In the first part of this series we noted that credit unions have become an industry in search of answers and not getting them.
The pressure on earnings, and the striking difference in ROE at banks and credit unions, is forcing credit unions to examine tough questions they have not previously considered-such as this one: what could motivate a CU to merge with a bank? The existence of a premium obviously makes any deal easier and more palatable, but one needs to consider some preliminaries.
For example, the group that infiltrates the membership of a CU and establishes a beachhead to knock down a charter conversion might do the same in a bank acquisition. Using the same tactics and messages ("your rates on loans will go up, your share rates down, while your fees go up, officers and directors want to enrich themselves"), these people might do their best to obstruct the deal.
Suddenly, a merger that the management of both parties believed made strategic sense takes on the characteristics of a hostile takeover and the cost of the transaction could go up (along with the prospect that the customer becomes disenfranchised).
As a result of these obstructions, the cost of doing CU charter conversions has nearly tripled (with no change in statute).
That said, if there is no obstruction and if we see premiums paid at market level to banks, then bank acquisition of CUs could accelerate quite rapidly. Also, with deposit gathering so difficult, banks may make the effort anyway. (An interesting sidebar to this is that no premium has been paid in previous CU to CU mergers).
Exiting the movement (in whatever form) seems more likely than the full passage of CURIA with secondary capital provisions, perhaps explaining why there is so much discussion regarding acquisitions, merger and charter conversions.
The exit looks as if it will not be as smooth as the law intends, given the obstruction that has accompanied recent charter conversions.
But I believe that the obstruction will be overcome by the market forces driving change-just as we saw with interstate banking, the repeal of much of Glass-Steagall, among other things.
Commerce and government work best with freedom of choice. The system, as it has evolved in the marketplace and the prevailing regulatory environment, has anticipated the need for institutions to evolve with consumer behavior and has provided for alternative paths (the dual charter system) to facilitate such change. For example:
The consumer enjoys an abundance of available credit. From 0% auto loans at the car dealer to mortgage loans from their investment broker, America shops for loans on every corner and the Internet. As a result, CUs have begun to reduce reliance on auto loans (once 45% to 50% of the loan portfolio, now 35%) by offering member business loans.
With the downsizing of IBM came the need for some IBM CUs to evolve to community charter and offer business loans. The community charter reduced reliance on IBM employees, while business loans helped the CU meet the needs of unemployed IBM'ers as they started their own businesses.
Some CUs, blessed with large and growing fields of membership (FOM), have not had to change. These-what I call "Traditional CUs"-have FOMs that give them plenty of business. They don't have to branch or market on the same basis as the "Evolving CU," which has begun branching in the open community. The difference in operating expenses is huge. The Traditional CU enjoys HALF the operating expense ratio of the Evolving CU (2.08 versus 4.16 according to our research).
The Evolving CU does not have a choice. Change started with the need to reduce reliance on its original FOM, continued with the need to diversify product channels and continues now as it seeks to compete in the community on the same basis as banks. The only option the Evolving CU has is to be decisive (or not) regarding its path.
As a CU, your choice in paths includes: remain an independent CU and hope for CURIA, CU to CU merger, CU and bank merger, CU charter conversion to MSB.
But, remaining an independent CU will require a traditional field of membership and/or a dramatic shift in earnings and marketing results. Even Traditional CUs have started to morph by moving from a single FOM to community or TIP charter and/or by offering member business loans. (According to our research there are only 66 single
CURIA Won't Stave Off 'Escape'
FOM CUs remaining above 100mm in assets).
No matter what path you choose, it is your decision and that of your membership.
Many CUs have told me these choices are being unfairly restricted by obstruction... and they're growing weary of the intrusion. They're saying a non-member's role, upon invitation, is to help the institution accomplish its dreams, not get in the way of them.
They're saying the intrusion occurs because they have no viable solution for what the business requires.
The market (of customers and competitors) will continue to mandate the changes necessary to compete and those of us who serve you are best to evolve with you and the needs of your member, without bias.
Remember this popular Hollywood moment?
Captain Hilts (Steve McQueen) is standing in front of the wire fence separating him from the freedom of the nearby woods outside a Nazi prison camp in "The Great Escape."
The German Colonel (who is a flyer stuck with commandant duty) has just finished telling Hilts that they're both "stuck in the camp to finish out the war."
Hilts replies, "You speak for yourself, Colonel."
Colonel: "You have other plans?"
Hilts, "I haven't seen Berlin yet, from the air or the ground, and I plan on doing both, before the war is over."
What dream is on the other side of your fence and what is the fence that is in your way?
Pete Duffy is with Sandler, O'Neill, New York. He can be reached at PDuffy<at>sandleroneill.com.