Bankers vs Credit Unions: The Field of Membership Face-off

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by Robert McGarvey For CULIANCE

A lot is at stake as credit unions and bankers face-off over the NCUA’s new field of membership (FoM) rules – and the American Bankers Association has already filed suit to derail the proposal. The outcome of this fight may mean a lot to credit unions, also to residents of rural America, and possibly to community banks.

And just possibly, there is another way of looking at this conflict wherein everybody can win – except maybe the money center banks. More on that innovative perspective – from a credit union CEO – later.

There are multiple wrinkles in the FoM changes, but most eyes are on the new NCUA rule allowing credit unions to apply for an expanded field of membership into adjacent rural areas – where population doesn’t exceed one million residents. That would include all of these states – Alaska, North Dakota, South Dakota, Vermont and Wyoming.

Large chunks of many other states would also be impacted – for instance, Maine, New Mexico, Nevada, even Arizona (where Phoenix and Tucson are the most populated areas in the state – the rest of the state is pretty rural).

Therefore, the  obvious winners under the new rules – if they survive the legal challenge – are rural residents.

Big banks do not give a hoot about these regions or about credit unions, for that matter. Marvin Umholtz, a longtime expert in credit unions and financial services, said, “Historically these mega-banks have been characterized as not viewing the credit union industry as a major competitive threat compared to the many other regulatory and marketplace challenges those huge institutions face. That appears to still be true today.”

But community banks view the FoM changes as goring their ox – and it is the community bankers who are up in arms and are behind the ABA suit.

ABA President and CEO, Rob Nichols explained his group’s opposition this way, “We’re deeply concerned about NCUA’s decision to go beyond its statutory authority to move credit unions even further away from the common bonds that define their missions.”

NCUA, for its part, defended the expansion as rooted in its consumer friendly commitment, “This comprehensive rule expands consumer access to credit and provides them a safe place to invest their life savings,” said NCUA Board Chairman, Rick Metsger.

Metsger is right. In much of rural America, there isn’t exactly a stampede of bankers.

Paul Stull, CEO of the Credit Union Association of New Mexico, pointedly said, “It is hard to understand why banks oppose growing fields of membership, especially in rural and underserved areas when they have been busy closing branches.”

Stull added, “Credit unions are the primary source of access to financial services in rural communities like New Mexico, and in many other states. Banks have shuttered branches in these rural communities because they don’t produce enough profit, leaving residents without access to basic financial services which requires them to drive many miles for access.”

In addition, for what it’s worth, Sarah Snell Cooke, a longtime executive with Credit Union Times, said she thought NCUA would prevail in court even though – or maybe because – in 2008, NCUA suffered an embarrassing loss in court over its granting of a community charter to Members 1st Federal Credit Union in Mechanicsburg, PA.  Said Cooke, “After the previous problems, I can’t imagine they wouldn’t really, really protect themselves.”

Pat Keefe, a long term observer of credit union – bank conflicts, also expressed optimism: “[there] are good signs for the agency’s position. On the other hand: we’ve all been surprised before by the courts.”

Even so, maybe the smartest way forward is to bury the enmity and for credit unions and community banks to join together to provide rural America the financial services they sorely need. That’s the big idea put forth by Edward Lopes, CEO of Liberty Bay Credit Union in Massachusetts. Lopes elaborated that just maybe peace – not discord – is the smarter way forward for credit unions and community banks.  “In our experience, many community banks welcome the addition to the market that community credit unions represent.  As opposed to large, aggressive financial institutions, we both tend to follow complementary business models.   We tend to become directly and significantly involved in community matters.  There is a growing body of evidence that credit unions and community banks should work more closely rather than participate in antagonism campaigns.”

Lopes does not say it – but it also is true that both community banks and credit unions face continuing business survival threats from the big money-center banks.

So maybe they should just work together to bring a new, better kind of banking to underserved, rural communities and, in doing so, everybody wins.

Except the money center banks.

In an atmosphere of prevailing enmities, it may not be entirely realistic however, it nonetheless is an idea worth pondering because it just may be the way to preserve small financial institutions – be they credit unions or community banks – and also to bring financial services to presently, underserved communities. That’s win-win-win.

In that vein, Cooke said, “I find that doing what’s right for your customers/members is the path to success rather than constantly attacking your competitors. And credit unions are wise to do the same.”

 

 

How to Save Thousands of Small Credit Unions

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By: Robert McGarvey

Now you see them, now you don’t.

Many experts warn that small credit unions are disappearing. And this is very bad news, not just for members and employees of the involved credit unions, but also for the credit union movement.

Start with the numbers. CUNA said that in 2010 there were 7486 credit unions.

In 2016 CUNA reported that number had tumbled to 5968. That’s a drop of almost 20% in six years.

