The Risk In Thinking That Safe Equals Sound

While the NCUA and the industry examines the merger process, maybe it’s time to consider providing a way for credit unions considering going away to save their value and re-deploy it for the common good.

 
 

Credit unions are different by design. This quality is one of our most valuable strategic assets. We need to use it properly.

In publicly held companies, shareholders act when they feel the company they own isn’t delivering the returns they expect. This has become more common over the past decade with the rising number of activist shareholders. While there is some good for stockholders that can come from this trend, the unintended consequences are very real. Those consequences are still not completely understood, but they include job loss, destruction of goodwill, and damage to communities.

In a cooperative there really aren’t such people as activist shareholders. Sure, a member or group of members could run for the board and try to drive change that way, but the nomination process is often so closed and controlled that in most cases this approach is a long shot at best. And if elected to the board, the newcomers may find themselves in the challenging position of being an unwelcome, minority voice.

Instead of becoming activist shareholders, dissatisfied members too often become passive or drop out altogether, something far more dangerous for the long-term sustainability of their credit union and the movement.

While we are revisiting the merger process, we should look for a way to give credit union member-owners an alternative to just walking away. They need the ability to wave the white flag and surrender with the goal of saving value while value still exists and re-employing it for the common good.

According to the NCUA’s June 17, 2017, report on first quarter trends: “Overall, 51% of federally insured credit unions had fewer members at the end of the first quarter of 2017 than a year earlier. Median membership growth was negative in 22 states.”

There has been a great deal of press and dialogue about mergers and back room deals done in secret, with insiders profiting handsomely. When some industry people are becoming known as the Sotheby’s of credit union mergers — they attract the highest bid for the sellers (management and board) — it’s clear we have some type of problem.

The NCUA’s proposed merger disclosure rule would at least put some sunshine on these deals and give members the opportunity for a more balanced and complete discussion. It’s certainly debatable whether the outcome of member votes would change with more information or more time to decide, but even if the new process amounts to little more than a speed bump, and these kinds of mergers still happen, at least the principle of transparency will be reinforced.

One of my favorite lines in talking about NCUA regulation is that safe does not always equal sound. A credit union might be well capitalized and pose low risk to the NCUSIF, but if it’s not performing well and meeting the evolving needs of its members, it may be on its way to a slow, painful death.

At the same time though, another conversation is starting to pop up in some pockets of our movement. Instead of talking about mergers where credit unions are sold to the highest bidder, people are starting to talk about mergers that are needed but not happening.

One of my favorite lines in talking about NCUA regulation is that safe does not always equal sound. A credit union might be well capitalized and pose low risk to the NCUSIF, but if it’s not performing well and meeting the evolving needs of its members, it may be on its way to a slow, painful death.

We need to look ourselves in the mirror as a movement. Why did 51% of federally insured credit unions lose members year over year?  What happens if this trend continues for the next three years, five years, even seven years?

It’s easy to imagine scenarios where credit unions members would actually be better off if their credit union liquidated today, shared the accumulated retained earnings with the members to whom they belong, and then let those members move to a new, more dynamic credit union.

Those members might well be better off if their credit union went away, and they might be better off still if instead of just shutting down, their credit union was merged into a similar one that had the energy, drive, and dynamic management to be both safe and sound.

This is not a small vs. large credit union issue. There are dozens and dozens of really small credit unions I am aware of that provide tremendous value to their members. The issue I see is mindset from board and management.

I would bet many of the board and management of the 51% are tired of the fight, that they wish we could go back in time to when things were simpler. If they don’t want to serve their mission in today’s world, as it is, we need to help them find a way to serve their members by helping them find a new, more dynamic and responsive credit union.   

Make Your Voice Heard

  • Click here for the new merger rule as published in the Federal Register on June 8, 2017. (11 pages)
  • Click here for the full text of the proposed changes to 12 CFR Parts 701, 708a, and 708b. (52 pages)
  • Click here to submit comments directly to the NCUA, due by Aug. 8, 2017.
  • Click here to submit comments through NAFCU, due by July 19, 2017.
  • Click here to submit comments through CUNA, due by Aug. 7, 2017.

I can assure you, those credit unions exist and they are open to smart growth that brings new members and new tools for serving them. Our movement is full of volunteer boards and professional managers who are excited by what the future holds and the opportunities their credit unions have to be pillars of whatever communities they serve.    

The challenge we face is there is really no way to bring these pieces together in a safe, predictable process that is good for all stakeholders. While we are revisiting the merger process, we should look for a way to give credit union member-owners an alternative to just walking away. They need the ability to wave the white flag and surrender with the goal of saving value while value still exists and re-employing it for the common good.   

 
 

July 3, 2017


Comments

 
 
 

No comments have been posted yet. Be the first one.