Credit Unions For Sale?

When member-owned financial cooperatives are sold in a merger that is really a fire sale, the benefit goes to the buyers, the selling board, and senior managers at the members’ expense.

 
Chip Filson

By Chip Filson

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Forty years ago, there were more than 20,000 active credit union charters in the United States. Now, fewer than 6,000.

Much of that attrition has been from unavoidable forces of market economics, such as liquidations and involuntary mergers that are the result of inability to expand products and services, withering SEGs, or the inability for to go after new senior managers.

But a disturbing trend has emerged. We now are seeing some so-called voluntary mergers that are nothing more than sales orchestrated by boards and senior managers at the expense of members whose interest they’re obliged to represent.

That’s not true of all consolidations, of course, but a look at the pre-merger books and aftermath for some of these takeover targets reveals financially sound institutions sold to larger credit unions for pennies on the dollar, in merger processes opaque at best, followed by senior managers bailing out with golden parachutes.

Left behind, local staff that spent years building those personal relationships now working under a new regime, distant in philosophy, priorities, and practice from the people who had co-existed for years on either side of the teller line and desk. Many move on, and the cooperative financial charter and all it represents sustains another blow.

It doesn’t have to be that way. First, take a look at what’s happening. Then, learn how credit unions can merger openly, honestly, and to the benefit of the member-owners.

Credit union mergers don't have to be corruptions of the ideals of the member-owned financial cooperative movement. Learn about alternative approaches.

How Does The Sales Process Work?

A credit union seeking mergers will send offers to smaller credit unions that include:

  • Significant bonuses and/or severance packages for senior managers that are multiples of their current annual salaries (the golden parachute so associated with Wall Street excesses).
  • Ongoing benefits for board members who now become advisors.
  • Offers to employees to continue their employment or receive significant severance offers.
  • A one-time nominal “special dividend” to members.
  • A recitation of expanded services, branches, and products available for members.
  • A very brief period for public disclosure to members of the intended merger, via the “Notice of the Special Membership Meeting.”
  • The special meeting in short order after the NCUA’s approval, with voting in person or via ballot to approve the merger closing at the end of the meeting.

A Managed Sale

Everything looks proper on paper, except the whole process is designed to keep members in the dark, often long after the boards initially approved the plan and applied to the NCUA for regulatory approval.

The meeting notice contains the minimum information necessary and omits the oral promises and other personal benefits guaranteed. The board’s pretense of having “considered alternatives” is asserted in communications without any details.

Other potential merger options are not explored. Even if there are objections raised at the special meeting — as has occurred — the merging credit union closes the ballot at the end of the meeting so there’s no real opportunity for dialogue or objections.

The vote period is kept short and often the “majority of those voting” ends up being a small fraction of the total membership. The process is merely a veneer of compliance with NCUA Rule 708.b.

The intent — and all too often, the effect — is to remove any role for owners in the most important decision a member is asked to make.

All the direct merger costs such as the so-called bonuses, severance payments, and/or special dividends are paid from the merged credit union’s resources.

At the merger date the surviving credit union books an immediate gain from the newly added reserves, undivided earnings, and mark-to-market adjustments — that is, the collective wealth of the merged credit union — through its income statement. All of which, of course, flows directly to its capital account.

Ultimately, these are cases of the surviving credit union buying growth. The top executives get handsome payouts while the members get a special dividend that is a cent or two on the dollar for the wealth that has been created and transferred to the merged credit union.

Quite a bargain.

These voluntary mergers often involve credit unions that have stable if not excellent financial results accumulated over generations of member loyalty and participation.

So, what’s wrong with this increasingly commercial way of seeking mergers? It’s simple: The members’ financial interest, accumulated over decades of loyalty, and the ability to exercise an informed vote are compromised by the very leadership that puts its self-interest ahead of the members.

These voluntary mergers often involve credit unions that have stable if not excellent financial results accumulated over generations of member loyalty and participation.

These reserves and the intangible goodwill are in fact sold to the merging credit union and the current leadership is rewarded with one-time bonuses and/or severance packages on top of their existing employment terms. The terms of continuing-employment contracts are typically designed to incent management to leave instead of staying to oversee the outcome.

