by Rick Metsger, NCUA Board Member
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.” (Sound of clock ticking to build suspense.) And the final Jeopardy answer is: “What is the U.S. credit union system?”
For those of you who correctly stumbled onto the right answer, your gold star is in the mail!
In a streak now exceeding two decades, the number of credit unions in America continues to shrink while credit union membership and assets continue to expand. With the possible exception of credit union taxation, 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 that erosion inevitable.
Whatever your perspective, climate change in the credit union system is real. As a regulator and insurer, we are agnostic when it comes to weighing in on the decisions of credit unions to merge. Our focus is on ensuring member interests are protected through the regulatory process and that the merged entity meets safety and soundness requirements.
The value proposition of mergers is, as it properly should be, left to the members of those institutions to weigh and then decide. Most mergers fulfill the objective of enhancing services to members. They are an essential element of a dynamic marketplace, which often overwhelms the ability and expertise of some smaller institutions to keep pace with member demands in an increasingly competitive environment.
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 pursuing 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.
Throughout my tenure on the NCUA Board, transparency in governance has been a cornerstone principle my colleagues and I have committed to build upon. As one trade association constantly reminds us, “Every dollar is ultimately a credit union member dollar.” While that is indeed a valid and important point for any regulator to remember, it is equally valid and important to remember that same responsibility falls upon boards of directors 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- large credit unions with relatively strong balance sheets. In such instances, boards of directors 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 acquirers’ 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 may not be adequate to provide true transparency to members.
Many boards of 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 disclosure. Members also may not be given adequate opportunity to digest the information before the final merger vote.
Just as the agency has updated many other vintage regulations, such as fixed-asset limitations, field-of-membership restrictions and member business lending policies, it is time to dust off the old blueprint and address the new realities of today’s merger landscape.
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.