Could more member communication complicate the merger process?
Should a member who is just angry about his car being repossessed be able to derail a merger that actually may be in members’ best interests?
Such a scenario could be the result of NCUA’s proposed rule on voluntary mergers, which includes a provision for facilitating intra-member communication about a proposed merger prior to the vote, some experts warn.
Credit Union Journal queried a number of executives and analysts within the credit union movement on what impact the rule might have. Here are some of their responses.
'One of the worst' proposals in memory?
“This is one of the worst NCUA rule proposals I have seen in quite a while,” said Marvin Umholtz, president and CEO of Umholtz Strategic Planning & Consulting Services in Olympia, Wash.
“The NCUA legal staff’s and the NCUA regional directors’ past unconscionable shenanigans perpetrated on credit union officials seeking conversions to mutual bank charters will soon be foisted upon credit unions involved in voluntary mergers," he added.
Umholtz predicted the rule would have a “chilling” effect on mergers, “if not outright frozen solid.” He said NCUA regional directors will “become like banana republic dictators controlling their fiefdoms by rewarding their loyal cronies with the spoils of involuntary mergers,” since, as he sees it, there will be no competition from voluntary mergers.
“Very few within the credit union industry have figured out the ramifications of this proposed rule,” Umholtz said. “And those that have are focused on the ‘compensation straw man’ rather than the more substantive poison pill that is the member-to-member communication aspect. What other industry authorizes customers to veto organizational changes?”
'Perfectly suitable' -- with one exception
Pete Duffy, managing director with New York-based investment banking firm Sandler O’Neill, told Credit Union Journal he believes all aspects of NCUA’s proposed rule are “perfectly suitable for a highly transparent merger, except one.”
“The one part of the proposed rule that we would like to think can be removed is the member-to-member communication,” he said, noting there already is a venue for any member wishing to provide feedback or opinion about a proposed merger – the special meeting. He said members can voice an objection at the special meeting to all members who are present, plus the management and board.
“To mandate the credit union facilitate private e-mail exchanges -- and essentially force the opinion of one member on all other members -- is, in our opinion, unnecessary and potentially damaging to the reputation of the credit union,” Duffy declared. “Our recommendation is to rethink that provision, having a dialog and hopefully removing it. Nothing stops a member from going to the meeting, or standing outside a branch and discussing with other members. The latter gives members the opportunity to say, ‘Tell me more’ if they want to hear more, or they don’t have to listen.”
By removing that component of the rule, members still have "everything they need to make an informed decision, if they choose to do so,” Duffy said. “The impact could be dramatic on a credit union’s willingness to look for merger partners or accept a merger proposal, in an environment where the question really should be, why aren’t there more mergers?”
NCUA trying to allow for opposition
Andy Price, senior director of advocacy and counsel for the Credit Union National Association, said, “From our preliminary review of the rule, the credit union is being put in the position of getting comments out to other members. There might be a one off where members object, but in the vast majority this will just be a procedural to get the merger to take place. NCUA is trying to allow for cases when there is opposition.”
NAFCU examining the proposal
Carrie Hunt, EVP of government affairs and general counsel at the National Association of Federally-Insured Credit Unions (pictured above), noted over the years there have been some concerns about someone in the community potentially disagreeing with a course of action at his or her credit union.
“It could be something as simple as they love their credit union and want it to survive, but from a financial standpoint it just does not make sense,” Hunt said. “As for the mechanism of member-to-member communications, what if the member is writing something that is inaccurate? What is the cost going to be for the two credit unions? What are the limitations?”
Alexander Monterrubio, NAFCU’s director of regulatory affairs, said the member-to-member provision is “interesting and a little bit unexpected, so we are looking into it.”
Changes won't impact most mergers' end results
Dennis Dollar, a former NCUA chairman and now the principal partner of Dollar Associates, a consultancy based in Birmingham, Ala., expressed several concerns.
“There is no doubt that allowing disgruntled members still mad because a car got repossessed two years ago to have a regulator-mandated and credit union-funded avenue to vent their frustrations by opposing a needed merger will make some voluntary mergers more controversial at member vote time than they would be otherwise,” Dollar assessed.
