MONTEREY, Calif. — Too much capital in a credit union risks an attempt for a hostile takeover and “a net worth ratio of 16.8% is bound to attract attention,” according to Bob Hoel, the former executive director of Filene Research Institute.
In an apparent reference to California-based Continental FCU's current data, the Filene research fellow warned that excessive capital brings “unintended consequences from banks, speculators and other credit unions.”
Hoel spoke in a breakout session at last week's Big Valley Educational Conference sponsored by the California/Nevada Credit Union Leagues. See more coverage from the event on pages 1, 34-35.
Without identifying Continental, the target of Wings Financial FCU's hostile bid three weeks ago, Hoel said this particular CU “is even more loaded with capital than the standard net worth ratio suggests and with loans of only 33% of total assets, net worth to loans is an incredible 50%.”
“That's like painting a takeover bulls eye on your chest,” Hoel quipped.
In his remarks highlighting a session entitled, “Strategic Errors Made by Smart CEOs: How to Avoid Them,” the ex-Filene senior manager demurred in criticizing any “individual credit union since I don't have all the inside information”, but yet “we should all realize that takeover and charter conversion pressures will be part of our future.”
“Perhaps credit unions should be much more open to enhancing member benefits through returning some capital to members or at least by refraining from building capital ratios too high,” he declared.
Hoel mentioned the takeover threat in discussing behavioral research he has been doing about “anchoring,” which he said is a commonly used mental tool that can cause decision-making problems.
“Anchoring refers to key guidance numbers that we establish or anchor in our minds when making decisions or negotiating with others,” he explained. “They may be numbers that reflect conventional wisdom that are stated by some expert or government agency or that are the opposing numbers mentioned in negotiations.”
Examples of CU anchor numbers include a CU having at least a 1% ROA, chargeoffs less than 1% and double digit net worth ratios.
“Industry net worth ratios are nearly 12% but economists tell us that most credit unions don't need double digit net worth ratios,” he said. “Federal law even says that credit unions with 7% are well capitalized.”
Credit unions often pursue high capital ratios at the expense of delivering member value and some “mistakenly believe it's impossible to have a capital ratio that is too high.”
Improper anchoring, he concluded, not based on careful analysis “can impede clear thinking.” Peer comparisons are insufficient and some CUs hold loan portfolios that require high capital levels, but “most do not.”
“We need to challenge our mental anchors and independently ask, 'How much capital does our credit union really need?' Excess capital reduces members benefits and it will invite takeover and conversion attempts in the future.” –[email protected]
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