ALEXANDRIA, Va.–Long hidden in the shadows–and in some cases, intentional secrecy–NCUA’s new rules requiring disclosures be made by credit unions going through mergers reveal a host of new details around what members are being told and, in some cases, how they are being rewarded, as well as how some in CU leadership are being compensated as part of a merger.
In June of 2018, the NCUA board approved a final rule on voluntary mergers that provides greater transparency about compensation being paid to top executives of the acquired CU, and provides members with more time to make a decision on the combination. Rules effective this year have led to the creation of an NCUA-hosted web page on which credit unions in mergers must disclose significantly more information than members typically received in the past.
CUToday.info has reviewed the nearly three-dozen merger disclosures listed on the NCUA’s web page so far in 2019. In more than a third of the mergers, the managers/CEOs at the institutions disappearing in the merger have been paid or are being paid severance or bonuses. In some cases, agreements are clearly written to encourage the former managers to leave in order to collect the bonus payment. In only one case did a credit union say it was making a payment to all employees.
Secret Pay Packages
The new NCUA rules came after CUToday.info reported extensively on lucrative pay packages and other benefits going to senior executives and even board members at credit unions that were being absorbed in mergers. As reported, in most cases these pay packages were not being disclosed to members prior to or at the time members were voting on the merger; instead, members were often told only that the merger was about “improved products and services.”
A number of sources told CUToday.info it was common practice for larger credit unions to approach managers and boards at smaller CUs with offers of paying out incentives well into six figures from the smaller CU’s capital, which in many cases could be substantial. Often, none of that same capital was paid back to members of the disappearing CU.
When the NCUA board first proposed the voluntary merger rule, agency staff reported that in “75% to 80%” of mergers they had found “significant merger-related compensation” being paid to people at the credit union that was being acquired, nearly all of which was kept from members when voting on the merger.
Key Changes to Merger Rules
Among the key changes required under new rules now in effect are:
- Members must be given notice of the merger and provided with information at least 45 days in dance of the vote, as opposed to the former seven-day minimum notice.
- Merger-related compensation paid to the top five executives of the acquired CU that exceeds $10,000 or 15% (whichever is greater) of current compensation must be disclosed.
As part of the new rules, NCUA now hosts a moderated web page for member-to-member merger communication. The new rule also clarifies the contents and format of the members’ notice to provide better information, NCUA said.
The new “Comments on Proposed Credit Union Mergers” webpage includes 35 credit union mergers dating back to February of this year.
What Must Be Disclosed
Each merger requires credit unions to provide “Primary Documents,” nearly all of which use the same boilerplate language about the how’s and why’s of a membership vote, and “Supporting Documents,” which offer information on the reasons for the merger proposal, how the merger will affect net worth, whether or not there will be a share adjustment (or payout to members of the disappearing CU), locations of the continuing credit union, and changes to service and member benefits. This is also where a credit union must disclose any compensation being paid to any of the five highest-paid employees at the CU being merged.
Although it follows a generally uniform format, the amount of information disclosed to members varies, with some CUs providing a minimum of information, and others going as far as to provide copies of the balance sheets of the merging credit unions. In nearly all cases, the institution being merged out is smaller in asset size and it typically provides a list of expanded product and service offerings that will result from the merger.
No ‘Cure’ For Situation
Very often, the merging credit union shares a story of squeezed resources due to its limited assets, its inability to invest in new technologies, or of changing times and dying fields of membership.
Soo Line Credit Union, which merged into Central Minnesota Credit Union, for instance, confessed to members, “We do not have the ability to provide the financial resources, technology, and management skill required to effectively provide the products and services our members require such as mobile banking, updated website enhancements, etc. Additional analysis revealed a slowly declining membership and inability to grow membership through expansion of the Field of Membership, which limits our ability to deal with an ever-increasing level of complexity in regulatory and compliance issues… The SLCU board saw no other reasonable course of action available to cure this situation.”
The board of Energy Services FCU in Minnesota said the credit union had worked “incredibly hard over the last 85 years to provide products and services their members desired while maintaining financial stability,” but “the current rate environment, the unrelenting regulatory/technology pressures, and most importantly the unsuccessful endeavor to fill the vacant manager/CEO position with a qualified individual has led the ESFCU team to seek a compatible merger partner.”
CT1 Media Credit Union, which is merging into Hartford FCU in Connecticut, said it was left with little choice but to merge due to layoffs at its primary sponsor, the Hartford Courant. Moreover, it told members its long-time manager and sole employee, Ray Gmeindl, was retiring, and it “would be profoundly difficult to attract a qualified part-time manager at a compensation level that is economically feasible.”
