Credit Union “Sales” Use Secrecy To Undermine The Movement

Some mergers now appear to be little more than bank-like takeovers, without the transparency.


Credit union mergers are often necessary to preserve a struggling institution’s assets for its members and to protect the Share Insurance Fund.

But unfortunately, there appears to be a growing number of mergers that amount to nothing more than a giveaway of the smaller credit union’s assets to the larger credit union.

What do the members get? Typically, only the promise of expanded services and the latest technology tools.

What about the collected wealth of years of member-ownership? Out the window and into the pockets of exiting managers and the coffers of a larger financial cooperative that may not have the same interests, values, or even SEG or community commitments as the merged institution.

These “insider sales” are negotiated in secret, making it difficult to determine who got what, and rushed through consummation with nothing more than cursory member notice or participation. Afterward, there’s no regulator follow-up to see if any of these promises of a great new day for these merged members ever materialized.

Indeed, these mergers are happening without even the oversight and transparency required of banks and thrifts when they merge, and they fly in the face of what the NCUA says is the obvious standard for this board-initiated termination of a credit union charter: “We believe that (directors’) fiduciary duties are properly owed to people, and not to entities.”

That fiduciary standard is not being met today. The members’ voice is seldom sought or heard in these cooperative wealth transfers.

This turn of events not only sullies the reputation of the financial services cooperative movement, it opens the door for attacks from bankers and other who can point to these takeovers as another reason to quit treating credit unions like not-for-profits exempt from taxation.

Mergers Aren’t Rare, And Insider Sales May Not Be Much Longer

More than 50,000 state and federal charters have been granted since the first state charter in 1909 and the first federal one in 1934. There now are just less than 6,000 in business.

Mergers have been and are today a way to ensure that co-op services are continued when circumstances, financial and otherwise, overwhelm a credit union.

Dramatic changes in field of membership interpretations over several decades have led to a new use of the merger process. This business strategy is to aggressively seek out credit unions and induce their boards and CEO to ask members to approve the transfer and control of all their business operations, assets, capital, and member goodwill via merger.

Too often, these transactions are simply “insider sales.” They hijack the merger process because there is no law or regulation for one credit union to be bought by or sold to another.

The NCUA’s merger manual was last updated more than a decade ago and was designed for more benevolent activity. Therefore, the thin guidelines make it easy for boards to manipulate the required member vote process. It’s extremely rare for members to not approve this board-initiated recommendation.

The members’ voice is neither asked for nor heard. The required member vote is conducted in a manner reminiscent of the elections conducted in authoritarian countries governed by a single party. Not very democratic.

Credit Unions For Sale? A look at the growing trend of mergers that appear to undercut core principles of the member-owned financial cooperative movement. Read now.

At last count, the NCUA has approved 1,533 mergers in the past five years. Of these, 592 credit unions completed just one merger, and 136 just two. This relatively infrequent activity suggests traditional merger circumstances.

However, at the other extreme of activity, one credit union recorded 14, one reported nine, and seven reported four.

Multiple mergers are not necessarily bad. For example, Self-Help FCU reports five mergers with combined total assets of $6.9 million in this five years. This is not merging for growth’s sake. Rather this activity reflects Self-Help’s efforts to keep the community development, low-income model as an option whenever possible.

But other multiple merger activity show mergers as a corporate growth strategy, sometimes even publicly proclaimed by the credit union. In this approach to business, a CEO does not have to be good at running the credit union to benefit members; rather, growth is achieved from buying up the businesses of other credit unions whose boards can be persuaded to buy into this strategy.

Boosting The Buyer’s Bottom Line Without Benefiting Members

Mergers are often touted to bring benefits of size such as operating scale, market reputation, and more employee opportunity.

But, despite the claims of larger is better, the most important motivation is the acquisition of valuable credit union assets and local presence without having to give anything to member-owners who surrender their collective wealth and generations of loyalty.

In bank sales, via mergers or takeovers, the owners are paid for their ownership stake. The prices for these market-driven transactions can range from 1.3 times to more than twice book value (net worth).

For acquired credit unions, the member-owners receive nothing, except an occasional token amount labeled a “special capital dividend.”

