Why A Stronger Voluntary Merger Rule Is Necessary

The proposed NCUA rule would require payoffs to take place in the open, exposing merger deals to transparency before members give away millions in equity and member value.


The NCUA’s proposed new merger regulations would help stop the abusive practice of board members and executives robbing members of their collective wealth, or at least make them be up front about it.

But the new rule, proposed in May and now up for comment, has been greeted with ambivalence, even though the agency itself says that approximately 80% of the mergers it reviewed included payments to insiders.

This self-dealing is an attack on the very core of the credit union movement, of what the financial services cooperative should be, yet some commentators are voicing reservations about the need for such changes.

Make Your Voice Heard

  • Click here for the new merger rule as published in the Federal Register on June 8, 2017. (11 pages)
  • Click here for the full text of the proposed changes to 12 CFR Parts 701, 708a, and 708b. (52 pages)
  • Click here to submit comments directly to the NCUA, due by Aug. 8, 2017.
  • Click here to submit comments through NAFCU, due by July 19, 2017.
  • Click here to submit comments through CUNA, due by Aug. 7, 2017.

We’re not one of them. This rule may be the most important regulatory action NCUA takes this year. So-called voluntary mergers have become a business strategy increasingly used by some credit unions to take over solvent, well-run institutions by inducing insiders to compromise their fiduciary duties to members.

These insider sales provide financial incentives to management and employees, but rarely do members receive any benefit from their generations of loyalty. Instead, a valuable charter disappears, insiders pocket years of built-up equity, and the movement suffers another blow to its image as a not-for-profit that exists for the common good.

The NCUA says the new rule would:

  • Increase the required time for notice to members before a merger vote to at least 45 days;
  • Require the merging credit unions to disclose all merger-related compensation for certain employees and officials of the merging credit union;
  • Clarify the contents and format of the members’ notice to provide better information; and
  • Create a member-to-member communications process similar that found in NCUA’s regulations covering credit union conversions to or mergers with banks.

Calusa Bank Purchase vs. Cornerstone FCU Merger

Because the corrective power of market competition is absent in the collective model, examples to demonstrate the magnitude of this corrupt transfer of member wealth have been lacking. But now that some credit unions have completed whole-bank purchases, it’s feasible to show how harmful this expropriation of members' collective ownership can be, and how those harmful effects can be avoided. 

Here's an example of the latter, of how things can and should be done: Achieva Credit Union ($1.5B, Dunedin, FL) has completed the purchase of $165 million Calusa Bank in Punta Gorda, FL. The small bank had total deposits of $133 million, $114 million in loans ($108 million in real estate), $38 million in investments, and operated four full service offices. Total book value of net worth was just over $17 million.

The sales price was $23.2 million in cash, as credit unions can issue no stock. The price was 136% of tangible book value. The price to estimated 2015 earnings was 54.4x. The bank’s shareholders had contributed capital of $10.3 million, and so received over two times this amount for the bank, which had operated since 2007 until the sale in 2015.

Achieva’s December 2015 call report records an increase of capital of $20.1 million. Of that, $3 million was internal earnings and $17 million was Calusa’s capital. The credit union also recorded an increase in goodwill of $9.0 million to account for the price paid in excess of book value.

The bank’s owners doubled their capital, received cash, and could remain members of the credit union or take their gains and business elsewhere. And it was all out in the open.

This charade of “voluntary mergers” is becoming more frequent. Stealing members’ collective wealth may not violate NCUA rules, but it’s certainly corrupt.

Credit Union Member-Owners Receive Nothing

Compare this to what the 11,000 member-owners of Cornerstone FCU ($109.1M, Carlisle, PA) get when their 43-year-old, highly regarded hometown financial institution is merged July 1, 2017, with Belco Community Credit Union ($470.9M, Harrisburg, PA).

Cornerstone has three wholly owned offices and a high school branch operated by students under the supervision of a credit union employee. Along with serving as a longtime provider of mortgages and other loans to the community, the credit union has helped finance locally owned small businesses and organizations, including a radio station, restaurants, a bicycle shop, several church renovations and the Muslim community center, and vital long-haul truck servicing firms.

Cornerstone has been able to respond quickly to market conditions and member needs, providing lower-cost loans and fewer fees and service based on local knowledge and relationships. Sounds like what a credit union is supposed to do.

The acquiring Belco Community CU is more than four times as large as Cornerstone and has an expense ratio that over the past five years has been over 1% of average assets higher than the much-smaller Cornerstone.

Cornerstone’s rates and fees are superior to Belco’s in nearly every instance because of its cost advantage. Cornerstone’s board and management provided members no due diligence, no product or service comparisons, and presented the merger as an opportunity for a “brighter future.” More than 35% of its members voted against the merger.

Unlike the Calusa bank owners, the member-owners of Cornerstone FCU received nothing for this insider sale. It was the members’ loyalty, savings and support that built this credit union’s $10 million in net worth. The leadership, future opportunities, and all legacy assets are now transferred out of their control.

The final irony is that any Cornerstone member could have long joined Belco already if they perceived that credit union provided better value. Belco eliminates a competitor and members lose everything they have invested in creating their cooperative institution. The Carlisle community, meanwhile, loses its best financial services provider.

No Commercial Sense

This charade of “voluntary mergers” is becoming more frequent. Stealing members’ collective wealth may not violate NCUA rules, but it’s certainly corrupt. No objective observer comparing what Achieva had to pay to acquire a bank of similar market benefits versus the zero cost and free assets acquired by Belco would see this as commercially justifiable action.

The longer bad behavior goes on, the worse it gets. When credit unions use their size and power to “arrange” mergers which serve only institutional greed, then the credit union model has been perverted from its core purpose.

The NCUA’s efforts to protect members’ ownership rights and collective property with a revised merger rule is much needed and long overdue.

If you agree, please speak up. Submit your comment before the Aug. 8 deadline.


June 26, 2017


  • Building off the person who submitted the previous comment, I don’t know what is required to dissolve a credit union, but if I were a bank, I would offer credit union members 0.70 times book as the purchase price. This is a lot better than what they are getting now (nothing) and 30-50% cheaper than I can acquire a bank for. I would try to structure the deal as a deferred arrangement with a trailer, so if a member leaves before fulling vesting, they lose their equity claim. I have not seen this happen, yet, so it might be because the dissolution rules would not allow it. Just a crazy thought if I were thinking like an investment banker instead of a credit union manager.
  • Chip -- Great commentary! The merger game for credit unions is really a travesty for the membership of the acquired credit union. I don't know of any other industry where you can acquire the EARNING assets of another institution for free. At least with a bank transaction, the stockholders get paid something for their capital (book or a multiple thereof if high performing). It simply appears that credit union shareholders are treated as second-class citizens in the merger transaction -- get to the back of the bus. At a minimum, some portion of future earnings of the combined entity should be assigned "preferred shareholder" status so that a dividend can be paid to those members who contributed their capital and EARNING ASSETS to the acquiring entity with in exchange for zero economic consideration.
  • comments submitted to NCUA. CU members are waay to complacent, and very few understand the concepts discussed here. their membership, loan and deposit balances have measurable tangible value. No payments unless disclosed, an ombudsman should be appointed and paid for by the members to represent their interests in the proposed merger.
  • Here Here. Anyone who thinks management and boards are not being bought off has their head in the sand.