In Maryland, in addition to listing reasons common to other mergers, Boyds FCU, which is merging into Mid-Atlantic FCU, said it could “no longer attract and keep volunteers for the board of directors, supervisory committee or credit committee. Many of our members who were active and running the credit union are no longer able or willing to volunteer their service. We have not been able to attract younger individuals to serve.”
In nearly all cases, board members emphasized they performed considerable due diligence before finally choosing to pursue a merger.
What Members Are (Not) Saying
The NCUA web page for mergers includes an opportunity for members to comment and potentially speak to each other, but in most cases to date there are no member comments. To what degree credit unions involved in mergers make members aware of the NCUA site is not known.
But in some cases members do share their feedback.
One Member of Springfield, Mo.-based District 8 Highway Employees CU, which is merging into Metro Credit Union, wrote, “I am in favor of the merger but would like to see more of the Undivided Earnings distributed to the members of the District 8 Highway Employees CU. The board and committees have done an outstanding job of keeping the CU on very solid financial ground and I would like to thank them for their service.In closing, I feel that the members need more of a disbursement of the approximate 1 million dollars than 75 thousand dollars proposed.”
In Richmond, Va., in the case of Entrust Financial Credit Union’s merger into ValleyStar Credit Union, three comments appear, one of which is from the credit union itself responding to a member question about the fate of the CU’s building and its board.
In one case, a member objected to a merger. Tim Jarnot, who said his spouse had been CEO of Energy Services FCU for 25 years, said he would vote no to a merger with SPIRE Credit Union, saying he believes “the credit union should dissolve thereby giving back to its members the investment and dedication that they have given to it. With many options for credit unions in our area, this course of action does not put undo (sic) stress on the current members to invest in another credit union which suits their needs.”
Members Receiving Payouts
A number of the CUs involved in mergers announced a payout to members in cases where the merging CU’s capital was higher than that of the CU into which it is being merged.
Among the CUs offering such payouts:
- District 8 Highway Employees Credit Union said it will distribute a portion of its net worth as a merger bonus dividend equal to approximately 0.55% of share and share certificate balances as of Dec. 31,2018.
- Energy Services Federal Credit Union in Minnesota, said it will distribute a portion of its net worth equivalent to four times the 2018 dividends paid to all eligible members.
- Kansas City P&G Employees Credit Union, which is merging into Azura Credit Union, said it will distribute a portion of its net worth in the following manner: $100 per member with a share account in good standing; $75 per member with a checking account in good standing; $15 per each full year of membership to members of good standing; 100% rebate on all loan interest paid for the period of 1/1/2017 through 6/30/18, and a 100% bonus on all share dividends earned for the same period.
- Oak Point Employees Credit Union, which is merging into NAS JRB Credit Union, said it paid a special, one-time 7% dividend to members in good standing as of March 31, 2019.
- Hanesbrands Credit Union, which has found a fit with Members Credit Union, said it is paying out a portion of its net worth in the form of a 1.75% bonus dividend paid to all active members as of the merger date. The balance of their regular share account at March 31, 2019 was used to calculate the dollar amount of the bonus dividend.
- Boyd’s FCU in Maryland said it increased the dividend rate to 3% for the quarter ending March 31.
- McClatchy Employee Credit Union, which is merging into First U.S. Community Credit Union, said it will pay the regular 2019 dividend on a pro-rated basis for the number of months in 2019 prior to the merger at an expected annual rate of up to .80 to .90, based upon available 2019 earnings.
- Health Care of New Jersey FCU, which is merging into Healthcare Employees FCU, said capital will be equalized to 9% between the merging and continuing credit unions once the merger is concluded, resulting in a bonus dividend on share and certificate accounts for HCNJFCU members of between 1.8% and 3.6%.
Bonus Comp & Severance Payouts
At least half of the 35 credit unions announcing mergers so far this year disclosed to members that some kind of bonus or severance was being paid to management. In addition, the new rules also require disclosure of instances where employees are seeing increases in compensation as a result of joining the surviving credit union.
Among those disclosing such payments:
- Price Chopper Employees FCU, which is merging into Sunmark FCU, reported CEO Dawn Donovan received severance payment of $106,018, and Branch Manager Ralph Gazzillo received severance payment of $75,854. According to the disclosure, Donovan will be entitled to receive the amount of her then monthly salary if she is terminated without cause within the two-year period following the merger, multiplied by the number of months remaining in such period but not to exceed 12 months. She will also participate in the continuing credit union's employee benefit plans. Gazzillo will be entitled to receive the amount of his then monthly salary if he is terminated without cause within the two-year period following the merger, multiplied by the number of months remaining in such period, but not to exceed 12) months. He will also participate in the continuing credit union's employee benefit programs. Neither Donovan nor Gazzillo will receive any salary increase in connection with the merger, the credit union said.
