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Only One Thing Stands Between A Fertile Or A Barren Valley

Let's hope it remains a conference name and not a metaphor.

It seems fitting that one of the first major meetings among CUs to be held in the wake of Wings Financial FCU's bid to merge with Continental FCU, whether hostile or not, was the California/Nevada league's Big Valley Conference. That's because after three days of talking to credit unions still digesting the so-called "hostile takeover" merger bid, which followed news of other CUs seeking charter conversions and the first-ever purchase of a credit union by a bank (Nationwide FCU by Nationwide Bank), the movement has been left with indigestion, and wondering if ultimately it will be left standing on opposite sides of a big valley.

Even before the meeting ever started California's CUs, like so many others, were engrossed by uncertainty over their future. One person told me they had been at a chapter meeting that ran 90 minutes long as the result of discussion of what to make of events unthinkable not long ago.

One day before Big Valley opened, the National Credit Union Foundation hosted a Social Impact Management Institute. The very existence of credit unions in communities has a social impact, but at this meeting, too, there were worries over how that impact will be impacted. Hanging on the wall of the meeting room inside the Monterey Marriott was a banner proclaiming the "Cooperative Principles." One person elbowed me and pointed to Principle No. 6: "Cooperation Among Cooperatives." Nothing more needed to be said. Later, in welcoming remarks to the group, California/Nevada league President Bill Cheney observed, "I think it's great to pause and think about the cooperative principles that shape our movement and how we can translate those into ways to help our movement."

When the Big Valley meeting finally commenced, Cheney didn't wait for the audience to ask the league's position on the Wings Financial bid, which is targeted at a league member, El Segundo, Calif.-based Continental FCU. "Your league supports Continental FCU's board's authority to act in the best interests of [its] members," he said. "This hostile takeover attempt, we feel, is not in the best interests of the credit union or the credit union community." It was a firm statement and a departure from what are often bland tributes to fence straddling by trade groups. But it also raises a thorny dilemma: what about credit unions that seek to convert to banks? In those cases don't the boards also claim to be acting in the best interests of members?

Meanwhile, the conversation inside the hallways of the Portola Plaza hotel, where the Big Valley conference was being held, belied the bucolic surroundings of the Monterey peninsula. Most folks were rather consistent in their reaction, perhaps because the takeover targeted one of their own, and many shared the view that "out-of-state" credit unions had no business prying into the affairs of CFCU. The strongest word used by one person speaking to the Journal regarding the concept was "reprehensible," but far more used the term "interesting" or "unsettling" to describe the practice of going straight to a CU's members with a merger pitch.

Perhaps most disconcerting was this: one person told me he knew of a credit union management team that had brought in an investment banker to discuss whether "taking the credit union private" might develop into an option. I later had a talk with a long-time credit union analyst and numbers-cruncher with whom I shared that bit of information. Mulling it over, he observed there were any number of roadblocks and complications over such a plan to "go private," but also conceded that the far bigger issue was that the concept had been considered at all. And if one credit union board or management team is thinking about it, well...

I spoke with one woman who was new to the board of her credit union. She didn't know a great deal about the history of credit unions, and certainly couldn't recite the Cooperative Principles (quick, can you?) When I found her she was reading a copy of the Credit Union Journal's coverage of the Wings/Continental story.

"Credit unions to me had always seemed to be a more, I don't know, elegant business model," she said when asked for her impressions. "Now this is more like the blood and guts of Wall Street. Credit unions to me had always seemed to be above the fray until this happened."

Right or wrong, the Wings Financial bid isn't so much an illness as a symptom of a more complex picture, the very future of the credit union business model. To some degree it has taken attention away from other symptoms that need some medicine, symptoms on display for all to see as part of the conference agenda. There was talk of the need for CURIA and regulatory relief. One Ph.D laid out in detail the clear "big valley" between expense structures at large and small credit unions, and the resulting lack of competitiveness in the latter. Another spoke to the ramifications of the wave of option-only ARMs so many Californians used as their only means of getting into a house (median price in the state is $500,000). When payments readjusted the only option many were left with was to throw up their arms. At a roundtable discussion I heard two people admit that even at their credit unions they had had borrowers who couldn't make their second mortgage payment.

All of these are huge challenges credit unions must resolve. The movement has overcome obstacles throughout its history, although perhaps none as significant as those being faced right now. To overcome them credit unions must respond as only they can-cooperatively. If not, there will be little left but a Big (Empty) Valley.

Frank J. Diekmann can be reached at fdiekmann<at>cujournal.com.

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