A board of directors has the option to merge, convert or liquidate the credit union. The option to liquidate was proposed by Bill Brooks as a good option that allows members to realize their ownership interest in the credit union, [Guest Opinion: "Merger or Convert? Consider a Third Option," April 11, page 12.]
Liquidation is probably the worst option that anyone can suggest for a credit union. Brooks presents it as a viable option because he entirely misunderstands mergers, conversions and the value of a credit union.
Let me begin by addressing some of the misconceptions that I think have led Brooks to the faulty conclusion that liquidation is a valid option. Brooks begins with the assumption that members of a merging credit union lose out because the value of their assets is undervalued in a merger. A merger between two credit unions doesn't change the members ownership interest. A member of a merging credit union has an undivided interest in the new consolidated credit union. NCUA at one time had each of the two merging credit unions determine the value of a share dollar by dividing the shares plus capital by the shares and then comparing the two. Even if one credit union has a higher share value than the other credit union, it is a meaningless comparison because no member can cash in on that value unless you liquidate.
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Brooks fails to mention that almost very merger results in a credit union which is financially stronger and better able to serve its members. If credit unions were valued at market value (which as he points out is usually higher than book value) the market value would almost always be higher as a result of the merger. Most importantly, the value of the credit union to the member, who cannot except for liquidation cash in on the value, is a function of how well the credit union serves the member. Mergers result in a new credit union with a better set of resources to serve the member.
A liquidation is the worst outcome that can happen to a credit union. The credit union is worth more as a going concern than by liquidating it. Similar to what happens when you sell foreclosed real estate, assets sold in liquidation have less value. Liquidation would cause huge member inconvenience, it would probably result in job losses and much of the credit union's investment in facilities and equipment would be written off. Liquidation would be a bad decision in almost every case.
Brooks is concerned that in merger members may not be informed about the liquidation value of the credit union. What Brooks misses is the far more likely problem that most boards never inform their members of bona fide merger offers. Most boards do not consider mergers unless forced by regulators.
Brooks fails to mention that when regulators force a merger it is usually because the capital to asset ratio is down near 3% of assets. The very value that Brooks is concerned about losing is more often lost because credit unions failed to consider mergers than because they merged.
The thought that liquidation is a valid option is a very bad suggestion with very bad consequences. I believe either a merger or a charter conversion provides members with far more benefits than liquidation.
Henry Wirz
President/CEO
SAFE CU
North Highlands, Calif.
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