Industry leaders are shedding light on the dark side of credit union mergers.

Over the last two months, Callahan & Associates Chairman Chip Filson posted three articles on his blog that detail what he calls a troubling trend of some well-capitalized mergers of credit unions that may not be in the best interests of members and place the cooperative model in jeopardy.

“We are now 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,” Filson wrote. “That's not true of all consolidations, of course, but a look at the pre-merger books and aftermath of 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.”

Other credit union leaders agree with Filson. What's more, a related proposal for more merger transparency came up in a speech by NCUA Acting Chairman J. Mark McWatters at CUNA's Governmental Affairs Conference last month.

Jim Blaine, retired president/CEO of the $35 billion SECU in Raleigh, N.C., said he's been concerned for a long time about this trend, which has finally surfaced as an industry-wide issue that needs to be addressed.

“It is the soft underbelly weakness of the credit union movement or any mutual or cooperative type organization. It's legal perhaps and it can be done, but in fact to me it's just not ethical. It's capturing community capital that belongs to all the members,” Blaine said. “There is a lot of chat out there that some more aggressive credit unions are doing mergers for market share and they are offering monetary incentives to managers and boards to push the deal. Those kinds of things, so far, I don't think have been fully revealed, but I understand they're out there ready to come to the surface. And my feeling is that credit unions ought to address this situation and write the rules that are fair to everybody so we don't end up getting a black eye.”

Could new rules on merger transparency be in the making by the NCUA?

To enhance the NCUA's regulatory and supervisory approach to focus on the problem areas that would allow well-managed credit unions to serve members with minimal federal interference, McWatters said he is working with Board Member Rick Metsger and the NCUA staff to analyze 15 issues. One of them is about additional merger disclosures.

McWatters said the NCUA should work diligently to preserve small credit unions including minority and women-operated cooperatives. He added, however, that the agency should “require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote.”

McWatters, who declined an interview with CU Times, did not elaborate on his comments during his GAC speech, and it's unknown whether the NCUA plans to introduce new rules that would require credit unions to disclose change-in-control payments (otherwise known as Golden Parachute disclosures), and other management compensation awards and agreements.

“I'm looking forward to working with my colleague on this issue,” Metsger said.

When Filson worked as a credit union regulator for more than eight years for the state of Illinois and the NCUA during the late 1970s to mid-1980s, he found that most of the consolidations were local and made in the best interests of members. And he believes that this continues to be the case for most mergers today.

“What's changed, I think, in the last number of years is that credit unions have fairly open fields of membership that have reached beyond the local community,” Filson explained. “They've reached into other counties, they've reached into other states, and in at least one case, they've gone national in scope and they aggressively solicit these mergers as a corporate strategy.”

After credit unions make an initial handshake agreement to merge, the boards meet in secret to forge the details of the merger agreement that is typically not disclosed to the membership. The merger agreement is submitted in secret to regulators after which the proposed merger is announced to members, who receive a letter and talking points that explain the merger's rationale and how it will affect them. But this information is usually general and presented only in a positive light with promises of more products and services for members, more career opportunities for employees of the merged credit union and more economies of scale advantages in operations for both credit unions.

But Filson pointed out the process is so benign in terms of the required disclosures that it can be pretty much at the board's or manager's discretion because the members have grown to trust and believe their credit union.

“If the board or manager is telling them, 'This is good for your future,' it would take a rare member who would have the time, interest or inclination to stand up and say, 'Hey, tell me more,'” Filson said.

He believes the best evidence that the process currently isn't working to protect the members' best interest is the difference between mail-in vote ballots and when members vote at a special membership meeting to discuss the merger and tally the final vote count.

For example, a group of members, including the retired CEO of the $105 million Cornerstone Federal Credit Union, Dan Keffer, is fighting a planned merger of the Carlisle, Pa.-based consolidation with the $453 million Belco Community Credit Union in Harrisburg. To be clear, Keffer does not think there is anything untoward with the proposed Cornerstone-Belco merger. (Note: For details on this controversial consolidation, see page 1.)

The mail-in ballot results were 1,146 votes for the consolidation and 564 against it. However, at the special membership meeting on March 2, 13 voted for the merger and 66 voted against it, according to Amey R. Sgrignoli, president/CEO of Belco Community and Samuel J. Glesner, president/CEO of Cornerstone. During the meeting, Keffer and other members raised questions and concerns about the merger and expressed their opposition to it.

Filson noted that in addition to Cornerstone, he is aware of similar vote results at special member meetings for other merger proposals.

“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.”

Before its special membership meeting, however, Cornerstone did hold three merger presentation meetings at which members asked a variety of questions.

“We had a lot of really positive conversations with those members at the information sessions who came in with concerns,” Sgrignoli said. “By talking with those individuals one on one and getting at the core of what their questions were, we were able to put their minds at ease and have them walking away comfortable that this merger would in fact be a good thing.”

Nonetheless, Filson warned that how credit unions manage ongoing consolidations of their organizations might be a defining moment for the industry.

“Will their role evolve to just another economic choice operating with practices and goals similar to their for-profit competitors?” Filson questioned. “Or will they enhance their cooperative design to continue the mission that embraces the well-being of their members and the capability of creating shared value for current members and future generations?”

Filson added, “Now is the time to act. Once credit union leaders decide their own wallets are more important than what the movement has done for the average American for more than a century, the cooperative model is truly at risk.”

Instant Insights /

The Dark Side of Credit Union Mergers

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