CUs With 'Excess' Capital Have Become Merger Targets
Editor's Note: This article first appeared in Digest, the magazine of the California/Nevada CU Leagues.
Thankfully, Wings Financial FCU has withdrawn its proposal to merge with Continental FCU. Now that the entire credit union movement has heaved a sigh of relief, we can try to glean a positive opportunity from the experience; namely, a chance for credit unions to go before our national elected officials.
The combination of Wings Financial and Continental may have made sense from a field of membership perspective, as both are focused on the airline industry. However, since the Continental members did not demand a merger vote, the members of the El Segundo-based credit union appear to like the relationship and service from their credit union just the way it is.
There was much talk about Wings' "offer" to "give" each Continental member $200 as part of the merger agreements. Though the NCUA deemed that offer impermissible under the provisions of the Federal Credit Union Act, the reality of that $200 offer was a return of the equity of the extremely well-capitalized Continental to its membership.
Returning some net worth to the members in the merger transaction would eliminate one of the "complaints" from the banking trade associations that credit union capital is not really "capital," because it cannot be returned to members. We can use Wings' offer as evidence to elected leaders that our capital CAN be returned to its owners in the same way as bank capital can be returned to bank shareholders.
At the same time, one of Continental's attractions had to be its 16% net worth ratio. Had the $5 million been returned to Continental members, the members of Wings Financial would also have received the net worth benefits from Continental's years of success. It begs the question: "Are credit unions over-capitalized?"
I know we have made that argument before, especially during the efforts to get HR 1151 through Congress in 1998.
Credit unions with high capital ratios could become targets for larger credit unions because the "merger" can pay for itself without the surviving credit union taking any hit to its ratio. In addition, smaller credit unions face difficulties with regulatory requirements - especially with compliance to the Bank Secrecy Act - which could lead to even more mergers. These types of mergers have been encouraged by actions of Congress over the past 20 years.
But at the same time, targeted credit unions could begin to ask potential merger partners for payments to return capital to their members. In effect, the management and board of these targeted credit unions could seek both the highest payments and the best service for their members.
Of course, this incentive could be reduced if Congress would reduce the required capital levels for credit unions and/or return credit unions to a risk-based capital plan that was in effect before HR 1151. Thus, the most "basic" credit unions would not need to keep net worth levels above 10%. Keeping 200 to 300 basis points above the 7% "well-capitalized" threshold results in too much wasted capital-making credit unions a target for merger.
If I was a credit union lobbyist (and with the exception of January to August 1998, I never was), I would love the opportunity to meet with our elected officials and their staffs on Capitol Hill and make the following statements, which were made clear by the Wings-Continental events:
* Credit union members can and do receive the ownership benefits of their credit union capital (net worth).
* High capital requirements without opportunities to replenish capital (i.e., secondary capital) make credit unions with high capital levels merger targets.
* Credit union members do control the destiny of their member-owned financial cooperative. Had Continental members wanted the Wings offer, they would have communicated that desire to their board and the board would have taken appropriate actions. The Nationwide FCU members did take the opportunity to merge their credit union into a thrift and take the capital payout.
Credit union members do have loyalty to their credit union and will not sell out just to get a "quick buck and the promise of better services" (unlike bank shareholders).
All of this proves that credit unions are different than banks - not better or worse - just financial institutions with a different focus.
I know none of this will make sense to the true "universe builders" in the banking industry, but it does to those of us who work in the credit union movement.
Greg Badovinac is compliance officer with Western FCU, Manhattan Beach, Calif.