By Sarah Snell Cooke, Principal, Cooke Consulting Solutions

“A lot of people were pretty passionate about the topic on both sides of the issue… There were definitely no lulls in conversation at the table,” John Faries, CEO of Columbine FCU, said of the speed dating session he led at the Underground Collision last week.

Columbine FCU CEO John Faries led the merger discussion speed-dating table at the Underground Collision, May 8.

The topic: Mergers, a frequent matter of heated debate among credit unions. Two hundred mergers occurred in 2016, he explained, and that trend is up 65% from where it was in 2000. But it’s the underlying story of how mergers—particularly of smaller credit unions—happen that everyone is concerned about on both sides. Welcome to the dark side.

Don't miss the sidebar discussion on credit union charter recycling at the bottom of the page, nor this earlier content from the May 8 Underground Collision on collaboration.

“As long as the intent of the merger is pure, then so what,” Faries said. “As long as it’s good for the member, it’s good for the movement.” That isn’t always the case.

Faries, a self-proclaimed “philosophy nerd,” said he hopes most credit union mergers are for the right reasons. As the CEO of a small credit union, which he grew from $40M to $60M under his tenure, he understands the regulatory burden and resourcing problems. If you can’t excite consumers with your offerings, you can’t bring them in.

Columbine FCU is growing its deposits so fast, it’s depleting net worth—a difficult road to ho for many credit unions. When credit unions are willing to collaborate, however, they can often overcome these obstacles. He said his credit union hasn’t personally taken advantage, but some larger credit unions (and Columbine for that matter) are willing to help with marketing collateral or even Call Reports.

The problem is that many don’t take advantage, because smaller credit unions have been hit with so many merger offers trust is lacking. (Which is ironic, because trust is what credit unions are often known for among their members.) Faries said an NCUA examiner asked him to help another smaller, but troubled, credit union out, and referred the credit union to Faries. When the CEO never reached out, Faries contacted them. He was basically hung up on.

Golden parachutes were another hot topic for debate at the table. Some CEOs felt that a small credit union CEO who’d done a lot of work for a lot of years for not a lot of pay deserves to be compensated in their retirement. While Faries believes the argument rings true, he has a hang up over using member capital to do that—and so did some others in the room. The consensus of the groups that visited his Underground Collision speed dating table was that, depending upon the situation of the credit union, the CEO and the board, that person can be entirely deserving of it.

Plus, new CEO searches are expensive, and smaller credit unions may not be able to attract the leadership it feels is needed.

One solution to the debate was better member disclosure of the financial arrangements made to facilitate the merger. It’s an issue that NCUA Chairman Mark McWatters brought up in his address to the CUNA Governmental Affairs Conference. Most firms, however, are wary of greater government involvement in their business—and rightly so. Even if the intentions are good, it often creates more paperwork and headaches from the very organizations they’re trying to help. “It all comes down to disclosure to the membership,” Faries said. “As long as there’s adequate discussion that’s clearly written or explained, then the members still made their choice.” Credit unions either need to take it upon themselves to self-regulate or it might be worth considering, Faries said, a regulatory solution.

Faries noted that he has good CEO friends whose credit unions could gobble him up, but he trusts them. Discussion of a merger never come up. In a recent meeting with a legislator, he explained Columbine FCU’s deposit growth challenge, and after another credit union suggested they should figure out a way to participate out deposits similarly to loans, but current regulation does not allow for that.

Finally, when a merger does take place, the culture gap afterward can be a huge obstacle they can’t overcome well. “The bottom line for credit unions, focus is on financial and operational aspects, and they don’t apply that same rigor to the cultural aspects, Faries said. His tips for addressing the culture issue:

1. Define the post-merger culture, and how it should look (sales, service, etc.);
2. Find the gaps through employee surveys, process flow maps, and employee interviews; and then,
3. Create solutions and measure progress.

The last piece is a considerable challenge because not as measurable as ROA, for example, which is where a group like Mitchell, Stankovic and Associates can step in.

Charter Auction: Can Old Charters Be Recycled?

South Bay Credit Union's Jennifer Oliver was the mastermind behind the charter auction idea.

Enough credit unions must continue to exist to justify the NCUA continuing as an independent regulator as well—the old devil-you-know scenario. If/when too many credit unions merge, continued justification of an independent regulator may deteriorate. As it is, when credit unions merge, they try to maintain a state charter where it’s more lenient (and it’s a substantial number of states), which does not bode well for the regulator’s survival. Who knows how the Treasury, the FDIC or the CFPB might treat credit unions and their unique culture?

Faries explained that possibly the most creative solution of the day was around what to do with the abandoned charters. It’s notoriously difficult to form a new credit union, but is there some way to adopt the charter of a merged credit union. Some sort of charter auction perhaps.