So new products entered the marketplace. The quick answer uh to this as interest rates went up, new products came into the marketplace. In our case, it's called switch dollar, and there are a couple other firms that have introduced that product. On the other hand, the index universal life product, which is the other primary product, if you might recall, two products that fund the insurance policies, whole life or index universal life, the IULs or Index Universal Lives product uh has been strained. And it's now in a situation where a lot of those have had to be uh refinanced uh because they no longer are performing at the illustrated rate that the executives had counted on. Uh so you've had a lot of pressure that's been created by interest rates and created by the design of the products that are forcing most credit unions to go back and evaluate whether the plans are designed and illustrated as properly as they should be, and if they're going to deliver the retirement plans that the executives hope to. There's more to that, but I've gone on long enough. Let me ask, let me let you ask a few questions.
SPEAKER_00:Let's go back to why do SERPs exist. It's not because credit unions want to be nice to their chief executives, although perhaps that's part of it. It's really to provide compensation that has some resemblance to what that person could make working for a bank. And since a credit union doesn't have shares, there can't be share, I mean shares of stock, you can't award stock to the person, et cetera, et cetera. I mean, that's the simple, that's not simple, but that's the basic problem that SERPs are designed to handle, right?
SPEAKER_01:It is a a design for a retention and reward or wealth creation uh plan that takes the the same tries to create the same value as stock options were in the for-profit world. And it took on and it has taken on a particular priority because we used to be able to offer defined benefit plans, which only now 13% of the credit union marketplace provides, and because salaries have gone up to an extent that 401ks and Social Security no longer can, because of the caps on those plans, no longer can make up a high percentage of an executive's retirement. So you you don't have, you do not have the traditional tools, the defined benefit plan, and you're trying to compete in the marketplace against uh executives that can work in environments for fintechs or big techs or banks or or community banks that have stock options. And without these types of tools, you can't compete for that talent.
SPEAKER_00:And very, very, very few companies still offer defined benefit plans. It's not just very few credit unions, there's very few companies of any kind.
SPEAKER_01:That is the difference is that that used to stand in place of uh some of these uh tools and benefits, but once that got eliminated, the gap became much larger and SERPs became even more important.
SPEAKER_00:Now, I had a I have a friend who used to he's now retired, but he had a very large privately held hospitality company. He was the sole shareholder, sole owner, and he liked it that way. But to keep his employees, he created a kind of phantom stock. Uh wasn't a real stock exactly, but in the world of that fantasy world, it actually had value. And what could go up, it could go down using normal metrics. And the employees were quite happy with that. They thought they're they were paid comparable to what they would have gotten from from larger hotel companies that are publicly held. Could a credit union create a vehicle like that?
SPEAKER_01:It's wonderful that you ask it, because we've worked on this a couple times, particularly for QSOs. Uh I worked on one extensively, uh modeled extensively last year, and we're we'll probably do a couple more this year. The challenge with Phantom stock, and I don't know if your your friend and and that firm ran into it, it's the valuation of that stock. And because there's not a market for it, you're you're making estimates in the marketplace based on you know returns, the income that the organization created, or other valuations.
SPEAKER_00:Now, in his case, I think he had an advantage that you don't have with the QSA. I think he modeled it after competitors that were public.
SPEAKER_01:Correct. So that's that that is with CUSOs, it's particularly challenging because they tend to be so unique each time. With credit unions, there have been some discussions of phantom stock from time to time. You may be able to compare that to a for-profit community bank of a similar size, but as you know, credit unions tend to, and their boards particularly care about this, tend to be driven by more member value, meaning lower rates uh on loans and higher rates on dividends and lower fees and more convenience than they are on profitability or ROA.
SPEAKER_00:So most community banks, smaller ones, are owned by 10 guys down at the country club. Yeah, there's no there's no marketplace for that stock.
