In an economy where growth means survival for both cooperatives
and for-profit businesses, seven former credit unions in recent
years have launched member approved Initial Public Offerings (IPOs).
The IPO, which results in a substantial increase in regulatory capital
and fuels growth, is tightly regulated and supervised by the Securities
and Exchange Commission (SEC), the FDIC, state bank regulators and
/ or the Office of Thrift Supervision (OTS). In the last couple
of decades, business cooperatives, mutual insurance companies, and
hospitals are among the hundreds of institutions making similar
moves, called demutualization.
Also, the demutualization trend is influenced by changing member
needs. Like mutual savings associations and business cooperatives,
credit unions were formed by individuals seeking to improve their
standard of living and the community. Over the 8 decades since credit
unions started in the United States members have prospered and now
have access to multiple banking and investing sources, and they
enjoy the highest standard of living in the world. Today, the vast
majority of members view themselves as credit union ''customers''
rather than as credit union ''owners''.
A few argue that demutualization removes a member's name from credit
union net worth earned over decades of patronage. In fact, 60% of
credit union net worth was contributed by members in just the last
10 years primarily because of strategies executed by professional
managers. It is these members that have voted in favor of the transition
to a stock institution. These members recognize that their name
(''ownership'') only gets attached to the net worth two
ways; as part of a liquidation or as part of a mutual bank IPO subscription
In liquidation, members will divide the net worth on a pro rata
basis based on deposits. The result is about 15% of the members
would divide about 85% of the net worth. However, high net worth
credit unions are seldom liquidated, but most would agree getting
a liquidation vote for a 10% (or less) windfall would be easy. Likewise,
an IPO gets a positive reception from all members because it leads
to expanded product offerings and added convenience by expansion
of the branch network; and it allows for growth that results in
more cost effective services. Those who would benefit from a liquidation,
who contributed the most to the accumulation of capital, and who
typically care enough to vote on credit union matters also vote
in favor of an IPO. Even members who do not buy stock in the IPO
continue to own a share of a ''liquidation account'' and,
like credit union members, their intangible ownership continues
as long as they maintain their deposit relationship.
The new capital raised allows growth far beyond what would be possible
by retaining earnings and transfers the cost and risk of funding
future growth to stockholders; and the growth provides huge benefits
to the community served for which older members can be proud. As
part of the IPO process some form a charitable foundation designed
to provide additional community benefits.
In conclusion, since much of credit union net worth was accumulated
in recent years, the members most responsible for the accumulation,
many of which are older members, immediately benefit from an IPO
by gaining tangible ownership. Otherwise, new (perhaps unrelated)
members will ''inherit'' the net worth. These new members,
especially in the case of credit unions converting to a community
charter, may not hold the same values or share the same common bond
as those formerly patronizing the credit union and contributing
to its success.
Although demutualization has a few critics, it does help to reward
those that have been most responsible for the accumulation of capital
and the abundant fresh regulatory capital helps support the community
infrastructure. Although it is not an option for the majority of
credit unions, it is yet another strategic planning option for some
credit union executives to consider. For more information about
the mutual thrift option, the mutual holding company option, and
for information about capital raising options, contact Alan
Theriault at 800-649-2741.