In these credit union “merger-sales” the credit unions are operationally sound. Their net worth is in double digits. Furthermore, accounting rules require all fixed assets and other valuable franchise advantages to be “marked to market.” This valuation gain plus the merged credit union’s net worth are then treated as other income on the acquirer’s books.

Credit union mergers don't have to be corruptions of the ideals of the member-owned financial cooperative movement. Learn about alternative approaches.

This process of collective wealth transfer is a complete inversion of market-based sales. For voting to terminate their charter, members lose control of the future use and direction of their savings, loans, and accumulated capital. They are paid nothing.

These merger ruses are often presented as a promise of a brighter future with an expanded general list of services. But there is no post-merger follow-up by regulators or other interested parties to ensure that promises such as keeping branches, retaining employees, expanding services levels (such as loan underwriting criteria), or even continuing involvement in the community, are ever followed through.

In banking, the market would be watching and evaluating whether the surviving institution is indeed producing better results, as promised. The stock price is an ongoing signal that owners can see if the new owners are really performing in their interest.

Another difference between public sales transactions required of other financial firms, is that there’s rarely any due diligence to explore alternative combinations with other credit unions. Once a bank sale is announced, other suitors can join the fray if they believe it’s worth a higher price.

But in credit unions, while the phrase that “the board has considered other alternatives” is always present, this due diligence rarely occurs. Even if they happened, such comparisons are not included in the Special Meeting Notice sent to all members. This notice is the only official member communication NCUA requires in these transfers of control.

The reason for no meaningful evaluation of alternatives, and disclosure of whether this even happened, is easy to see. The boards and executives here have something to hide.

The reason for no meaningful evaluation of alternatives, and disclosure of whether this even happened, is easy to see. The boards and executives here have something to hide.

Unfortunately for members, the terms of the merger agreements, which are always negotiated in secret, are not even required regulatory disclosures. That contrasts with the often hundreds of pages of disclosures in the typical bank merger; not to mention the officer/director liability if information is withheld or inaccurately presented. (See NCUA Rule 708(a) for the mandated disclosures in conversion of a credit union to a mutual savings bank.)

Corruption doesn’t have to be an illegal activity to destroy a firm, an industry, or even bring harm to the broader economy.

The public, press and Congress all complain that no senior executive was “sent to jail” for the recent financial crisis. Rather the failures that sparked the Great Recession began internally. Leadership teams (board and senior managers) became enamored with institutional success, not proper business or personal conduct. In many case, that ultimately meant lining their own pockets at the expense of millions of everyday Americans.

Is this now happening among credit unions? That would be a bitter irony, given the movement’s roots and even recent history as the innocents, the good guys, in the financial crisis of the last decade.

Corruption doesn’t have to be an illegal activity to destroy a firm, an industry, or even bring harm to the broader economy.

There seems to be more and more credit unions going the way of self-interested mergers. Some managers are asking themselves how to protect their members from these out-of-area, or out-of-state takeovers, but others are seeing a way to profit themselves.

Should a CEO just negotiate a better, more secure future by becoming a senior vice president with a higher salary than the current CEO compensation? Or boards may ask, do we really want to go through the months-long process of finding a new CEO — let’s just turn the place over to Bigger-Better Credit Union and take the sinecures offered?

Leading a credit union is hard work, no matter the size. Asset size does not make the future easier, more certain, or less taxing. Rather the key to any credit union’s success must be the leadership team’s morale and belief in serving the member-owner. When the leadership’s focus becomes primarily institutional glory or personal ambition, sooner or later the members will lose.

A former colleague of mine when I was a regulator always counseled me to act and speak as if the words will be on the front page of tomorrow’s newspaper.

Eventually these “sales” will become front page stories, first local and then national. The bankers will point out that credit union leadership motivations are no different than banks. The white hat reputation will be sullied no matter the good works of the vast majority. And the effort to reduce regulatory overhead will be compromised by the failure of the industry to set its own standards.

Eventually these “sales” will become front page stories, first local and then national. The bankers will point out that credit union leadership motivations are no different than banks. The white hat reputation will be sullied no matter the good works of the vast majority. And the effort to reduce regulatory overhead will be compromised by the failure of the industry to set its own standards.