SPEAKER_01:So it's it's much harder to find the apples and apples uh that you need to do the evaluation. So that that has been the reason primarily it hasn't occurred.
SPEAKER_00:Right. No, when you talk, I I think I I know he picked out a couple competitors that were basically the same business he was in that were public. So he had clear models he could use. Yep. And the the employees would understand those models because they were always competing with these guys.
SPEAKER_01:I mean that's very different, right? And most of the credit union uh executives, particularly those below five billion dollars in assets, really only know the credit union world, right? Certain there there is a sprinkling of people from the banking side, but even in those cases, they're they're not particularly familiar with or as close to as as they were when they were working on that side, what uh the valuation might be of the firm.
SPEAKER_00:Yeah, yeah. So SERPs still are and the other the other Park Street product are still the way to go right now.
SPEAKER_01:Yeah. So when when you look at the options in the marketplace, they they are the switch dollar product that we're offering, which again is a where we set up a credit union life insurance policy uh in the executive's name. It switches, literally the name, switches over to a traditional plan after it's matured enough to have cash value in it and interest rates uh that have balanced in the marketplace. And what'll happen is, just to put it really simply, is that one of two things will happen uh over time in the rates that are associated with these products. Either the dividend will go up or rates will go down. And why can we be so sure of that? Because if rates stay up in the marketplace, then the dividend must go up. The dividend is based on Mass Mutual and New York Life's dividend, it's based on their$750 billion investment portfolio that is heavily regulated and it is in the in mostly in the same type of bonds uh that credit unions are allowed to purchase, uh, U.S. government, municipals, etc. And so if rates stay higher, then the dividend rate will go up and the margin will come back into the business model uh for these products, the difference between the dividend rate and the loan rate on the credit unions books, and allow us to switch it over to a traditional split dollar loan sometime between year seven and year 10. Uh so that we can prove that math. We show it, we can show you that it always works. Um, so that that that new product has worked very well for us. It also allows for the premiums to be paid um annually rather than all paid up front, uh, which was a real value when liquidity was a problem in the industry. Liquidity has uh is no longer as much of a challenge. Um, so that part of the product is still valuable, but not as as valuable uh or as necessary as it was two years ago.
SPEAKER_00:Now, as have the problems suffered by competitive products tarnished your products in the minds of credit union executives and board members?
SPEAKER_01:Yeah, so it's uh probably the the thing, the the issue that we struggle with uh the most, um, because that there have been there are real challenges in the index universal life, the IUL product. Um you may remember the detailed conversations we had on this, and if not, uh there are some podcasts that Robert did that will that lay this out carefully. Um but IULs uh are tied in those indexes are tied to normally the SP uh returns. The problem has been that those they had they have floors and caps. Floors zero, that's wonderful. The market goes down below zero, you you are not penalized below not having any return that year. It's not negative. On the upside, though, uh those caps were originally set at 15%. They have been changed by the insurance providers because of the profitability of the product. They've made mistakes in their calculation of the profitability of their products. They lowered those caps to 8 and 9%. So now, in the very good years of a market, you can only earn 8 or 9%, not 15%. Or if you're in the stock market yourself, you know, if you have a year that's that has a 20% return, you're going to get that 20% return. And that's going to offset the next year if it is if you have the zero or negative return. So now instead of a wide range of value that's created by the index universal life, zero to 15% or 0 to 13%, you have a very limited return of 0 to 8%. Well, the average of the 0 to 8% ends up being right around 6%, which is lower than the dividend on the whole life policies. So, in essence, you take a completely risk-free environment, dividends on a whole life policy, and now you compare that to an index universal life, which has a lot of volatility and risk, and uh the whole life product stands up very well. As a matter of fact, in every in every credit union and in every plan, our whole life product today illustrates the same or higher retirement value than we originally designed. So every one of our plans is working to the extent it was designed or better than the design for the executive and for the credit union. And it's just simply whole life products are really well designed for this product.
