The Demutualization Secret of Credit Unions

You’ve probably encountered the general advice that the luckiest people are the most prepared. One of the basic, ordinary decisions that you make in your life is where to bank. Unless you are affluent, travel a lot, or bounce a lot of checks, most financial institutions offer products and services that are largely indistinguishable from each other. This has been especially true during the 2008-2018 timeframe in which interest rates have been negligible.

I am firm believer that, if you can make modest tweaks to your lifestyle with almost no additional hassle, but it sets you up for the possibility of a significant reward, you should pay attention to those circumstances in life.

There is a strong advantage that comes with doing your bank and credit unions, and that is the possibility of what is called “demutualization.” A demutualization occurs when a member-owned financial institution, such as certain insurance companies or credit unions, switch from becoming a non-profit firm to the creation of a stockholder base that owns equity in the company.

The calculation formula for a demutualization usually takes into account the average daily balance of your account as well as the length of time that you have maintained your account. In other words, if you own maintain a balance of $20,000 for over 20 years at the local credit union, and it decides to demutualize and become a for-profit corporation, you might find yourself awarded a few thousand shares that trade at $10 or whatever. You have just found yourself becoming a stockholder with tens of thousands of dollars in value without actually having to do anything beyond using a member-owned financial institution that seeks to change its financial status.

The reason why there is a time-based component to the formula is to deter, say, Warren Buffett from putting $50 million in a bank with $100 million in deposits on the day that the demutualization is announced so that he could receive a third of the shares. The time-weighted formula gives you credit for being a long-term member that supports the institution.

Most credit unions, over a 50-100 year period, will at some point go through a demutualization. In a given year, the probability of a demutualization is quite low. However, as management teams and local culture changes, over the course of your entire lifetime, there is a fair chance that you might bank somewhere that undergoes a demutualization. If you maintain a five-figure daily bank balance over the course of years, the dollar value of the shares that you are awarded may be substantial.

It is a fascinating lottery ticket. It is not something that even 1 out of every 1,000,000 people in a given population think about, but intelligent behavior does not require majority awareness or approval. Going through your life at the local union compared to the local for-profit entity likely doesn’t lead to a different experience and yet it comes with the potential for reward. And heck, given the non-profit nature of member-owned credit unions, you often get better costs and services for situating your finances to take advantage of a riskless, albeit low-probability, windfall.