FEDERAL WAY, Wash. - The declining number of credit unions due to mergers or charter conversions shows no signs of abating. But the large proportion of small credit unions that are being lost to mergers with larger CUs has regulators taking a closer look at the factors driving this trend and looking for ways to stem it. Regulators from throughout the U.S. and 40 CEOs of small credit unions met in Washington state on April 28 to discuss their concerns and brainstorm possible solutions to the survival of small CUs. The day-long roundtable discussion was facilitated by the Washington Credit Union League. WCUL President/CEO John Annaloro said the meeting "truly produced insights beneficial to the survival of small credit unions not just in Washington, but across the United States." Regulators and officials who participated in the meeting included: Mary Martha Fortney, president/CEO, NASCUS; Harold Feeney, Commissioner, Texas Credit Union Department; Ginger Larson, Director, Wisconsin Office of Credit Unions; Don Larsen, CUNA Government Affairs Vice Chair; Elliot Gregg, government affairs committee chair, Washington Credit Union League; Linda Jekel, Director, Washington Division of Credit Unions; and Melinda Love, Region V Director, NCUA, on behalf of NCUA Chairman JoAnn Johnson. According to NCUA, 70 credit unions merged in the first quarter 2003. Of those, 49 had less than $5 million in assets. Nineteen had less than $1 million in assets. The smallest merging CU - West Chestnut FCU, Louisville, Ky. - only had $48,131 in assets. It merged with $111.8 million Kentucky Telco FCU. NASCUS' Fortney noted that the merger trend among credit unions is not charter specific and is happening on both the federal and state sides. "Consolidation is a fact of life, but you still don't want to have one segment of the credit union population leave as a result," she said, referring to small credit unions. Behind the Numbers What's driving the mergers of so many small CUs? Jekel, recently traveled around the state talking with CEOs of small credit unions. The common theme that emerged from their comments, she said, was these CUs are feeling competition the greatest from other credit unions, banks, as well as non-traditional sources for financial services such as Wal-Mart, because they have fewer options to resort to. "Their members have a lot of opportunities to borrow from other sources, so it's harder for them to compete for their members' loan dollars. Larger credit unions have access to more alternatives to compete," said Jekel. Washington State has witnessed a noticeable loss of small CUs: in 1995, 59 out of the 100 state-chartered CUs in the state (59%) had $20 million or less in assets; currently there are only 24 $20 million or less CUs out of the 86 SCCUs (27.9%). Jekel said the state is losing state-chartered CUs at the rate of 3% a year, and most of those are due to mergers with larger credit unions. According to Jekel, the three most common reasons why small CUs are merging with larger ones are: problems with their financial condition; lack of succession planning and retirement benefits; and continuing difficulties with controlled growth under prompt corrective action. "We still have trouble with credit unions falling below 7% net worth. Some of them decide to voluntarily merge instead of turning things around," she said. In addition, Jekel said some large credit unions are offering incentives such as attractive severance packages to healthy smaller CUs to convince them to merge with them. In October 2003, Jekel issued a bulletin (No. B-03-10, "Changes to Merger Manual" concerning changes approved by the Division of Credit Unions. Among the items required to be included in the summary of the merger plan were "an explanation of any contracts or agreements relating to any senior management officials of the merging credit union (by employee class only without identification of individuals)" and "an explanation of any compensation or benefits (such as incentive plans, retirement plans, or severance benefits) offered to any employees of the merging credit union and state the amounts (by employee class only without identification of individuals)." It's not just larger CUs that are trying to entice smaller CUs to merge with them. Jekel said that in August 2003, several small CUs received correspondence from Citizens Community Federal Bank, formerly Citizens Community FCU, inviting them to merge with the bank. Jekel said she didn't know if any of the credit unions contacted the bank, "but it was brought to my attention by one of them because they were concerned." Texas has also seen its share of loss of small credit unions due to mergers, and Commissioner Feeney said many of these mergers are the result of larger CUs "aggressively pursuing" smaller CUs to merge. "I've been told by several small credit unions that even when they've told larger credit unions they're not interested in merging, the larger credit union has continued to pursue them, sometimes for a number of years," the state regulator said. Over the last five years, Feeney said Texas credit unions have been averaging about eight mergers a year and "all but a very small number" were for credit unions with less than $20 million in assets. There are currently 241 credit unions in Texas, and 138 of them (57.3%) have less than $20 million in assets. Credit unions have a fiduciary responsibility to look out for their members, and Feeney offered that some small credit unions see merging as a fiduciary responsibility. "You have situations where the manager of the small credit union has been in the position for so long, they almost become a symbol of the credit union. When that person retires or dies, the small credit union has a difficult time replacing them because the pool of eligible people who'll take the job at the existing salary is very small. In some cases you even run into a credit union that may not want to continue as a separate entity after it loses its manager," said Feeney. Possible Solutions "I as a regulator don't have a lot I can do about compensation and providing cooperative services. But there are still things I can do something about to help small credit unions survive and make it easier for them to do business," he said. The most obvious area Feeney said he can have an effect is in crafting regulations that take into account small credit unions' circumstances. "When we write our regulations, we're looking at developing a regulation that applies not only to the most sophisticated credit unions, but also to smaller ones. In many cases, even the middle ground could be a significant hurdle to a small credit union. We need to provide small credit unions with more flexibility so they have something different other than just that middle ground," Feeney explained, adding that accomplishing that would require either writing separate regulations for small CUs or amending existing regulations. He emphasized that would entail an administrative rule which he would propose to the Texas Credit Union Commission, which would then determine if the regulation was within their risk parameters. It wouldn't require any legislative effort. Asked if he'd identified any regulation yet that he'd like to amend, Feeney said he hadn't but his concerns are in the lending area. Jekel also said she wants to explore reducing the regulatory burden for small credit unions. A representative from a small Washington CU who participated in the roundtable suggested the $10 million in assets mark for the state's regulatory relief rule that allows the state regulator to waive or change burdensome regulations that aren't necessary to safety and soundness, should be raised to $50 million so more credit unions could take advantage. Other ideas that were discussed as ways to help small credit unions survive was bringing together a cadre of senior management of large credit unions to serve as a backup to small credit unions when, for example, their president is on vacation or is out ill. As a result of the success of the roundtable, the Washington League plans to form a Small Credit Union Regulatory Relief Subcommittee to meet twice a year bringing small CUs, subject matter experts, and regulators together to identify areas of operational efficiency and regulatory relief. The Subcommittee will be chaired by $50 million in asset Columbia Basin FCU President Mark Neumann, and is expected to hold its first meeting in November.1 -

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