SPEAKER_00:IUL is my point was you if a friend of yours had an IUL product and now needs it and is not quite there for him. Is that friend as a senior executive of the credit union, does he distinguish between that product and your product? In other words, are all products tainted in his mind? Yeah, it's too it's too risky, man. Yeah, my friend was counting on this and now he's on food stamps and blah, blah, blah.
SPEAKER_01:Yeah, I I don't think that all plans are tainted. I think that that executives and boards are taking a great deal more time to understand what they're getting into. Because if you know this this is something that once it's set up, is extraordinarily important and substantial to the executive's family. They're counting on this. He, the she, or they are all counting on uh living off of this benefit. And so if it is miscalculated or misperforming, um, it's severely disruptive. So they're spending time understanding the options. Uh when it isn't working, credit unions are stepping in and putting in additional plans to fix the problem. So it has not tainted the industry at this point. And part of that is where you started, Robert. There's only one option. Uh, if you don't offer insurance-based SERPs, then you're going to offer a cash-based SERP of 457F, and that's a terribly expensive product for the credit union.
SPEAKER_00:It also has more tax consequences for the executive, right?
SPEAKER_01:But that's why it's so much more expensive because they're going to get taxed on 50 cents on the dollar.
SPEAKER_00:Yeah, in a totally different world. Of the let's say credit union is a billion and above, what percentage would you guess have in place a retirement plan similar to the one you're talking about? Or you know, a SERP or something comparable?
SPEAKER_01:So I I actually have most of that data. There, and it breaks into three buckets. Uh first of all, just the general concept, SERPs, and that's 457 F and split dollar plans. Uh, 94% of the market have one or the other. 94%.
SPEAKER_00:And the market is defined as what?
SPEAKER_01:Million dollars or above.
SPEAKER_00:Okay.
SPEAKER_01:Um, about 80% of the credit unions above 50 billion uh 500 million, and then it goes down to about 30 percent between um 100 million and 500 million. Now, second bucket or second data point, that is that uh they're split about 50-50 between 457Fs and split dollars. Third and critical data point is about 70 percent, though, about 70 percent of new plans are split dollar plans because they're so beneficial to the organization because they get paid the credit union gets paid back principal and interest, and so valuable to the executive because it's uh tax-free income during the retirement years.
SPEAKER_00:In the case of a merger, what happens to one of these plans?
SPEAKER_01:Great question. Uh and it's a material question now that you see such large mergers occurring.
SPEAKER_00:Uh yeah, you look at first tech DCU and you say anything is mergeable. Maybe the only one that isn't, maybe state employees and and navy. And everybody else is employed.
SPEAKER_01:So when you look at at a merger, the credit union that's being acquired, okay, the credit union that's being acquired, their executive serves become a hundred percent vested on the merger date. So the idea behind it, the concept, the strategy is that an executive that's getting acquired would not stand in the way of the merger for their own self-interest.
SPEAKER_00:Ah, that's excellent. Yes. So they And I I know in smaller credit unions, and this is pretty well documented in in filings with NCUA, a lot of times it's concerns about pensions and whatnot that could prompt executives to fight literally against a merger.
SPEAKER_01:Correct.
SPEAKER_00:And and by the way, and I'm kind of understandably too.
SPEAKER_01:I mean, that's perfect sense on a human basis. If you're the if if you're in a$10 billion credit union and you're acquiring a$5 billion credit, so major stuff, right? But the acquired credit in the$5 billion, you know, that CFO, that chief operating officer, that chief whatever, um, if they don't have a SERP in place, if they're not gonna get a benefit from this transaction, a financial benefit, are likely going to work against the merger. Because they're not gonna be the CFO of the bigger company. Whoever's the CFO there is going to be it.
SPEAKER_00:Right. And that that I've I've done research on mergers, and executives often are some of the biggest leaders against the exec against the merger, primarily for the reasons we're just now discussing.