Dollar suggested this part of the proposed rule might impact the percentage of the vote and even stop a few necessary mergers. “But I do not think the fundamental marketplace factors that are driving most voluntary mergers will be fundamentally changed in any way by the controversy that these changes may bring into some merger votes. Most mergers will go forward because the members see the value to them, even if staff and management get a better deal as well.”
According to Dollar, history has shown the more members who vote in a merger election, the higher the percentage in favor of the merger. He said CU members see the value in most mergers and are generally supportive, and that is why there has been an average of one merger per business day for the past 20 years and “the credit union industry as a whole is financially stronger because of these strategic mergers.”
It's a good start, but...
“The basic concept of letting dissident groups get their ideas across is good,” said Eric Richard, principal at the CU Counsel law firm in Washington and a former general counsel and EVP at CUNA. “It is the same as dissident groups at publicly traded companies getting their candidates on the ballot.”
However, Richard continued, “I do not know if all the details have been worked out, which is why NCUA is looking for comments. NCUA seems to be proposing a system that would involve multiple e-mailings of comments as they come in, rather than all comments at once. I am not sure that is the right system. NCUA might have to think about that. Management is not allowed to alter the comments as they come in, but I do not see anything stopping management from sending out another e-mail arguing with the comments.”
Corporate and Commercial Photography
by Mark Skalny 1-888-658-3686
Mark Skalny/Mark Skalny/www.markskalny.com
Hijacked by a vocal minority?
Vincent Hui specializes in strategic planning and leads the Merger & Acquisition and Risk Management practices for Cornerstone Advisors. Hui raised the potential down side of a handful of disgruntled members stopping a merger.
“Depending on voting rules in the credit union’s charter, every member gets to vote, but not every member votes. There is a risk of a vocal minority taking over the process,” he said. “What is good for some members is not good for the entire membership. If the vocal minority manages to vote down a proposed merger that is good for them, but it is not good for the rest of the members, who would have benefitted from the merger going through.
“Swirl and distraction is not good for a credit union or its staff,” Hui added.
Mergers could slow
Michelle Thorne, president and CEO of $195 million American United Federal Credit Union, West Jordan, Utah, said it is “difficult to say” how significant the effect will be if the rule is approved as is.
“Mergers could slow down slightly, but there are a lot of credit unions out there that are not viable in the long term so they are going to have to merge,” Thorne said. “Certainly it will give credit unions and boards pause when considering a merger. As long as there is a level playing field that is okay with me.”
Thorne said in her opinion allowing a credit union’s membership to look at different options that were presented to the board is “good because it is their credit union and they should have a say.” However, she noted not all members understand all the nuances of the financial goings on in a credit union.
“Some members could put up a lot of opposition to a merger that really needs to happen,” she said. “I know in some of our mergers we had members who were very unhappy, but that did not mean the merger was not a good thing. We just tried to let them know the added benefits they would be getting. People love their credit union and want that personal experience, so we let them know we are small enough to give them that.
“There also are members that just do not care,” Thorne added.
Banker in CU member's clothing?
“I am concerned about the potential for obstruction by a group that may have a reason to interfere, such as a disgruntled former employee, and I wonder how regulators are going to manage that, said Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors. “If someone wants to take retaliatory action against a merger, will they take advantage?”
Ito said she hesitated bringing up a possibility that had occurred to her out of fear of giving someone an idea before asking, “What is to stop a banker who is threatened by a credit union becoming a stronger competitor in the event of a merger from joining the credit union just to access the membership and be part of the opposition group?”
The company's Silicon Valley Bank unit reduced its loan-loss cushion by $52 million. Private-equity and VC clients have warmed to the practice of doing deals virtually, which increases lending opportunities, SVB executives said.
What's behind the unlikely First Citizens-CIT deal; ex-Trump adviser Gary Cohn predicts bleak future for community banks; midsize banks gird for loan defaults, more margin pressure; and more from this week's most-read stories.