By Ray Birch
GLENDALE, Calif.—As credit unions carefully watch for threats from outside the movement, one CEO asserts that the biggest risk to the future of the industry is coming from inside CUs as some leaders are “pimping” out their credit unions for personal gain.
Stuart Perlitsh, CEO of the $355-million Glendale Area Schools CU, believes that the growing issue of large credit unions scooping up smaller, well-performing shops by enticing leaders of the acquired organization with hefty payouts—an issue on which CUToday.info has extensively reported—will eventually spell an end to the CU tax exemption.
“We have Wells Fargo, City Bank and Chase branches within walking distance of our main office and I don’t ruminate at all about them,” said Perlitsh. “My concerns are credit unions like SchoolsFirst, Navy and Pentagon—and other multi-billion-dollar credit unions—that are enticing smaller credit unions to merge with big CEO payouts. This is undermining our industry.”
Where Have All Small CUs Gone?
Perlitsh believes that at some point Washington will see only large credit unions lobbying on Capitol Hill, and wonder where all the small credit unions have gone.
“Our elected leaders will recognize that only the Navys and Pentagons are running around D.C. and say, ‘You guys look pretty much like Chase and Wells Fargo, so why are your entitled to preferential tax treatment?’ That will be hard to defend against with all the small postal, city and schools credit unions gone.”
Perlitsh estimates that more than half of the mergers being completed today include some form of CEO enticement to get the deal done. He said he is aware how the deals work, saying he has even heard of managers at some small CUs starting “bidding wars” among interested acquirers in order to boost payouts. Perlitsh, who at 59 will retire at the end of March after leading Glendale Area Schools for 21 years, said he has been offered these kinds of deals himself and turned them down.
“I have been approached within the last 12 months by a credit union with over a billion dollars in assets and by one with less than $500 million,” said Perlitsh, noting that his organization is an attractive target. “Read our balance sheet. This credit union has 13% net worth—it is a hugely successful enterprise. I could have sold out to make money, shopped this credit union like I was a mercenary, but that’s not right.”
Perlitsh walked CUToday.info through what he said is a common scenario that begins with sights being set on small credit unions that have high net worth.
“The (acquiring) credit union then gives 10%-20% back to the CEO of the acquired institution and it’s still net ahead. It’s like free money to them,” he said. “But this is the members’ money. They built those reserves, not the CEO.”
Practice Goes On 'All The Time'
Perlitsh called such deals “deplorable.”
“Pimping the credit union for personal gain. It’s reprehensible. But this goes on all the time,” he said.
Perlitsh believes that mergers of smaller credit unions into larger ones is good for the movement when a CU’s condition deems that necessary. He said he understands how credit unions that have not invested in growth can fear their ability to compete in the future as they face the rising costs of technology and compliance.
“For these credit unions a merger makes perfect sense,” Perlitsh said.
Merger Spin
But he also recognizes how some credit unions that have the ability to continue on well into the future spin a merger message to the membership.
“I know how the pitch goes. The merger is presented as being good for the members—a means to provide more services and achieve a lower operating cost,” said Perlitsh. “But nowhere in that announcement is there anything said about the CEO’s three-year contract at $400,000 a year.”
Disclosure of executive compensation must be made with all mergers, insisted Perlitsh, who said Acting NCUA Board Chairman Mark McWatters’ recent announcement that all aspects of a merger should be disclosed to members is a a good start. During CUNA’s GAC, McWatters stated 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.’”
“This information has to be disclosed to the members,” said Perlitsh. “Members are entitled to know how the merger is being structured and who is getting greased, when that happens. Then they can say, ‘OK, we support this,’ or, ‘No, we don’t.’”
But Perlitsh is not so sure members will actively vote against a merger unless there is some organized, aggressive opposition to the deal, as was the case with the recent Cornerstone FCU and Belco Community CU merger that was eventually approved by Cornerstone members.
“If there is not strong opposition, I think 90% of members generally acquiesce to the deal or just not bother to vote and the merger passes by default,” said Perlitsh.
Keeping Up With Big Boys
Perlitsh believes these kinds of deals got moving in earnest as billion-dollar credit unions saw how the $79-billion Navy FCU and the $21-billion Pentagon were putting on assets and felt they needed a quicker way to grow, and therefore compete. Perlitsh wonders what’s next, after all the $250-million-and-under CUs are gobbled up.
“Then is the next stack of credit unions on the radar screen $250 million to $500 million?” asked Perlitsh. “I just see this spreading like a cancer.”