These merged credit unions have built extensive, valuable franchises sometimes with locational advantages that another credit union could not acquire. This franchise value and positioning are rarely reflected in the balance sheet.

Moreover, it’s frequently the case that if members believed the surviving credit union was a better deal, they could have joined. However, the acquiring credit union is unable to compete with the credit union’s local, historical advantages, so it resorts to a private purchase to acquire what it could not win in the market.

It’s frequently the case that if members believed the surviving credit union was a better deal, they could have joined. ...  so [the acquiring credit union] resorts to a private purchase to acquire what it could not win in the market.

These managed deals rarely present information about the strategic or business model of the surviving credit union other than listings of “market-leading products and services” or improved access. Often the suggestion is that bigger is better and scale will ensure greater benefits. That’s not so true anymore.

Today, many credit unions contrast their approach to the mega-financial institutions that are both stateless and reliant on uniform processes, not individual service. This is because most members’ needs are local, whether it be auto, credit card, or housing finance.

Credit unions can adapt quickly to local environments and economic circumstances — that's one of their advantages. However, there is no comparison of the merged and surviving credit unions' business models. The decades of local service and presence are not even referred in management’s zeal to get members’ approval.

Every credit union operating today has come through the worst financial crisis since the Great Depression. They have cultivated organizational partnerships, supported local schools and communities, and been an integral part of their area’s economy.

Bigger Is Better? Not Necessarily.

Members elect boards to oversee this local focus. The managers they oversee are to execute these principles for the greater good. Selling out to a larger credit union that doesn’t have this local focus and is simply buying unearned growth seems at best irrelevant, and at worst contradictory, to the local credit union charter that is being surrendered.

Most of the problems the country faces are decentralized in nature. Creating jobs takes place in local communities, not in Washington. Credit unions are a means to empower and equip people as leaders in their communities.

However, these business contrasts are never presented. Everything is promise and hype; the new reality is known only after the merger is complete. Members are not given information about the earlier experiences of employees and members from the surviving credit union’s past mergers.

Once Done, It’s Done

A merger is a one-way event; it cannot be undone directly. That’s why members are required to vote to give up their charter. In conversations with employees of credit unions caught up in these situations, the circumstances after the merger are often different from the promises beforehand.

In one situation, almost half of the employees left after six months, the promised technical capabilities were less than before the merger, and, sadly, some members who qualified for loans at the merged credit union are not eligible under the new loan policies.

Not only have the service capabilities deteriorated, but the employees so carefully cultivated in the merger courtship experienced a different business culture. Another example is a credit union where member service was so much the focus it was rated the employer of choice in its market area for three years in a row. At that credit union, there was low employee turnover. Now, after a merger, most of its experienced staff have left.

The Cooperative Model At Risk

The truth is that many of these so called voluntary mergers are managed sales. One response in defense is that “everybody does it,” so it must be OK.

But not everybody does it. Many boards and managers approached formally with written offers and informally with these self-serving transactions have turned them down.

A defining principle of leaders is taking responsibility for regulating their own behavior. The fact that some boards and senior managers would compromise their fiduciary responsibilities to their members and sell their members’ legacy, created over generations, to another credit union and then leave the scene does not make it right.

Examples of temptation that turn dedicated leaders into self-interested beneficiaries of their institution’s sale undermines the foundation of the cooperative model.

Cooperative ownership produces common wealth. Boards and management have the responsibility as agents of the members to always act in their best interests.

Many boards and managers approached formally and informally with written offers and self-serving transactions have turned them down.

If the same boards had decided to sell the credit union under the same terms to a non-credit union entity, there would be an uproar of opposition to this dispersal of members’ financial interests. But selling the members’ cumulative legacy to a much larger credit union, where their pro rata interest and influence is minuscule, is somehow OK?

Defending these manipulated sales compromises the very core of the cooperative alternative to the for-profit banking sector. Instead of focusing on member value and impact, these sales reward an institutional greed for unearned growth.

At a time when many Americans are worried about the ability of government and large financial institutions to focus on their economic well-being, this distortion of the merger process can only reinforce members’ anxiety about their lack of power in the market.

A Perversion Of The Cooperative Model

The cooperative model is perverted when institutional size becomes the end game and not the means to improve members’ financial control of their lives. The visions of lifetime financial partnerships become nothing more than an asset to be sold to the credit union willing to pay off senior managers and boards who have lost their moral compass.

