PORTLAND, Maine — As credit unions deal with the fallout from the corporate system failures and the general economic downturn, a number of them are eyeing mergers, or even charter conversions as a way to protect member capital.
"What you're going to see happen as a result of credit unions having to take the losses related to the corporate situation is that 2009 is going to be a very poor year for credit unions. This always gets the attention of the board of directors," said Alan Theriault, president of CU Financial, a firm that assists credit unions in converting their charters. Theriault argues economic conditions have already created an environment conducive to mergers. "This is just going to speed up the process. For some mergers that might have been more likely to occur two to three years from now, this is going to accelerate those merger processes."
But the shape of the market may be overplayed, according to one person, who said there is no specific case in which a credit union would be more likely to merge, argues Ron Nice, CEO of Colo.-based Nice Enterprises. He said all credit unions "regardless of size and present financial condition," are likely to consider a major move.
"Probably the only ones not considering this as a real option are those credit unions with a traditional or closed field of membership, who are also extremely profitable, are growing in membership, and have off the charts membership satisfaction," he added. "And in those situations, they are looking at the current market and seeing an opportunity to help out their brother credit unions."
Burning Up the Phone Lines
A multi-billion dollar assessment to replenish the share insurance fund and pending costs to cover the expense of conserving US Central and WesCorp, sent credit union executives scurrying to the phones, according to a number of industry experts. Theriault said credit unions are asking about charter conversion at a pace not seen since 1998, when the Supreme Court ruled in the AT&T Family FCU lawsuit. That decision was later overturned in CUs' favor by Congress.
"I've seen more interest in it recently than I have in the last 10 years," he noted, adding that many CU execs believe the continuing costs of fixing the corporate system are "worse than a tax."
"I've had four natural-person CU calls in the last two weeks that are nice- sized credit unions, because of their concern of the financial impact of all of this," added Dennis Dollar, principal at Birmingham, Ala.-based Dollar Associates.
Making Waves
One big credit union made waves when Credit Union Journal previously reported that Pentagon FCU was considering a charter conversion. CEO Frank Pollack now says the credit union never publicly floated that idea, and that such a conversion is "absolutely not happening."
"But we think very strongly that the action NCUA has taken is both right and effective in terms of minimizing the impact to all credit unions and making it manageable," Pollack added regarding the corporate fallout. "It's a difficult time right now, but I think the agency is trying hard to do the right thing and in the right way."
Money flowed out from many of the largest financial institutions during last year's big crash, and now private capital investors are now sitting on the sidelines for confidence in the financial sector to improve before making a move, Pete Duffy, associate director at New York based Sandler O'Neill & Partners pointed out. These investors are just waiting to pump money into a clean financial institution that has strong connections in its community, he said, and that presents opportunities for bigger CUs that are willing to make charter conversions.
"These well-run large credit unions that don't have an asset problem, and are well managed, are part of the solution in their local markets and many of them are looking at the situation saying, 'Given a slightly different environment I can help fix this thing,'" Duffy said. "A credit union should consider this, and all their options because it appears somewhat perilous to consider doing nothing and remaining vulnerable to more hits to their incoming capital."
Theriault believes community banks do not have the same target on their backs that big institutions are wearing today. He sees the potential for serious money to begin flowing to start-up banks and credit unions that make the conversion pretty quickly after the current period of instability passes.
"Clearly there is a lot of compelling arguments for a well-run credit union to make the move to the thrift charter," Theriault said. "Those franchises, those small community franchise are going to flourish in the months ahead. They are going to benefit the most in the coming months when we get out the other side of this economy."
