I hate to say I told you so, but I did. When the news broke of Wings Financial FCU attempting to engineer a hostile takeover of Continental FCU, there was a lot of hysteria.

Specifically CUNA and NAFCU were pounding on NCUA's door to drop everything and stop the merger in its tracks. Rule that it was not a “cooperative” merger and thus should be killed, or that it did not have the regulations on the books to handle hostile takeovers, they said.

What struck me and many credit union leaders I am sure as the real opening was the $200 payout. After all, $200? What did that number mean? Could a credit union really promise an arbitrary payout? How did it come up with that number? Was that fair to the folks with lots of money in the credit union who would be subsidizing the payouts of the members with a $5 balance? How could one credit union offer a payout to members of another credit union of which it has no control of their finances? Why could one CU assume the 16% capital of another CU was their's for the taking?

It was a strange “what if” type offer with no clear formula for determining the $200 payout.

NCUA was no dummy here. It picked up on Wings' inconsistency.

What's good about this scenario is NCUA had something on the books to deal with the $200. It didn't have to cause a big stir on Capitol Hill. It didn't have to add a reg that would have drawn the ire of bankers and more importantly elevate the profile of the Wings/Continental fiasco to lawmakers. I think the trade associations were playing with fire in their aggressiveness. Fortunately NCUA didn't bite, otherwise this story would have seen even more headlines.

NCUA ruled authoritatively with a couple very good points:

oThe Federal Credit Union Act does not allow per capita dividend payments.

oPromising a dividend to the members of the to-be-acquired credit union without that credit union's approval is not allowed.

It's cut and dry but solid. I know Wings will strike back, but I think they are out of luck. That $200 promise was a gross error in a seemingly well orchestrated plan to take over Continental.

Here's an interesting tidbit. It amazes me that the CEOs of these two credit unions never talked about this potential merger. From what I understand there was no phone call from Wings CEO Paul Parish to Continental CEO Tom Glatt. I have been asked this question many times by CEOs looking to approach another CU for a merger. They often inquire as to whether that is OK, or should it be done by a board member. What's wrong with an exploratory call to a fellow CEO?

Inquiring CEO: “Sure things are going great here Bob, but we are looking to possibly do a few mergers to build our base.”

Responding CEO: “Interesting, no we're not looking at any merger deals now, we have enough on our plate.” (Hint, hint).

Is that so bad? I don't think so. There are also plenty of third-parties out there acting as merger brokers, so take advantage of them if you're in the merger market.

While the Wings/Continental saga is fascinating, I was more intrigued by NCUA's recent proposed rule on executive compensation in mergers. The rule requires merging federal credit unions to disclose any material compensation–a 15% increase or $10,000 or more–to any of the executives' salaries or retention plans.

This empowers members. I think it's a good move, especially given what the GAO said about credit unions needing to be more forthcoming with executive pay.

It might cause some credit union executives to pause. I know of some merger deals that have been mighty sweet for certain execs, especially those leading the acquired credit unions. No one is saying they shouldn't be compensated, but seeing it all out in the open might paint a better picture of why some of these deals get done. This rule could especially come into play with major corporate credit union mergers. Some corporate leaders have already told me that the way they read the rule it applies to corporates as well.

Speaking of corporates, not only has NCUA made it clear that money shouldn't be paid out in the Wings/Continental case, but it also said last month that corporates cannot pay back capital in merger deals. NCUA said that defeats the whole purpose of building up capital for a safe and sound network. Ironically, I think the more acquisitive corporates out there are breathing a sigh of relief. Now they have a ready-made answer to the members of the acquired corporate regarding their capital. I am probably in the minority, but I think it makes sense. Why should credit unions have their capital paid out if it will be transferring to the corporate that acquired their corporate? Yes, I know I can be accused of being hypocritical because in the case of credit union conversions or buyouts I would like to see members have the chance to get their capital back, but I think that is a very different scenario than credit union-owned organizations like corporates.

Finally, NCUA has also proposed allowing members to petition to view non-confidential credit union documents. If this covers membership lists, this solves a big problem some member groups had in fighting conversion attempts.

All in all NCUA is trying to make things more transparent. Who can argue with that? –[email protected]