The merger game–its timing, procedures and practices–is comingin for new scrutiny and debate this month among a coterie ofanalysts and top credit union CEOs.

Some of the rhetoric over NCUA policies along with CEOfrustrations about weakened peers acting too late in solving theirproblems was triggered by last month's long-anticipatedconservatorship of the $318 million Telesis Community CU and its eventual management takeover by aCalifornia competitor.

“Most of the CEOs I talk to share a similar frustration aboutcredit union mergers and that is that those credit unions that areavailable are so distressed that by the time they are forced tomerge no one wants them,” said Henry Wirz, president/CEO of the $1.7 billion SAFE CU of NorthHighlands, Calif.

Wirz said he can often predict which credit unions are on theverge of failing. However, after SAFE contacts them, “well beforethey are impaired, the answer is 'no' when it comes to talkingmerger,” he said. And then “regulators take them over, but by thenthey have lost most of their capital and have reduced memberservice to the point that larger numbers of their members haveleft.”

Agreeing with Wirz was Gary Easterling, president/CEO of the $1.3 billion United FCUof St. Joseph, Mich., who said the boards and management of weakcredit unions fail to honestly evaluate their financial conditionsas they allow their capital to erode until the regulator takes themover.

But “if these credit unions could be enticed to a merger tablesooner, the capital could be preserved, the insurance fund would bespared, and the members would be better served,” arguedEasterling. 

Like a sampling of other CEOs contacted by Credit UnionTimes, Ronald Burniske, president of the $1.9 billion ChartwayFCU of Virginia Beach, Va., faulted the NCUA for what he called anaggressive, needless and costly role in effecting and thenmaintaining conservatorships.

“I think there may be 15 to 20 of these conservatorships stillmanaged by NCUA, and what has been the result?” asked Burniske.Conditions have not improved, “and they may have spent 100 grand topay the salaries for one of their managers to run the place, andthe assets are still toxic.” He said his Virginia credit union longago was a bidder for the still-conserved Keys FCU in Florida, oneof the early sand state Great Recession casualties seized by NCUAin September 2009. Its net worth remains at 2.9%.

Burniske maintained  that “it is NCUA's responsibilityto serve as a regulator, not a manager. It's like the military inIraq. Their role was to create peaceful and sustainable stability.Not to serve as a police force.” The NCUA needs to apply the sameconcept “to fulfill its intended role as aregulator.” 

A NCUA spokesman, when asked to comment, said, “NCUA processmergers when they are needed or desired by the institutions dulyelected officials representing the membership.”

The merger landscape, Burniske maintained, has changed markedlyin the last year and a half, contending “the days when we could gopick a target and strike a deal have become immenselycomplex.” 

Among the analysts, a number said that banking regulators do amuch better job of handling failing banks. They also argued thatdespite the large numbers of small credit unions being merged eachyear, the year-to-year merger rate as compared to banks is harmfulto healthy and growth-minded credit unions.

“The banks are merging up their weaker brothers in meaningfulnumbers,” said New York investment banker Peter Duffy, a managingdirector at Sandler O'Neill.

“Our research indicates that, the average asset of a mergedcredit union since 2004 is $19 million. This compares to $749million with banks,” said Duffy. “What's more, every year since2006, CU mergers are down. This defies logic when one considers thegrowing numbers of CAMEL 3, 4, 5 CUs, not to mention the higherrated CUs that aren't growing.”

Merger Solutions Group, a Portland, Ore. based consulting firm,said Duffy's statistics are slightly off base since comparing banksand credit unions is like apples and oranges.

“In our experience, the opportunity for a bank to find and agreeon merger terms with a willing partner is much higher than that ofa credit union,” said J. David Bartoo, head of Merger Solutions,which advises both banks and credit unions.

For one thing, banks have none of the field of membershipproblems that limit credit union options, he said.

Moreover, “the FDIC is much faster in having a quick sell tomove a failed bank off of its books and the bank-share valuation isa critical piece of the merger puzzle for the banks merging out ofbusiness,” said Bartoo.

“The bottom line is that merger activity has been slow in bothbanks and credit unions for the last five plus years,” said Bartoo.He said  the FDIC and the NCUA have different managementmodels but deal with two very different financial communities andneither show financial risk to their current balance sheets basedon the numbers of distressed businesses.

But Duffy of Sandler O'Neill said he basically agrees withBartoo from a certain perspective. But when you broaden it to coverthe last 15 to 20 years, mergers occurred in the banking industryin much greater numbers to the point where 10% of bank industryassets reside with banks less than $1 billion in assets but in thecredit union industry 52% of assets are with credit unions below $1billion. 

Clearly, he continued, “the marginal and weak performing bankswere merged into the top performing banks.” 

“So when David said apples and oranges, he is correct becausethe system of accountability in the banking industry allows foronly the best to survive,” said Duffy, adding that “whereas on thecredit union side close to half of the credit unions below $1billion are at or below profitability.”

Nonetheless, maintained Rick Craig, president/CEO of Utah's $5billion America First FCU, a recent merger player in the MountainStates, the central policy issue rests on timing “of how NCUAapproaches preserving troubled credit unions for their members andminimizing the loss to the insurance fund. Are they acting tooearly or too late?” 

Looking at statistics, former NCUA Chairman Dennis Dollar saidthat while the raw merger numbers are down year to year, thatphenomenon is due to the overall drop in the number of creditunions. But the actual percentage of credit unions involved inmergers is actually up and growing significantly, he said.

While mergers have traditionally been smaller credit unions intolarger ones voluntary mergers between mid-size and large creditunions are increasing, he said.  Dollar Associates, theBirmingham, Ala., consulting firm he heads, is currently working on14 merger deals and they are not all small credit unions, headded.

The biggest single deterrent to voluntary mergers is the verytight field of membership interpretations between credit unionsseeking to merge, particularly under the federal charter, saidDollar.

Federal credit unions complain a great deal about this lack offlexibility on voluntary mergers, making it something that the NCUAwill have to address in the future or the result will be a decidedfederal charter disadvantage, he said.

One other merger consultant, Thomas Glatt Jr., head of a Wilmington, N.C., firm, said he hashad the same experience as Wirz and others when his clients want toapproach other credit unions about a merger.

“I'm talking about credit unions that are a basis point awayfrom net worth restoration plans, and they don't even want to talkabout the option to merge,” said Glatt. “I've also seen whereboards and CEOs of weak, underperforming credit unions will onlyagree to merge if they are the surviving leadership team. I thinkthe word is 'hubris'”