SPEAKER_01:Well, that's been my experience, uh Robert. And in and when I was doing the consulting practice for five years, uh, we were involved in a in a couple three mergers and uh um and helping negotiate the deals. And in each one of those, uh two of the two of the three did not uh finish it, it did not complete. Uh we were not the uh consulting firm on the advice, the advisory side. We were the operational consultants. We're doing the tech platforms and the uh uh product mergers. Um but in two of those three, it was the executive team of the acquired credit union that kept whispering in the ears of the board members and got them to uh turn down the mergers on what were frankly kind of silly reasons and had nothing to do with the financial performance or the decisioning, the strategic decision or the member value decisions, but we're based on I'm gonna lose jobs and power here.
SPEAKER_00:Right. And you know, if you're 60 years old and you're a CFO at a billion dollar credit union, probably there aren't a lot of job opportunities out there at that same salary for you. And that's just reality, whether you like it or not. So unless that person has a beautiful golden parachute that's intact, it stands to reason they'd be opposed to the merger.
SPEAKER_01:That's it. You've got it, and uh, so it's so SERPs matter in that uh framework because it allows those executives to see the value that they're gonna get. So they, you know, let's say that they're vested at 30% or 50%, they become 100% vested at that point, and uh that value accrues to them um at uh their retirement age. You do see uh some additional SERPs put in place at times uh at uh at mergers so that people, as part of a means of of keeping people within the company who whose talent the organization wants to retain. Um, and as you can imagine, you go way up in asset size, compensation follows assets, so there is reason to put in new SERPs at a larger institution because the val their their compensation is going to go up, their annual salary and base and incentive, and so will their proportion that would go to a SERP um over time.
SPEAKER_00:Now, if my memory's right, you you had talked some time ago to me about nascent plans, nothing nothing really hardcore, where you were looking at what can be done for this retirement issue in smaller credit units, let's say a hundred million and under. Where my sense of the research as I remember it, is the vast majority of those CEOs, their retirement plan is social security, and maybe a 401k, maybe. And that's it. No SERP, nothing, nothing of that kind. Is my memory distorted? Do I not, or were you working on something like that?
SPEAKER_01:You're spot on, and I um I'm working, I I continue to work with uh the folks at the underground. I you may be familiar with with uh uh uh that organization.
SPEAKER_00:Uh Mitchell Stankovich.
SPEAKER_01:Yep, yep. Um with them a little bit on the design. They have already done some research and put in some design options, but I I've been able to configure a model that will work for a credit union of$70 million or more in assets. Wow. Goes down below$70 million, then it's gonna be uh dependent on salary. So if the salary is, let's say,$100,000 a year for that CEO, then if they have a$401K and a Social Security, they're gonna be able to get to their retirement goals. It's when you get above$200,000 that the caps come in for 401ks and Social Security, and that's where you need a SERP, and that's where we're where we're we're putting it in. And that comes in around$70 million,$80 million in assets.
SPEAKER_00:Well, the most you can get out of Social Security, right? Is uh$55,000 a year, something like that.
SPEAKER_01:Like that. Yep.
SPEAKER_00:And yeah, so much you get much over a hundred thousand, and there's a big stretch, a big gap between that and what social security is going to give you.
SPEAKER_01:Right. It's you know, then it depends on whether you have a 401k, right? And if they had a fair match or not. So there are there are um levers within that analysis that that you have to take a look at. The biggest issue is that as you get to the smaller credit unions, they are less uh connected to these tools, and so the education and and bringing the board members along is a difficult process.
SPEAKER_00:And also, and you notice, Kirk, some of those small credit unions, the board members are acting in many cases as unpaid employees of the credit union.
SPEAKER_01:That's right. They're they're doing it.