There are innovative, imaginative scenarios that may stop the bleeding – more on them below – but first, there is the pessimism to contemplate.

Here’s the crucial question:  Is there a minimum size that a credit union needs in order to survive?

For many, the biggest financial issue is compliance and it’s important to know that compliance is no joking matter. The apparent hacks on the Democratic National Committee, a Vermont utility, and more, illustrate how skilled cybercriminals have become. Evidence also mounts that many have shifted their focus from the money center banks – Chase supposedly spends $500 million annually on cybersecurity and its competitors do likewise – to the less, well defended smaller institutions.

That means credit unions too.

There are reasons why the regulators have imposed so many compliance must-do’s – from money laundering to fair lending – but there are also good reasons why so many small credit unions loudly protest the costs.

Which brings us back to the question: how many credit unions will be left standing in a decade?

Experts say that this will be a matter of survival of the biggest. Marvin Umholtz, a longtime credit union expert, said, “in the right marketplace a$100 million in assets credit union might have a few more years left. However, if I were in the shoes of that CEO and/or board of directors of that credit union I would be looking to become a billion dollars plus as rapidly as possible.”

Peter Duffy of Sandler O’Neill investment bank and, himself credit union expert, said that there is no definitive metric that he is aware of that sets out a minimum size for a credit union to survive. But, he added, his guess is that $1 to $2 billion in assets is probably “a sweet spot” for survival.

But he said he also saw vitality ahead for at least some credit unions as small as $300 million.

Here’s the problem: most credit unions are well below $300 million in assets.

CUNA counts 2525 with assets under $20 million. There are 1114 with assets between $20 and $50 million. There are 742 with assets between $50 and $100 million. There are 734 with assets between $100 and $250 million. Do the math. There are 5115 credit unions with assets below $250 million.

If all went, under 1000 credit unions would be left standing.

“At what point do credit unions cease to be relevant?” asked Mansel Guerry, CEO of CUSO CU24. “When do they become a footnote in financial services?”

Those are pointed, poignant questions.

What can stop the bleeding?

First off, not everybody believes small credit unions are doomed. Credit union consultant Tom Glatt, Jr., who uses his proprietary HealthScore rating to determine an institution’s viability, said, “I know some people have the view that only $500M and larger credit unions will be viable in the future, but I’m skeptical. I know of one small credit union, about $1.4M in assets. They routinely score well above average in our HealthScore calculation. Last quarter they had an ROA of 1.32 and an efficiency ratio of 30.71. Their membership growth is generally positive. Why wouldn’t they be viable? I think they are, all things being equal.”

Glatt makes a good point: it is indeed premature to bury thriving credit unions, regardless of size.

But there are steps that can be taken to help all small credit unions do better – but this will require taking a fresh look at what credit unions can do to help each other and work together. That’s also the Sixth Principle in the Rochdale Principles, which underlie the cooperative and credit union movements: Cooperation among cooperatives.

What would that look like?

Some years ago, Jim Blaine, then CEO of State Employees’ Credit Union in North Carolina, the nation’s second biggest credit union, said this to me, “I hope we do a lot to help smaller credit unions. If the small credit union goes away, the larger ones will be in a mess. Little, local credit unions get a lot of sympathy from political leaders.”

Blaine is right. When a billion dollar credit union knocks on the door of a member of the House, often it is greeted as just a bank – and a small one, at that.

When a $50 million credit union that issues mortgages and used car loans in the district of that same rep, well… the Congressman is all ears.

Don’t believe me on this. Ask people like Blaine. Ask CUNA. Ask your own Congressman.

What kind of help can a large credit union offer? Everything from ATM access – think networks like CU24 – to free management consulting. A big credit union can also point talented, but restless staff, toward a small credit union with greater opportunity for ambitious employees to move up.

Work together, not apart – that’s the Rochdale Sixth Principle.

Another – big and futuristic cure – is encouraging small credit unions to join CUSOs that provide back office functions. Everything. From loan processing to cores to cybersecurity.

The credit union itself becomes the front-end, marketing face. But that is its forte anyway. Members who love small credit unions, love the people.

Have you ever heard anyone say, “I really like how they process my car loan payments?” Of course not. But you have heard people say they still go into a branch weekly and have a 5 minute chat with their favorite teller, Mae.

Technology experts tell me it’s feasible to effectively outsource most of a credit union to a CUSO – which would ‘up’ the quality and reliability of the processes, with no real increase in costs.

Why don’t credit unions hop on this? Partly it’s inertia – it hasn’t been done, so who can see it?

Bottomline: there are ways to keep thousands of credit unions prospering.   – even the very smallest. If enough credit unions embrace the Sixth Rochdale Principle.