Credit Union Managers Conference

1. Credit Union Managers Conference Hodson Bay Hotel, Athlone, County Westmeath, Ireland Tuesday & Wednesday, September 4th & 5th 2012 Peter Goth M.A., Ph.D, A.C.I.S. p.goth@bellaliant.net “Time of Great Change…… Challenges and Opportunities”

2. The Commission’s Report 1. Engaging With Credit Unions ‘Each credit union will have the opportunity to engage with the ReBo. For the most part, this engagement will involve a preliminary discussion on restructuring options open to the credit union, based on available information provided by the Central Bank.’

3. The Commission’s Report 2. Making it Happen The ReBo’s roll will be to: • Consider the information provided to it by the Central Bank with a view to planning for and encouraging restructuring where it considers that to be both necessary and appropriate. (Perhaps some variant of DEA for credit unions) • Engage with credit unions on the ground with a view to formulating restructuring proposals for submission to the Central Bank for funding approval.

4. The Commission’s Report 2. Making it Happen The ReBo’s roll will be to (Cont.): • Provide technical support and expertise for restructuring proposals; project management the restructuring process; and provide post-restructuring support. • Provide the primary interface with the Central Bank on restructuring proposals.

5. The Commission’s Report Who takes the initiative within the movement….? What is the plan? How do you proceed?

6. Irish Credit Union Structural Change There appears to be three separate areas of structural considerations: • National system and the role and function of the ILCU: • Acommon banking platform • Central treasury function • System strategic plan • Training, professional development, etc • Liaison with Legislative and Regulatory bodies • Sub-national movement structures: • Atomized • Strategic Groupings • Regional Credit Unions • Federated Network • Operational Partnerships

7. Irish Credit Union Structural Change There appears to be three separate areas od structural considerations (cont.): • Individual units: • Merge with another credit union • Form a federated network with other credit unions • Transfer of engagement to another credit union • Form informal or formal partnership for certain operations, products and services, delivery of services, etc • Go it alone

8. Mergers, Transfers of Engagements, Federated Networks and Partnerships • Mergers Combination of two credit unions into one, with the ‘acquirer’ assuming the assets and liabilities of the ‘target’ credit union…. Possibly into a new entity with a new name. • Transfers of engagement Absorption of one credit union into another…. ‘Any registered society may by special resolution transfer its engagements to any other registered society which may undertake to fulfil those engagements; and if that resolution approves the transfer of the whole or any part of the society’s property to that other society, the whole or, as the case may be, that part of the society’s property shall vest in that other society without any conveyance or assignment.’ The decision to merge or to undertake a transfer of engagement needs to support the long term strategy and growth objectives of the credit unions involved.

9. Mergers, Transfers of Engagements, Federated Networks and Partnerships • Potential Opportunities for Partnerships (informal or formal): (CUSO is specifically a US phenomena and are defined by legislation and regulation … they are corporate entities separate from the participating credit unions.) • Clerical (back office) • professional and management services (purchasing, personnel, marketing, etc) • financial counselling services, • electronic transaction service (banking platforms), • fixed asset services, • insurance brokerage or agency, • loan support services, • record retention, • security and disaster recovery services, • payroll processes, • call centre, • etc

10. Mergers, Transfers of Engagements, Federated Networks and Partnerships

11. Desjardins Credit Unions 2005 – 2010 (CDN$ millions)- A Federated Network of Credit Unions - **Desjardins Corporate Group December 31st 2010 Assets $175 billion *** March 31st 2012 # of CPs 379

12. Evaluating Mergers/Transfers of Engagement • Questions: • Is there an overall economic and/or non-economic gain to the Merger/Transfer of Engagement? • Do the terms of the merger make the resultant credit union and its member/owners better off? Both financial and/or non-financial present-value (PV) Long-term potential rather than immediate

13. Evaluating Mergers/Transfers of Engagement “Long term ongoing gain”

14. Four Reasons to Merge or Accept Transfer of Engagement • Increase Member Value • Not necessarily only increased economic value (private sector) …. Economic and non-economic value • Offer members a larger product suite, better rates, more branches, greater online capacity, etc • Economies of scale… the opportunity to spread fixed costs across a larger volume of output, thus increasing residual income. (seldom in evidence.. “personnel costs”) “As a small standalone credit union, I simply could not provide such a breadth of services to my members.”

15. Four Reasons to Merge or Accept Transfer of Engagement • Growth….. Long term. • Long term potential growth rather than simple instant increase in assets and members ***. • Growth potential presented by the smaller credit union’s underpenetrated field of membership and/or poor-management *** “We did not merge with ABC credit union for its assets… the headaches associated with all the ‘people’ issues and the IT conversion simply wouldn’t have been worth it”.

16. Four Reasons to Merge or Accept Transfer of Engagement • Diversification • The credit union with an industrial bond (Select Employee Group) is dependent upon the financial health of the corporate sponsor and if events detrimentally impact the sponsor then credit union performance will suffer. • Geographic diversification … a merger with a credit union in another geographic area can reduce exposure to any single area.

17. Four Reasons to Merge or Accept Transfer of Engagement • Necessity: • Some small credit unions are re-inventing themselves to adapt to the ever-changing market. • For many small credit unions the challenges (financial, operational, compliance, etc.) are becoming acute…. Sustained financial under-performance forces many to merge or transfer engagement***** ******There must be no obligation to ‘accept’ a ‘deficient’ credit union (for example say, the good of the movement) without some external ‘compensation’….. Loan book weakening a strong credit union

18. Analysis of Potential Mergers • Market Considerations • Market area - How well do the demographic and geographic characteristics of the target credit union’s market complement the acquirer’s market? • Branches and facilities – Are the target credit union’s branches in high-visibility, high-traffic corridors? • Business Strategies and operations – What services, delivery channels and branch hours does the target credit union off members and how is it performing? • Marketing - How extensive are the target credit union’s marketing efforts, and what marketing channels does it employ?

19. Analysis of Potential Mergers • Financial considerations- A thorough financial analysis is critical. • Fixed assets – Evaluate the target CU’s fixed assets, remaining depreciable life, existing leases and other contractual obligations, ongoing relevance and potential for liquidation. Compare the market values to book values. • Earnings assets – the loan book quality (Hidden Delinquency and potential risk) • Income statement efficiencies – Revenues and expenses – potential improvements for productivity and efficiency gains.

20. Analysis of Potential Mergers • Other considerations • Cultural and political aspects - are often at the heart of the most difficult merger discussions. Key issues for the target credit union include: • Board representation in new organization • Management roles in the new organization • Accommodation of staff • Governance – How will the target credit union board and committee structure be incorporated into that of the continuing credit union

21. Analysis of Potential Mergers • Other considerations (cont.) • Management – Does the target credit union have key management that would benefit the continuing credit union? • Staff – • Rehiring • Cultural adjustments • Redundancies • Pensions Some very tough decisions