SPEAKER_00:And they're doing it out of joy and mission and passion, and they're really good people, but they they can't put the it's hard for them to say, oh, the president's getting a hundred thousand dollars and yet I'm working 60 60 hours a week here for nothing. Yes, is that fair? I I see both sides of that story, actually. I've I've talked to those uh Of persons, wow, I have nothing but admiration for them. I wouldn't do it myself, but I have nothing but admiration. So you're saying there's hope for the retirement plans of at credit.
SPEAKER_01:I believe that there is hope for uh the retention of the right leaders. I think the hard there are two hard parts to delivering those plans to the marketplace. And it and I want to emphasize that there are a lot of people trying to figure this out because it is uh uh it is a real problem of keeping talent. So let me give you a couple stories, uh quick ones. There is a uh credit union that I work with in uh Colorado, the CEO there is really talented and credit union in New York, uh really talented, very, very different institutions, but approximately the same size at assets. Call it 150 million, a little bit more, a little bit less. If they don't do something to retain the talent for those executives, those folks are going to be recruited to the 500 million, the 750 million, and ultimately the billion-dollar institutions and be compensated at a level that will make their families help their families be much more stable. So retaining the talent at those smaller institutions that is particularly strategic and financially literate and member-driven and community-oriented is very tough. And if you you have to use tools, one of which is a SERP, to be able to retain those leaders in place and create a succession plan for the next level of leaders. If you don't, they really have no choice but to leave, right? If you if it if you get caught up in this situation that you hear from boards from time to time about, well, you know, that's more money than I've ever made, or those are not plans that I have availability to, or that are not what the members normally have availability to, well, that's all well and good and clearly true, but you're not running an institution where you have all the regulations and all the product picks and all the technology and the responsibility for the hue for the people that are involved that these executives have. Um, and if you want the good ones, you've got to find a way to mix the compensation model up, including the retirement piece, in order to retain them.
SPEAKER_00:I I remember as you talk about retention, etc. NCYA was kicking around the idea. I don't know if they implemented it because things are a little hairy there. Uh where credit unions, boards, and senior executives have to fill out a document that outlines succession plans. And I remember talking to the consultant who was telling me about this. I said, Well, if I were on the board, I know exactly what I'd write. And he'd say, What? And I'd say, go merge this sucker out of existence if my CEO quits. And he laughed and said, Well, if a lot of people probably are thinking exactly the same thing, don't know if they'd write that on the forum for the NTUA, though. And it's and that's what I would do in the case of these two two good CEOs that you're talking about if I'm on the board. It's uh now that said, I might want to do some things to try to retain them instead. That's right.
SPEAKER_01:So, you know, let's let's explore that, Robert. I'd love to get your input on it as well. So I here's where I've I've evolved during our conversations, and now with my five years in this role as a partner at Park Street Partners, I I've come to the to this point where I'm I've always been passionate about this, but I've uh I'm really driven by this now. That that creating compensation models, and particularly retirement models, entire compensation models, that are fair to the executives who are talented. And, and this is the important part, I think, and hopefully the difference in what I do versus what other people do that are in similar positions is mine, and tying that to three drivers strategy of the organization, financial capabilities of the organization, and current state, and succession planning, the next leaders to be able that they need to be able to afford. And so I do a lot of analysis on their capital growth, on their current return on assets. I work hard with the executive team on the politics of getting the boards up to date and comfortable. I don't ever close a deal where the the board doesn't fully understand what they've bought into. Um, so I'm my belief is that my place in the market, having sat in the CEO seat and been around the industry now for almost 50 years, is to help executives get fairly compensated for what I think is the toughest job in retail banking, and do that in a way that is mutually beneficial to the organization, and then finding a way to communicate that so that it doesn't cause friction with the board. That's where I spend most of my time these days.
SPEAKER_00:We're really in a world of a business world that believes in the great man or woman. Example, Elon Musk's trillion dollar uh pay package at Tesla. I won't comment on how sane I think that is, but I think what it underlines is the great man theory at work. And in their own small way, a great leader at a hundred million dollar credit union is a great man or a great woman. They're essential for that institution. It did offer one at a billion-dollar credit union. And uh and great people should be compensated greatly, simple as that.