- In Illinois, Motor Coach Employees Credit Union, which merged into Catholic and Community Credit Union, said MCECU will pay its former manager, Vonzetta Lewis, a lump sum of her remaining salary through the end of 2019. Depending upon the merger date this is estimated to be about $19,621.
- Bard Employees FCU in New Jersey, which is merging into Illinois-based Baxter Credit Union, said President Jessica Loreti received severance based on years of service of $104,601.50, while Operations Manager Karen Barry received severance based on years of service of $49,849.80
- In Massachusetts, West Springfield FCU, which is merging Freedom Credit Union, reported that in order to retain the services of the CU’s manager, Ann Manchino, who also serves on the board, during the transition and integration of operations immediately after the merger, Freedom Credit Union has committed to enter into a Retention Agreement with Manchino that provides for a $100,000 retention bonus payable if any one of the following events occur: The continuing credit Union terminates Manchino other than for cause during the 180 days after the merger effective date; Manchino voluntarily leaves employment with the Freedom CU after the date West Springfield's data processing system is integrated, but before the date that is 180 days after the merger effective date; or Manchino voluntarily terminates her employment with the continuing credit union on the date that is 180 days after the merger effective date, if the data processing system integration is not complete. The disclosure notes that should Manchino remain employed with Freedom Credit Union beyond the date that is 180 days after the merger effective date, she will notreceive the retention bonus.
- Desert Communities FCU, which is being absorbed via merger by Arrowhead Credit Union in California, said DCFCU CEO Penny Rodriguez will have an employment agreement with Arrowhead Central Credit Union for one year after the merger is completed. The agreement entitles her to a severance payment of $10,328 per month times the number of months remaining in the one-year post-merger period only if the combined credit union terminates her employment without cause during the one-year post merger period.
- North Side Community FCU, which is merging into Great Lakes Credit Union, said its former CEO, Sarah Marshall, will become chief community development officer at GLCU and see a $28,480 pay increase, plus bonus. Jeannette Velazquez, director of housing counseling, will see a $18,850 pay boost plus bonus.
- District 8 reported its manager, Stacy Yeary, would be joining Metro CU and would see a base pay increase of $14,000 annually, plus a bonus of $2,000.
- In North Carolina, Hanesbrand CU disclosed it paid its former president, John Hewes, a severance and longevity payment of $91,638; paid Kathy Alexander, VP-member service and marketing, a severance and longevity payment of $63,616,96; and paid Kathy Hamby, senior accountant, $22,185.40. All remaining employees as a group received $83,686.78.
- In St. Clair Shores, Mich., FME Credit Union, which is becoming part of Community Choice Credit Union, announced Manager Ann Ciesluk was to be paid a retention bonus or severance payment of $76,751.16; Sandra Burke, manager, was to be paid a retention bonus or severance payment of up to $43,954.04; Nicholas Bery, branch representative, was to be paid severance up to $18,283; Manager Sue Gettner was to be paid severance up to $22,083.75, and manager Debra Perkins was to be paid severance up to $19,890.
- StarCor Credit Union, which is merging into St. Cloud Financial CU, said John Hardekopf, its CEO of 22 years, head earned accrued sick leave during his tenure with an estimated value of $12,033.08. Hardekopf has also been offered employment with St. Cloud Financial Credit Union as VP-consumer lending and will see a $21,035 annual increase in compensation, according to documents filed with NCUA.
- In the Lone Star State, Lynn-CO FCU, which is merging into Texas Tech FCU, said it paid a retirement bonus to its manager, Della Swartz, of $40,000. The credit union said the financial impact of the bonus represents approximately 40% of Lynn-CO FCU’s equity and 0.20% of the combined institutions’ equity position.
Other Items Disclosed
The forms filed with NCUA also disclosed a number of other tidbits as the result of mergers, including:
- In one case, the merger will actually cost members some money. Southeast Texas Employees FCU, which is merging into FivePoint Credit Union, said the minimum to open a share account and be a member at STEFCU has always been $5, but at FivePoint Credit Union the member minimum is $25. Members are being given six months after the merger to meet the higher threshold.
- In one instance, Gilt Edge Employees FCU in Norman, Okla., did not include any additional disclosures to members on the NCUA site.
- While many CUs disclosed bonus comp, Credit Union South noted that “no volunteer or employee…is receiving any compensation as part of this merger. Our employees will go to work for Central Sunbelt Federal Credit Union at the same pay as they are receiving now.”
- Price Chopper Employees FCU, which is merging into Sunmark FCU, said an advisory board made up of its board members would be established.