Wings vs. Continental: The End of Credit Unions or a Rallying Cry?
It can be hard to recognize a watershed event, something that has long-lasting effects and consequences. Hindsight and time usually help, but in the case of Wings FCU vs. Continental FCU there is no question that this is a defining moment for credit unions.
I use the term "vs." because while this is not yet a legal battle it is clearly a fight. It's been the talk of the town since it happened, but if you've been out of pocket for the last week here is the quick and dirty version.
The $1.6 billion Wings has attempted three times in the last year to merge with the $178 million Continental FCU. Each time, the Continental board has rebuffed the offer. While three attempts may be a lot, one credit union courting another isn't unusual at all these days. What is unusual is that Wings is not taking no for an answer. The Wings board has decided that this merger would be so beneficial to the membership of Continental and of Wings (its words, not mine) that it is attempting a hostile takeover. Wings has sent employees to the branches of Continental to court members to sign a petition that would require the Continental board to bring the merger proposal to the membership to decide. Essentially, Wings is bypassing the Continental board and calling on Continental's membership to overrule its own board.
No takeover is hostile without money. Wings is offering all 25,000 of Continental's members a one-time $200 payout. We've seen a payout before in the case of Nationwide Bank taking over Nationwide FCU last year. But what's different here is Wings is offering $200 across the board. Extremely odd and where I think a legal battle could ensue. In the case of Nationwide, the payout was dependent on a formula that valuated a member's payout based on their funds on deposit. Not great, because it didn't consider loans, but still it paid out based on a usage criteria of the credit union. In this case, Wings is saying we'll give any Continental member, whether they have $5 on deposit or $200,000, a $200 payout. That's a raw deal for the member with a lot of money on deposit and a critical error by Wings. I know they vetted this takeover with their legal team, but someone was asleep at the switch there.
If successful, Wings would acquire a whopping 25,000 new members for a mere $5 million! A bargain if there ever was one. A steal is more like it. What's even more wickedly brilliant is Wings would pay that $5 million with Continental's own capital! Continental is extremely well-capitalized at 16%. It could shed $5 million and still be well-capitalized.
Those are the terms of the deal and the gist of the story, but this is about much more than a capital payout, this is about the future of credit unions.
The danger is obvious. If credit unions start taking over other credit unions they are no different than banks or any segment of Corporate America and could rapidly consume each other. But as we all know credit unions are different. They are democratically run cooperatives where the sole purpose is to benefit their member-owners. They are run by unpaid volunteers. There are no shareholders. They do not exist to make profits, but to return earnings to members. You no longer have a cooperative industry if credit unions are preying on each other.
So where do we go from here? The trade associations are livid at NCUA for not doing anything. My question to them is what can NCUA do? I would like to see NCUA step in and stop this, but on what grounds? The argument I have heard is that hostile takeovers threaten the cooperative nature of credit unions and thus present a safety and soundness issue, which is the purview of NCUA. Hostile takeovers certainly threaten the existence of credit unions, there is no question about that, but is it a safety and soundness issue? We see 300 mergers a year happen that result in no losses to the insurance fund. If Wings took over Continental, there would also be no impact to the insurance fund. I think the only threat to the insurance fund is that it would ultimately cease to exist. If Wings is somehow successful it will trigger a string of such takeovers and banks would clearly join the party. The credit union industry would wither away and die, but can those forward market predictions be enough to justify NCUA action? Many would say yes, and maybe they are right, but it would ultimately wind up in the courts. I don't think the cooperative argument is enough.
What NCUA is facing is a new animal. Hostile takeovers occur in the corporate world, but even they are bound by SEC rules and regulations. NCUA is in new territory and it clearly has the authority to put this merger on hold because it's simply not outlined in its rules or its merger manual. NCUA can not come out and say this is not "cooperative-like" behavior, and therefore we won't allow it. What it can say is that it must ensure that all mergers, hostile or not, are presented accurately to the members, and since this type of deal is not outlined in its rules, it must take time to present a fair framework. It can put the merger on hold and get to work.
If you think I am being dramatic about this deal triggering a flood of similar deals? Don't be. Credit union CEOs, die-hard credit union folks who I know and respect have told me they would love to do what Wings is doing. Not because they are predators, but because they see weak credit unions in their area who are losing money and marketshare because they are not offering a full slate of competitive products and services. They would rather see those members go to another credit union than to a bank. You could argue that hostile takeovers would just accelerate what's already happening, the 2,000 or so very strong, growing credit unions are slowly but surely eating up the rest of the pack.
The other underlying issue in this fight is fiduciary responsibility. Does the Continental board have a fiduciary responsibility to bring a merger offer to its membership because there is a financial gain for the members? That's a dicey question that is ultimately going to have to be answered, but I believe that the board does have a fiduciary responsibility to consider any merger, but not necessarily present it to the membership. The board was elected by the members and was empowered by members to make these types of decisions. If a credit union's board wants to stay independent it should be able to do so. If the members are that outraged that their credit union isn't merging, let the democratic nature of credit unions take over. Members can elect new board members who are pro-merger. That's the beauty of the credit union system and why hostile takeovers don't fit.
What's most upsetting about this particular case is Continental, though not a high-flyer by any means (in fact its numbers aren't great right now), has a brand new CEO in Tom Glatt. Glatt is an industry veteran who was brought in to help turn that credit union around, and he's not even getting a chance to do that.
I will end with what I've been saying all along on conversions and now hostile takeovers, fight fire with fire. It would be great if NCUA stepped in, but don't wait, become communicators. Do a good job letting your members know why a merger would not be beneficial. Inform members of Wings' attempt, its hostile nature, and what they might get out of it. I would definitely play the bank card. Wings has looked at converting to a bank and many suspect this Continental deal is one step closer. Don't be shy about that. Hold meetings, update the Web site every single day with the latest, dedicate the newsletter to it, call members, whatever it takes. Good communication, good PR, as I said back in 2005 when conversions exploded, will always win. I have been proven right a number of times already, and Glatt and crew should be able to do so again.
Finally, there is no fence for this issue, you're either for it or against it. Will the real credit union supporters please stand up? We all want to hear from you. --Comments? E-mail firstname.lastname@example.org