OLYMPIA, Wash.–If there is a problem issue in the mergers taking place among credit unions, it’s when one small CU merges with another small CU for the wrong reasons, according to one person.
“If you look at the merger data, what I see is a number of the smaller credit unions merging into a credit union that is not much larger than they are,” said Jim This. “My concern is when this happens, are both credit unions just delaying another merger in few years? If you are going to merge and give members the benefits they need, such as more services and branches, you have to consider merging into a partner that is significantly larger.”
This, who heads up James L. This and Associates and who has consulted extensively with credit unions, including on mergers, believes many of the small CU couplings occur when leaders make a move in the hope of protecting the friendly, personal service their members currently receive, fearing that may disappear by joining a big organization.
“They feel the smaller CU they are merging into will maintain the personal touch; at least they have that perception,” said This. “But I am not sure that in these situations the credit union is truly considering whether they are ensuring financial sustainability.”
Recognizing that the majority of credit unions merging out continue to be small in assets, This acknowledged there may be instances when the acquiring organization entices the leader of a well-performing small CU to combine by offering a hefty payout—a subject CUToday.info has extensively covered.
“Yes, I think this situation may happen occasionally, as I have heard stories about it—although I have never seen it happen in a merger I have been involved with,” said This. “But I don’t think this practice is widespread or pandemic.”
However, several credit union leaders CUToday.info has spoken with disagree, saying the issue is widespread and one that could threaten the future of the movement—making CUs more bank-like and possibly leading to the elimination of the CU tax exemption.
This questions the advantages—as a growth strategy—of a billion-dollar CU acquiring a small credit union.
“A $2-billion credit union absorbs a $50-million credit union—they could just have a good month and make that much in asset growth. So, strategically, I am not sure it makes sense. They are not taking in the $50-million credit union because they need those assets or capital.”
This believes it is fair for the small CU in a merger deal to compensate a tenured CEO for his or her years of service, especially if the merger moves up the leader’s retirement date.
“In my experience, credit unions under $50 million in assets in many cases have not made retirement provisions for the CEO,” said This. “It would not be uncommon for the board of the merging credit union to pay, in some form, a thank-you to their CEO who has likely been there for 20 to 25 years.”
Just as merger expert Glenn Christensen told CUToday.info, This believes small credit unions concerned about their ability to compete in the future should consider merging when they are strong.
“It’s better to make the move before performance weakens and capital falls,” he said.
This also supports transparency in disclosing executive compensation resulting from a merger. He said he favors what Acting NCUA Board Chairman Mark McWatters proposed at CUNA’s recent Governmental Affairs Conference--that the agency may require that “all merger solicitation documents provide, without limitation, a discussion of any management awards and compensation agreements in plain language and delivered in a reasonable time prior to the scheduled merger vote.’”
“I think that is absolutely appropriate,” said This. “Members need to know. In the state of Washington we already do that—in merger documents sent to members the credit union must disclose significant raises given to senior management.”
This believes the competitive pressures facing small credit unions will continue to lead to more mergers of small shops.
“I hate to see the number of small credit unions continuing to drop. So if there is no real reason for the small credit union to merge, they should not do so,” said This. “Having a large number of small credit unions strengthens the movement.”