Edited excerpts from this Second Quarter 2017 column in The NCUA Report provide a perspective on current merger discussions.
Scientific brainteaser of the month: “This man-made creation is defying the normal rules of science by both expanding and contracting at the same time.” The final Jeopardy answer is: The U.S. credit union system.
In a streak now extending for decades, the number of credit unions in American continues to shrink while credit union membership and assets continue to expand. . . no other issue is as perennial as the discussion of consolidation within the credit union system. Many bemoan the erosion of the small credit union fraternity, while others cite the ever- increasing tide of financial services competition for making the erosion inevitable.
Protecting Member Interests
Whatever your perspective, climate change in the credit unions system is real. . . our focus is on ensuring member interests are protected, through the regulatory process and that the merged entlty meets safety and sourndess requirements.
The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. . .
Really Acquisitions
But, while the term “merger” has a distinctively collaborative ring to it, make no mistake many mergers are really acquisitions. For some credit unions, their growth strategy is defined by pursing acquisitions. On the surface there is nothing inherently wrong with such an approach by either the acquirer or the acquired as long as sunlight permeates the pathway from boardroom to membership.
Transparency: a Cornerstone Principle
Throughout my tenure, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon. As we are constantly reminded, “every dollar is ultimately a credit union member dollar.” . . .it is equally valid and important to remember that the same responsibility falls upon boards to be open and forthright with their member-owners when it comes to the merger process.
While many mergers germinate from the ability of the acquired credit union, generally a smaller institution, to adequately serve its members, some voluntary mergers have involved medium to very larger credit unions with relatively strong balance sheets. In such instances, boards of director should be comprehensive in their disclosures to their members.
If an acquiring institution is tapping the net worth of an acquired credit union to pay for the acquirer’s’ cost of the merger, that reduction in net worth should be transparently, completely and fully disclosed to the members of the acquired institution before they vote on the proposed merger.
Certain disclosures of executive compensation and boards of directors’ benefits are already required under some circumstances, but the threshold for disclosure many not be adequate to provide true transparency to members.
Many board directors initiate the marriage dance long before the merger nuptials are finalized. Pay and benefit enhancements for the acquired credit union’s leadership are sometimes finalized prior to triggering the current window of disclosures. Members also may not be given adequate opportunity to digest the information before the final merger vote. . .
Merger Windows and Frosted Glass
In the final analysis, it will, and should be, the members who will rightly make the ultimate decision, not the NCUA. But, as members peer through the merger window, it is imperative their view not be obscured by frosted glass.
By Rick Metsger, NCUA Board Member