There is little dispute that the nation’s policies and practices are heavily weighted to favor the rich. In an era in which the inequality between the top 1% of individuals and the rest of the population is increasing, these credit union sellouts compromise the individual and collective benefit cooperatives were designed to create for member-owners.

Cooperatives countervailing role in the marketplace is compromised. The promise that the collective resources of the 115-year-old credit union model can be paid forward to benefit future generations is cast in doubt.

There is an alternative approach to self-dealing credit union mergers that corrupt the ideas of member-owned financial cooperatives. 

 
 

Feb. 14, 2017


Comments

 
 
 
  • Chip, I couldn't agree with you more. I've always said that "the only reasons credit unions actually merge are a) death/retirement of the CEO or b) regulatory force due to true financial duress. In the first instance (death/retirement of the CEO), the Boards are often just plain tired and are looking to hand off the responsibility of the organization. CEO recruitment is the most important job of the BOD and I believe it appears a daunting task for many. It is also a sign that CEOs aren't successfully preparing their direct reports to take on the challenge. The second instance (financial duress), I have always found interesting, because it typically results in exactly the opposite of what your initial commentary focuses on. In these instances, the surviving credit union's Members typically sacrifice (unknowingly) their accumulated wealth in order to merge with the weaker institution. Regulators don't offer a bargain price for the rescue either. Much like you noted, CEOs often times are willing to make these deals in order to 'grow' their business/Assets which, in the end, results in higher compensation, status, etc. I've been a firm believer that most credit unions have a sustainable future. It is simply a matter of finding the right Executives/Boards to run them. There will always be small businesses and large businesses in every industry. IF a credit union's Members are being served well, then size shouldn't really matter. Safety, soundness, and sustainability are the minimum requirements. True, 'scale', 'efficiencies', 'critical mass' are all important but, over the years it's become harder to distinguish whether these benefits even materialize as a result of the mergers. The beauty of the credit union industry is that our focus should be different. There are no external parties to cater to, just the Members.
    Moritz Wohanka
     
     
     
  • Having been on the regulatory side of the business for 27 years before retiring, we did not experience any mergers of this type while I was with the agency. However, in the ensuing years I have observed some of these nationally, but not many in my state. Mergers for distressed credit unions make sense, but just for the sake of being bigger is more a function of CEO ego! Credit unions between $50MM and $250MM seem to be the most vulnerable to these types of takeovers, and enticements to staff and boards only hasten then to decide to merge.
    Pappy Rat
     
     
     
  • I cannot thank you enough for writing this article. I have watched several credit union mergers in the Pacific NW (where I was CU born and raised) that were totally unnecessary. Viable charters, financially sound and community focused. One, many years ago, involved a husband and wife as merging CEOs. I do believe the "Everybody's doing it" is giving management and boards permission to check it out. But at the end of the day this money that is changing hands is our MEMBER'S money. When I hear the merging stats I never hear (until now) that this is a bad thing for everyone. For trade associations, partners, employees, members. I'm fortunate at this stage in my career to be working with NACUSO. I truly believe that the CUSO structure is one of the most powerful collaborative tools we have to help each other survive and to stave off the merger mania.
    Denise Wymore
     
     
     
  • Interesting take on voluntary mergers that, although a bit cynical makes a few good points: 1) Bigger is not always better, Credit Union leaders need to find ways to remain relevant to their membership regardless of their size or find leadership who can do so and 2) With today's field of membership options there is often a way for anyone to join the membership of a proposed merger partner without actually "merging" the credit unions. These are good reasons for smaller credit union's to think twice before completing a proposed merger. Notwithstanding the benefits of remaining independent, many voluntary mergers end up positive for the membership; and we have noted a intentional lack of self-inurement in the cases we have been involved with.
    Roger A. Jones, CPA
     
     
     
  • This article would be quite true if Credit Union Boards took their jobs seriously and stopped trying to run their CU like they did 25 years ago! Unfortunately this is not happening and many Credit Union Boards are eroding their capital ratios down while making risky loans and investments to try and make a bottom line. If your Cu is not growing... you're dying!
    Ben There
     
     
     
 
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