By Ray Birch
PORTLAND, Ore.—What might be a well-kept industry “secret” today—that large credit unions using not just their size and marketing might to force small CUs to merge but also dangling incentives in front of CEOs at smaller CUs–won’t be a practice under wraps for very long, assert analysts and CU executives who spoke with CUToday.info.
Those analysts contend the financial performance and asset-size gap quickly growing between large and small CUs is becoming too great, making it very difficult for small shops to fend off the larger credit unions’ advances and survive. And as large CUs grow and expand their geographic areas, the problem will simply be exacerbated, they say.
If that weren’t enough of a motivator, sources also said to expect more CEOs at those small institutions to take sweetheart financial packages being offered by acquiring credit unions to sway the merger decision. CUToday.info reported that the CEOs of two small California CUs who have been in a public spat with a much-larger CU that they believe is seeking to force them into mergers, believe that is an issue today across the country.
“Certainly merging is easier than building and easier than trying to take all of a credit union’s members,” said David Bartoo, president of Merger Solutions Group. “It used to be that credit unions were happy with their SEGs—then someone said ‘I want to get big’ and the community charter was created.
“And then, someone said, ‘What’s wrong with being even bigger?” continued Bartoo. “The principles of the credit union cooperation have been replaced by the insatiable need to grow.”
David Bartoo
Tip Of The Iceberg
But that need to grow often runs into the behemoth of market share that is the banking industry, which continues to hold the vast majority of wallet share.
“So some credit unions have to die for others to get bigger. The industry will just consolidate itself down to a handful of multi-billion-dollar credit unions,” predicted Bartoo, adding a forecast that is rather gloomy: a market of just billion-dollar CUs will eventually mean regulation by the FDIC. “This will just end with every credit union being gone. It won’t happen overnight, but this has been happening for decades.”
Glenn Christensen of CEO Advisory Services in Kent, Wash., believes credit unions are currently seeing only the “tip of the iceberg” of the scale of credit union consolidation that’s coming.
“The big are getting bigger. And the gap between ultra-large and medium-sized credit unions will continue to grow. In our most recent projections we are estimating the average credit union will be $2 billion 20 years from now,” Christensen said. “This size differential has profound implications for the industry, as the large credit unions will have a significant competitive advantage through the economies of scale and market momentum. As a result, larger credit unions will have a pricing advantage, and perhaps even more importantly, a major market awareness and brand preference advantage.”
Christensen said small credit unions that may feel protected today in isolated markets should not feel safe due to the momentum of more and more larger credit unions seeking growth. He believes that even the very largest credit unions will to begin to combine at a greater pace to gain advantages in their markets.
Bartoo said he believes that cooperation, what has long been the “hallmark” of the movement, is “out the window. It’s everyone for themselves and it is everyone out there killing each other.”
But, as CUToday.info previously reported here, some sources feel that small credit union CEOs are not blameless for how quickly small shops being merged into larger CUs. Many small CU leaders, sources said, are throwing in the towel after being induced by lucrative SERPs or limited-year contracts offered up by the acquirer.
“The merged CUs’ CEOs love it—they get some major pay to watch the grass grow for a few years,” said Stuart Perlitsh, CEO at the $355-million Glendale Area Schools FCU, Glendale, Calif., in a previous report.
One source, asking for anonymity, said the practice is widespread and that a three-year deal is a bargain for the acquirer.
“At least in my experience, that is what I know,” the source stated. “Three years is a poor offer. If I am a multi-billion-dollar credit union and I offer you three years to do nothing—not even show up to work, plus get benefits—do you think I am giving you my best offer first? A CEO takes three years and he is leaving a lot on the table.”
But Bartoo, who said he has also seen small credit union CEOs walk away with nice packages from acquirers, said those deals aren’t always simply rubber-stamped by the board.
“Just because the CEO is offered a deal does not mean the board will approve it,” said Bartoo. “I think there is a misconception that CEOs can negotiate a package and get their own buyouts. Bottom line is the board has a fiduciary responsibility to the credit union and its members.”
More Due Diligence Needed?
One source who asked not to be named asserted that fiduciary responsibility is not always executed by the board of the acquired CU. And the source added that also a
pplies to the choice of merger partners, saying that often not enough due-diligence is being performed before a final merger decision is made.
GASFCU’s Perlitsh suggested that might be one reason some board members at the acquired institution are offered a board seat at the acquired CU, or get appointe
d to some “marketing committee” or “technology committee” with a tidy little conference travel budget. “Everyone wins, except the members,” Perlitsh said.
Bartoo said that board travel incentives are something new that has surfaced in the last few years in merger deals.
“Even if a key board member is offered a seat on the acquiring institution’s board, that director knows the seat will be hollow,” he said. “They will have no influence. So the travel creates incentive and gets things moving.”