By Henry Wirz
It is regretful that some credit unions worry so much about hostile takeover (as discussed in "Hostile Mergers," p. 10 in the November 2010 Credit Union Management). Too many credit unions are held hostage by management and the board solely on the basis of protecting their own privileges rather than focusing on the membership. The result is members' needs are not met, evidenced by the fact that over 40 percent of all credit unions had negative member growth over the last three years. That percentage rises to more than 60 percent for credit unions under $100 million in assets.
The Wings/Continental merger was the headline story a few years ago. There were many who alleged it was a hostile takeover. But too few questioned the member service history of Continental Federal Credit Union and no one credited the benefits that Wings Financial Credit Union offered in the merger. Continental FCU's members would have been far better off in a merger. The credit union suffered years of underperformance and has recently been merged. I would bet that a significant amount of Continental FCU's capital was wasted after the "hostile takeover" was defeated. The real defeat was for the members.
Mergers are in fact a good solution in many cases. I can't imagine a merger that would not reduce operating expenses, increase the number of branches and other delivery channels, and provide a larger asset and capital base that increases safety and soundness. Of course credit unions can partner in other ways. But the same reasons that defeat mergers—the desire to hold on to power, privileges and jobs—also defeats most alliances and other forms of collaboration.
The best defense against a hostile takeover is to take care of your members and help them improve their financial well-being. A credit union that grows membership and increases assets and net income will be the credit union that NCUA and other credit unions seek as a merger partner. Satisfied members rarely vote yes when asked to merge into another credit union. That is the ultimate defense against a hostile takeover.
The article also raises other merger issues that I think need to be discussed.
I believe it is often necessary to "buy out" management in order to facilitate a merger. The fact is that no credit union needs two CEOs or two COOs, etc. I think it would be a bad idea to limit "buyouts." The need for "buyouts" is unfortunate but in most cases the members ultimately get a lot of benefit by allowing the merger to happen. The future savings in lower operating expenses far offset the cost of "buyouts."
I disagree with NCUA that the merging credit union should pay out a portion of capital to the members. NCUA certainly does not assess a fee on members in failed credit unions when the merging credit union absorbs negative capital. We don't pay out capital to long-term members when they leave or when they die. Why should we pay out capital when a merger occurs? If the merger is worth doing, the members will benefit with better service, better safety and soundness and a better return to members.
Credit unions are a great deal for their members. But member growth statistics show that about 40 percent of all credit unions are not meeting member needs. I think many credit unions could do a better job of meeting their member needs by consolidating with other local credit unions. I know that a good merger increases the return to members, reduces costs and improves service. I believe the best mergers create local community-based credit unions that share a common field of membership. The essence of modern credit unions is that they are the primary locally owned financial institution. Unfortunately many of the recent NCUA-assisted mergers have merged local credit unions with out-of-state credit unions. I am concerned that mergers with out-of-state credit unions will hurt credit union growth and success.
Credit unions are non-profit cooperatives. The intent behind anti-takeover measures is to limit cooperation and to prevent mergers for the wrong reasons. I am strongly against that concept. It should be an anathema to all credit union leaders.
Henry Wirz is CEO of $1.7 billion SAFE Credit Union, North Highlands, Calif.
Read "An 'Ace' in the Hole for Small CUs," also by Wirz.