SPEAKER_01:Not necessarily at a trillion-dollar level, but you know, that's important that we drive home in this conversation and through others that none of the credit union leadership that we're talking about are extravagantly paid. Yes, they are paid higher more than maybe the teacher that's on the board, or the state employee that's on the board, or or the manufacturing manager that's on the board, but they are paid in balance with the responsibilities of the job, and and we're getting them up to a market position that's a fairness in compensation, not an exorbitant amount. And you know, there there are there may be a couple CEOs at the very, very high end that are approaching a couple billion dollars in annual compensation, but they're running organizations that are$30,$50 billion in assets and have thousands of employees.
SPEAKER_00:It's a pretty I bet you, I bet you there are over a hundred people at JP Morgan Chase who make more money than the CEO of First Tech DCU when it's combined. Over a hundred. I'm not even counting Jamie Diamond. Yeah, of course he he's making many, many, many multiples more. Uh and I don't know what that person will make, but it's going to be a hell of a lot less. Uh, there's a hundred people at Goldman Sachs. 500 people at Goldman Sachs making more. That's right. Look, I mean, this is just the way the world works. You can not like it, but this is reality.
SPEAKER_01:And if you want to be able, you know, you can't have a conversation saying, geez, we have to have an organization that can compete for the members' business and provide the same quality of service and value to the members as these banks, and then on the other hand, say, well, we can't pay a third of what they pay. That that's not logical, that doesn't work.
SPEAKER_00:And you know, life is expensive. Uh you know, a friend of mine called me up the other day, and he's he's not complaining exactly, but he's kind of like thunderstruck. My son wants to go to Duke. Do you know that Duke costs about a hundred thousand dollars a year? And saying a hundred thousand dollars, and it's I think that's about what it costs, actually. So you know, it takes real money to play in this world sometimes.
SPEAKER_01:It does indeed.
SPEAKER_00:And you know, that that's uh that is a very interesting conversation that has nothing to do with what we're talking about today, but uh it has everything to do with the compensation and how credit unions have to accept that these these aren't unrealistic or nasty or greedy demands. Sometimes it's just a life demand. That's it.
SPEAKER_01:Let's say they're going to state, right? Uh let's say they're going to uh very significant university within your state, the you it's still very expensive for those uh those men and women to go to college.
SPEAKER_00:And oh, in New York State where you live, there are a lot of very nice small colleges, Hamilton, Hamilton, uh Colgate, etc., they all probably cost 80 grand a year.
SPEAKER_01:They do. And and I happen to have a son going to school in in Virginia right now, and and I can tell you that it's expensive. Um and the uh the important part of all these pieces is that what those if we have an executive, the credit union has an executive that has real talent, and that they're driving the member value and the financial performance and the regulatory requirements, and they're building strategy and they're building brand, and they're they're managing all the technology consequences and changes and the fintech uh investments and and the product differentiation and the product complexity and the balance sheet complexity and interest rate marketplaces that are moving very fast, then that takes talent. And that talent is compensated at a market rate. And most of the people, I would say that almost all of the executives of the industry are willing to trade off something in compensation, some amount of compensation, some percentage, for being in an industry that they care about, that they believe has better value, that they have more control of their careers in than they do in the banking world. But it has to be somewhat in commensurate, has to be somewhat fair, or they cannot make that decision. You you can't have a 50% differentiation and say that all of that is about being community-oriented and collaborative and and uh believing in the industry. Um at some point in those percentages of difference, an executive is going to move on, and without that talent, you're not gonna be able to provide the service you want.