The NCUA has written time and again what it expects of volunteer boards and the leadership team.

The following is a partial excerpt on the fiduciary responsibilities of leaders outlined by the regulator’s general counsel in a March 2011 letter on a proposed new rule 701.4:

As the NCUA Board has discussed at length in rulemaking preambles going back to 2006, for federal credit unions the law (as determined by the FCU Act) and philosophy align: the directors’ duties flow primarily to the membership.”

The same letter says: “FCU directors must understand the people who are affected by the directors’ decisions and identify which people the directors are serving. The danger is that, if the directors are allowed to focus only on the credit union when making a decision ? without regard to how the members are affected ? the directors can justify making self-serving decisions, or decisions that serve primarily the FCU’s insiders, under the guise that the directors are simply doing what is best for the credit union." 

The NCUA has stated the obvious standard for merger conduct. It’s up to credit union leaders to make sure that all mergers provide full and fair disclosure, are based on real due diligence, and document how members will be better off for giving up control.

Perhaps even more important give members ample time and opportunity for member input and comment. Working to put all credit union mergers in the sunshine assures all stakeholders that these transfers of member assets are in everybody’s best interest, not just the executives and board of the “selling” credit union and their “buying counterparts."


March 8, 2017


  • One day the movement, especially Leagues, NAFCU, CUNA and other closely held movement players, including many of the CUs that merged, will regret losing all these charters. There are so many things that could be done with the distribution network that has been created by CUs. There is truly no reason for every current charter to survive in some form or another. Rather than merge, these smaller CUs need to join together to serve each other, and larger CUs need to create scaleable aggregated services (there are a number of great CUSO opportunities) to save and manage these charters to the benefits of the members, and movement. It can be done!
    Walt Agius
  • Chip, great commentary. Mergers are indeed sometimes necessary, but I worry that when mergers become strategic just to achieve a certain level of asset growth or expand field of membership across a large geographic area, or even state, that we not only are losing our identity as a credit union movement, but could lose our special distinction with Congress. Whether true or not, if the perception is we are acting like banks, then we will be treated like banks. I wish every struggling credit union would follow the process that our most recent merger partner did in 2015. They were struggling financially, and knew a merger was probably the best decision for their members. But they sent out invitations or RFPs to over half a dozen credit unions and interviewed them to ensure they were making the best decision for their members. We feel blessed that they chose us. Once that decision was made, we had membership meetings to answer questions and be as transparent as possible with their members and ours. We made sure to fill a vacancy on the Board with a representative from their credit union. Simply put, all mergers should be transparent to the member owners, and truly benefit the members, not necessarily the staff or management at their expense. I appreciate your addressing of this sensitive, but timely, issue.
    Daryl Empen
  • Chip, once again, I fully agree with your assessment. The challenge is "What do we do now?" I've always said that it is a sad state of affairs when consumers value, prize, and understand the Value of their Costco membership more than they do their Credit Union membership. This extends way beyond just Members, but to our employees, Management, and Boards of Directors. The key issue is that we spend a lot of time 'talking and marketing' about what a great value credit unions are (higher deposit rates, lower loan rates, lower fees, and better service) ... but many organizations and Leadership teams have simply elected to nap alongside this historical narrative. There is very little effort placed towards actually delivering tangible financial value to our Members. I don't believe that our Members will become Raving Fans without it. The CEO is the key ingredient in all of this . Hire the right CEO, one who believes in the credit union movement and who selflessly carries out his/her fiduciary duty to the Member-Owners of the organization, and the movement can change. The right CEO can set the tone and pace of the organization and refocus the priorities of the institution towards delivering day-in/day-out tangible Membership benefits. When merger opportunities present themselves (rather than being sought as a strategic initiative), the right CEO would hold critical conversations that selflessly examine whether the merger decision would be of true benefit to both the surviving and merged credit unions' Memberships. The right, selfless CEO would also hold honest conversations with the merging institution's Board and, where appropriate, convince them of the value of remaining an independent institution, even offering to provide support and collaboration during the hunt for a new CEO (didn't we used to do this?). Tired Boards and retiring/tired CEOs should no longer be an excuse for the needless over-consolidation of our collaborative industry.
    Moritz Wohanka