A CEO's Merger Battle
It's unusual when a proposed merger is opposed by a group of members. What's more, it's very unusual when a CEO comes out of retirement to lead the opposition of a planned merger of the credit union he once led.
A fierce battle of that proposed merger scenario is under way in Pennsylvania.
Some industry leaders contend this consolidation of the $105 million Cornerstone Federal Credit Union in Carlisle into the $453 million Belco Community Credit Union in Harrisburg is an example of a troubling trend of well-capitalized credit union mergers that may not be in the best interests of members. They are also critical of the merger voting process, contending that the mail-in ballots do not provide sufficient information for members to make an informed decision. (Note: See “The Dark Side of Credit Union Mergers” on page 6.)
Dave Keffer, who served as the president/CEO of Cornerstone for more than three decades and retired two years ago, is leading a group of members opposed to the merger with Belco Community.
The group, Committee for Cornerstone Independence, has also hired a lawyer and is exploring options to postpone or block the impending merger that members approved, 1,159 to 630, after a contentious special membership meeting March 2. The merger is awaiting state and federal regulatory approvals and Keffer won't say what options, if any, he will explore to block the merger.
Before he retired in November 2014, he was approached by Belco Community to consolidate. He brought it back to his board members who decided against it.
Cornerstone, he said, has a successful tradition of self-determination and member responsiveness by addressing head on the challenges it has faced, including surviving the Great Recession and other hard times during its 43-year history.
Amey R. Sgrignoli, president/CEO of Belco Community, said both credit unions in the past talked about collaboration projects that would combine back office operations into one core processing system to save operational costs. While there were some discussions about merging, nothing formal was presented to the boards of directors in 2014.
Samuel J. Glesner, president/CEO of Cornerstone, who was a board member in that year, recalled mergers were discussed during strategic planning sessions but nothing materialized.
So why the about face two years after Keffer's retirement?
“If the merger did not happen, we would be looking at a core analysis right now because our contract is up midyear next year,” Glesner said. “We know that the core that we have now is not sufficient to move forward our member services and adding new things to offer our (10,966) members. The cost of that alone is significant.”
The merger, he said, would create an “economies of scale” that would help both credit unions.
Keffer is not convinced.
“In relation to a perfectly strong, healthy, well capitalized [Cornerstone], with lower fees, better loan interest rates, better membership growth, better expense ratio [than Belco Community], the kind of reasons they’re giving for this merger are economies of scale,” he said. “But if we’re doing way better on the Call Report numbers where are the economies of scale? Belco will get the economies of scale by getting a better run organization in Cornerstone, but there will be no economies of scale after the merger for the Cornerstone membership.”
Belco also is well capitalized with a net worth of 9.30%, an ROAA of 0.74% and loan growth of 6.57%, according to its 2016 NCUA financial performance reports.
However, Sgrignoli said industry information providers such as CUNA, Callahan & Associates and Dollar Associates show how efficiency and performance improves in areas such as lending and membership the larger the credit union becomes.
“You begin to see improvement at about half-billion [in assets], but a credit union that's larger than a billion [in assets] sees more significant improvement in just general economies of scale in operating efficiency, growth of loans, income, those sort of things amp up significantly,” she said.
But bigger is not necessarily better, according to Callahan Chairman Chip Filson, who is a vocal critic of what he described as “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.”
He contends that members elect boards to oversee the credit union's local focus and that 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.
Moreover, Filson, Keffer and other credit union leaders are critical about the merger voting process. When members receive mail-in ballots to vote on a proposed merger, they are only told the consolidation is good for the credit union, but critics contend that information is far from enough for members to make an important informed decision.
Keffer noted, for example, that a comparison chart of both credit unions’ rates, fees, services, financial performance metrics and other key information that presents the pro and con merger positions would have enabled Cornerstone members to make an informed decision.
“All the ballots that were sent out had nothing but this positive message of here's why [the merger] is good for us and good for you, the member,” Keffer said. “If you were to look on the [Cornerstone] website and every piece of literature that was sent out, it was nothing but a controlled message which said that things will be better in the future and a bright future is ahead.”
According to NCUA regulations, the merging credit union is required to provide advance notice of a special meeting. That notice also must include a summary of the merger plan, current financial statements for each credit union, a consolidated financial statement for the continuing credit union, analyses of share values, explanation of any proposed share adjustments, any changes relative to insurance such as life savings and loan protection insurance and insurance of member accounts.
The NCUA also requires that credit unions provide a detailed description of any merger related financial arrangement, including the name and title of each individual recipient and an explanation of the financial impact of each element of the arrangement, including direct salary increases and any indirect compensation, such as any bonus, deferred compensation or other financial reward.
In an NCUA email letter that responded to Keffer's questions about the merger, the federal agency determined Cornerstone met these regulatory requirements.
Nonetheless, Keffer worked to balance out Cornerstone's positive information with lists of questions and concerns as well as comparison charts that showed the differences in the performances of the credit unions. He distributed this information at three information sessions Cornerstone held for members before the special membership meeting.
At the second meeting, Glesner acknowledged he approached Keffer informing him of Cornerstone's no solicitation policy.
“I approached him and provided him with our no solicitation policy, which Mr. Keffer actually was involved in writing so he was familiar with the policy,” Glesner said. “I asked politely that he not hand out the information per the solicitation policy. The information that he was providing, we had no way of fact checking it. I would say some of it ... it wasn't that it was incorrect, it was that he was only providing things that viewed Cornerstone in a positive light over Belco and any [information] where Belco may have been more positive was not included. We needed to fact check it and make sure that what he was providing was accurate.”
Keffer, nonetheless, ignored Glesner and distributed his information.
The special membership meeting drew 117 members. Belco executives and other guests attended, but Cornerstone did not allow members of the local media to attend and prohibited anyone from recording the meeting.
While some members who opposed the merger complained they were caught off, the credit union had a parliamentarian following Robert's Rules of Order that gave every member five minutes to speak their mind.
After Keffer and other members fired questions at the Cornerstone board about the merger and presented their concerns about it, Keffer said he made a motion, seconded by members, to postpone the merger. But the parliamentarian ruled against the motion because it was dilatory.
The mail-in ballot results were 1,146 votes for and 564 against. However, at the special meeting, 66 members voted against the consolidation and 13 members voted for it, according to Sgrignoli and Glesner.
Filson believes the best evidence that the merger voting process isn't working to protect the members’ best interests is the difference in the mail-in vote ballots and when members vote at a special membership meeting.
“So what that tells me is when members hear the full story and get to talk about it personally, it's a very different likely outcome than when you just rely on the ballot,” he said. “Members are smart enough to figure out when it's not in their interests.”
Sgrignoli said the merger has been done for all the right reasons and there's nothing being done that's not above the board.