SPEAKER_00:You know, if I were selling for Park Street, I've often used the same strategy in doing interviews like this. Well, if I were selling for Park Street, I'd say to the board, let's not talk about service right now. First, I want you to talk about do you want this institution to exist 10 years from now? And and if it's gonna exist 10 years from now, do you realize there's certain things that are gonna happen in the executive staff? Because I think a lot of times they're just kicking this can down the road. So I I would try to get them to confront. Do you want it to exist? Do you want to merge it out? And if you want it to exist, you're gonna need a certain level of staff to exist.
SPEAKER_01:I I think your approach is exactly spot on.
SPEAKER_00:And and you could you can steal it, Kirk. It's yours.
SPEAKER_01:There's an interesting, there's a couple interesting uh transitions that are going on in the industry. Many of them, there are many, but two of them that come to mind. One is that certainly in the demographics that you and I talked about a lot about baby boomers retiring. There's also a second piece to that is that many board members are 20 years older than the baby boomers. And there is an extensive amount of new board members coming into the industry and helping them understand how the industry works, whether they're going to be here for in the next 10 years, how they think about that uh strategy and uh executive retention, um and who to hire for those roles is becoming a very interesting conversation. Because, as I'm sure you note, and and I'm sure the listeners will note, there are major job announcements made every day for large credit unions of the country. At least once a week, you see an announcement made. And along with those, if you you get underneath the covers, if you look at them, you're seeing that the board members are changing at the same time. They're they're moving on as the CEO retires because they are of an age and they are of a mind that may be different from the new organization.
SPEAKER_00:Well, I think that's healthy too. Agreed. Yeah, I credit unions, in my mind, most of them don't exist in a hyper-competitive world. That and the hyper-competitive world does exist in things like banking, not necessarily community banking, but uh money center banks are highly competitive with each other. And credit unions just say, oh geez, you know, NCUA says our camel score is this, so we're doing okay. Yeah, we're kind of mediocre, but so's everybody else. That's not a way to think, I don't think, anymore. It's uh is that really good enough? I I doubt it.
SPEAKER_01:So without the launch uh NCU 2.0 about last week, you know, one of the things that I noted about the organizations that were presenting or the thought leadership that was created was you know the modernization of financial institutions, the artificial intelligence, the use of artificial intelligence extensively. And uh, you know, we we have this opportunity within the industry, um, as we've had a number of times in the past, to be able to jump up the technology curve and compete uh with the new tools that are available. But what does that take? That takes thoughtful leadership, it takes a board support behind it, it takes an investment in new skills, um, it takes a requirement that the willingness to change and to be as aggressive as those regionals and money center banks. Um, but the tools are available. Uh, if you look at some of the pieces that we see around the industry uh that are AI tools to that significantly speed up new accounts or collections or loan approvals, um, but you need the right talent to be able to use those tools and be willing to understand the risk in them and be able to convince the board and the teams of the culture to accept them. In order to do that, you need real you need the uh leaders that understand it and are and are open to that level of change.
SPEAKER_00:And you know, to me, this the secret weapon of credit units is is the Q zel. Where uh particularly fintech-oriented Q zos, they can get really, really very perfectly good technology happening, even in the smaller credit union. However, uh to do that in almost every case, I ask FinTech, so what does a credit union need to implement this your your tool? If they're telling the truth, and almost always they say, Well, there needs to be a senior executive with enough bandwidth to oversee this project. And often there isn't. And that's why the credit union doesn't adopt the technology, or if it does, the implementation doesn't go well. It's not because there's anything wrong with the technology, the credit union just doesn't have the staff. And staff costs money. Before we go, think hard about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What can they do to really, really, really make a difference in the financial team? Can't all be megabanks, can it? It's my hope it won't all be mega banks. There'll always be a place for credit units. That's what we're discussing here. To figure out how you can help, get in touch with me. This is RJ McGarvey at gmail.com. That's RJ McGarvey at gmail.com. Get in touch with us. Figure out a way that you can help. We need your support. We want your support. We thank you for your support. Let's see you to DO Podcast.