New Bank Strategy, Or Is It Just One Man's Opinion
Upon further review, I still don't know what to make of some strange comments made about credit unions last week. What I do know is that it is fascinating how fundamentally different the banking industry's outside-in view of credit unions is from the inside-out view of credit unions themselves.
As The Journal was the first to report online, the vice chairman of a $200-billion bank has added a new wrinkle to the banks' divide-and-conquer strategy against credit unions, in this case not by employing the usual play-the-large-CUs-off-against-the-smaller-credit unions game plan, but instead by trying to play off today's generation of retiring CEOs against their apparently smarmy successors who will eventually cash in on their predecessor's hard work by converting the credit union into a bank.
Even days after the remarks were made, and after having talked it over with numerous credit union executives who were on hand for the Bank Administration Institute's Retail Delivery Show, where the comments came in a keynote address even though CUs have become an increasingly large part of the RDS' attendance, I still couldn't figure out if the source of the comments was a clever stalking horse for the American Bankers Association, or if he really believes credit unions are just community banks operating with a unique provision within the tax code.
Here's what was said by Richard Hartnack, vice chairman and head of the Consumer Banking Group at U.S. Bancorp in Minneapolis. "Credit unions clearly have hit a responsive chord with an increasingly large portion of the consumer financial market," he said, giving the indication that what was to come was a caution to bankers to respect what credit unions have become. But that's not where he was headed.
"Whether it's out of a sense of affiliation or the price of the product or convenience or the trust (consumers) have in their brand, one way or another we've seen credit unions become an important part of this industry," he continued. "In some markets they are very major players. In some markets I manage for U.S. Bank the dominant owner of branches in the market are credit unions."
Hartnack's next comments were a revealing glimpse into the mindset of most bank executives, who manage to beat each quarter's profit forecasts and for whom people and households are commodities to be bought and sold. So as not to be misunderstood, that's not a criticism, it's simply that the business model and motivations of large, publicly traded banks are 180 degrees from most credit unions.
"Credit unions have developed a very, very large and important market capitalization position," Hartnack said. "In short, they've become very valuable properties." With that, he revealed what was either a sinister subterfuge aimed at finding a new way to undermine credit unions, or a complete ignorance of the drivers behind the not-for-profit industry.
First, Hartnack harkened back to what he called the "olden days" and he served up a "trivia question": what ever became of the old mutual savings banks and mutual insurance companies? "They were owned by their depositors and didn't pay taxes," said Hartnack. "Sound familiar? How many mutual savings banks are left today? The answer is damn few and most of you can't even think of one. The question is, 'Is there something unique about credit unions that would result in them not going down the path of their predecessors?'" Are there no circumstances, he wondered, under which credit unions wouldn't convert to stock companies and "reap the value of what they built?"
Hartnack, whose bank's assets are approximately 25% of the total assets of all credit unions combined, then offered what he called a "prediction" that sounded more like something of a doomsday scenario.
"At some point the management or the members or both will figure out just exactly how valuable the franchise they are sitting on is," he said. "When financial institutions trade hands the buyer typically pays between $4,000 and $10,000 per household," a reference to the multiples used in bank acquisitions.
Hartnack said that if he's some worker in a company that has a credit union and someone tells him that a "vote yes" for conversion is "going to be worth $5,000 to you, I'm thinking I'm going to vote yes." What's missing in that whole scenario, of course, is in all the credit union conversions to date, the membership hasn't cashed in on any payout of $4,000 or $10,000 per household, or even $4 or $10, for that matter. The only ones who have cashed out have been those who have sold them out-the management and boards of credit unions that have bought into Hartnack's thinking.
And why shouldn't they, he asked, claiming today's retiring credit union CEO has spent his whole life working to build a credit union-and for what?
"Here's the worst position you can be in today," he said to a room that included people who were exactly those he was about to describe. "You're 60 years old and you've been the CEO of a credit union for 30 years. You've built it from being nothing to a couple of hundred-million-dollar franchise and your retirement party consists of a cheap sheet cake, and a gold watch and a handshake. And you're going to look into the eyes of that carefully recruited successor and in those eyes you're going to see someone who just might convert your credit union to stock, take the options, and reap the profits. That is a tough, tough thing."
That last comment was a tough, tough insult, frankly, to many credit union CEOs. He wrapped up his forecast for credit unions by saying, "My prediction is you are going to start to see credit unions converting to stock companies and giving their shareholders the value they deserve. The present value of what that company is worth is worth more than the unique tax structure."
Upon even further review, I've finally found a word that I think sums up this latest bank strategy: sheetcake.