The merger game–its timing, procedures and practices–is coming in for new scrutiny and debate this month among a coterie of analysts and top credit union CEOs.
Some of the rhetoric over NCUA policies along with CEO frustrations about weakened peers acting too late in solving their problems was triggered by last month’s long-anticipated conservatorship of the $318 million Telesis Community CU and its eventual management takeover by a California competitor.
“Most of the CEOs I talk to share a similar frustration about credit union mergers and that is that those credit unions that are available are so distressed that by the time they are forced to merge no one wants them,” said Henry Wirz, president/CEO of the $1.7 billion SAFE CU of North Highlands, Calif.
Wirz said he can often predict which credit unions are on the verge of failing. However, after SAFE contacts them, “well before they are impaired, the answer is ‘no’ when it comes to talking merger,” he said. And then “regulators take them over, but by then they have lost most of their capital and have reduced member service to the point that larger numbers of their members have left.”
Agreeing with Wirz was Gary Easterling, president/CEO of the $1.3 billion United FCU of St. Joseph, Mich., who said the boards and management of weak credit unions fail to honestly evaluate their financial conditions as they allow their capital to erode until the regulator takes them over.
But “if these credit unions could be enticed to a merger table sooner, the capital could be preserved, the insurance fund would be spared, and the members would be better served,” argued Easterling.
Like a sampling of other CEOs contacted by Credit Union Times, Ronald Burniske, president of the $1.9 billion Chartway FCU of Virginia Beach, Va., faulted the NCUA for what he called an aggressive, needless and costly role in effecting and then maintaining conservatorships.
“I think there may be 15 to 20 of these conservatorships still managed by NCUA, and what has been the result?” asked Burniske. Conditions have not improved, “and they may have spent 100 grand to pay the salaries for one of their managers to run the place, and the assets are still toxic.” He said his Virginia credit union long ago was a bidder for the still-conserved Keys FCU in Florida, one of the early sand state Great Recession casualties seized by NCUA in September 2009. Its net worth remains at 2.9%.
Burniske maintained that “it is NCUA’s responsibility to serve as a regulator, not a manager. It’s like the military in Iraq. Their role was to create peaceful and sustainable stability. Not to serve as a police force.” The NCUA needs to apply the same concept “to fulfill its intended role as a regulator.”
A NCUA spokesman, when asked to comment, said, “NCUA process mergers when they are needed or desired by the institutions duly elected officials representing the membership.”
The merger landscape, Burniske maintained, has changed markedly in the last year and a half, contending “the days when we could go pick a target and strike a deal have become immensely complex.”
Among the analysts, a number said that banking regulators do a much better job of handling failing banks. They also argued that despite the large numbers of small credit unions being merged each year, the year-to-year merger rate as compared to banks is harmful to healthy and growth-minded credit unions.
“The banks are merging up their weaker brothers in meaningful numbers,” said New York investment banker Peter Duffy, a managing director at Sandler O’Neill.
“Our research indicates that, the average asset of a merged credit union since 2004 is $19 million. This compares to $749 million with banks,” said Duffy. “What’s more, every year since 2006, CU mergers are down. This defies logic when one considers the growing numbers of CAMEL 3, 4, 5 CUs, not to mention the higher rated CUs that aren’t growing.”
Merger Solutions Group, a Portland, Ore. based consulting firm, said Duffy’s statistics are slightly off base since comparing banks and credit unions is like apples and oranges.
“In our experience, the opportunity for a bank to find and agree on merger terms with a willing partner is much higher than that of a 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 membership problems that limit credit union options, he said.
Moreover, “the FDIC is much faster in having a quick sell to move a failed bank off of its books and the bank-share valuation is a critical piece of the merger puzzle for the banks merging out of business,” said Bartoo.
“The bottom line is that merger activity has been slow in both banks and credit unions for the last five plus years,” said Bartoo. He said the FDIC and the NCUA have different management models but deal with two very different financial communities and neither show financial risk to their current balance sheets based on the numbers of distressed businesses.
But Duffy of Sandler O’Neill said he basically agrees with Bartoo from a certain perspective. But when you broaden it to cover the last 15 to 20 years, mergers occurred in the banking industry in much greater numbers to the point where 10% of bank industry assets reside with banks less than $1 billion in assets but in the credit union industry 52% of assets are with credit unions below $1 billion.
Clearly, he continued, “the marginal and weak performing banks were merged into the top performing banks.”
“So when David said apples and oranges, he is correct because the system of accountability in the banking industry allows for only the best to survive,” said Duffy, adding that “whereas on the credit union side close to half of the credit unions below $1 billion are at or below profitability.”
Nonetheless, maintained Rick Craig, president/CEO of Utah’s $5 billion America First FCU, a recent merger player in the Mountain States, the central policy issue rests on timing “of how NCUA approaches preserving troubled credit unions for their members and minimizing the loss to the insurance fund. Are they acting too early or too late?”
Looking at statistics, former NCUA Chairman Dennis Dollar said that while the raw merger numbers are down year to year, that phenomenon is due to the overall drop in the number of credit unions. But the actual percentage of credit unions involved in mergers is actually up and growing significantly, he said.
While mergers have traditionally been smaller credit unions into larger ones voluntary mergers between mid-size and large credit unions are increasing, he said. Dollar Associates, the Birmingham, Ala., consulting firm he heads, is currently working on 14 merger deals and they are not all small credit unions, he added.
The biggest single deterrent to voluntary mergers is the very tight field of membership interpretations between credit unions seeking to merge, particularly under the federal charter, said Dollar.
Federal credit unions complain a great deal about this lack of flexibility on voluntary mergers, making it something that the NCUA will have to address in the future or the result will be a decided federal charter disadvantage, he said.
One other merger consultant, Thomas Glatt Jr., head of a Wilmington, N.C., firm, said he has had the same experience as Wirz and others when his clients want to approach other credit unions about a merger.
“I'm talking about credit unions that are a basis point away from net worth restoration plans, and they don't even want to talk about the option to merge,” said Glatt. “I've also seen where boards and CEOs of weak, underperforming credit unions will only agree to merge if they are the surviving leadership team. I think the word is ‘hubris’”