Making the Most of Mergers

Seven ways to reduce costs, boost revenue, and achieve a happier, lasting union.

March 26, 2013

Credit union mergers can be sweet dreams, ugly nightmares, or anything in between.

In the best-case scenario, the merging credit unions fit together well, the emerging credit union is better than either one was before, and members ultimately reap the benefits.

Some merging credit unions, however, “end up beating on each other like two boats tied together in a storm,” observes Chris Oldag, chief lending officer and vice president at $1.1 billion asset Pacific Service Credit Union, Concord, Calif., who was involved in several mergers at another institution.

It’s no wonder that a dark cloud hangs over the topic of credit union mergers. People look at it as a “big, bad discussion in the industry,” says Tony Ferris, partner at The Rochdale Group.

But he urges credit unions to consider a brighter view. A merger is a strategy to consider, nothing more or less.

“I’m a proponent of looking at a merger regardless of whether you act on it,” Ferris says. “Even if credit unions elect not to merge, they oft en identify opportunities to combine their purchasing power or collaborate on other initiatives. They discover business opportunities simply by going through the merger analyses.”

Following these seven guidelines increases the odds of achieving a successful merger:

1. Spell out expectations.

Ferris advises credit unions to take this step long before merger negotiations begin. Both parties need to ask some basic questions: What are the opportunities? What do we want? What will we gain? What are we willing to give up?

By weighing such questions early on, credit unions “will have a predefined strategy as to what fits their business plan,” Ferris says. Skipping this step is the most common mistake in mergers, leading to decisions that “tend to be emotional rather than rational.”

Credit unions that do such early strategizing are far more likely to shape a merged organization destined to succeed. Ultimately it will attain greater market share, stronger membership growth, and increased products per member, Ferris says.

But, he warns, “If you merely put two organizations together, you end up with duplicative costs and expenses.”

Clarity about a merger’s purpose is critical, agrees Jennifer Lehn, executive vice president/chief operations officer at $1.2 billion asset Numerica Credit Union, Spokane, Wash. Numerica has pursued mergers to expand into new geographic markets and—in the case of acquiring a failed institution—because it was the right thing to do for the credit union movement, she says.

“Know at the beginning why you’re doing a merger,” Lehn advises. “That helps manage everyone’s expectations along the way.”

2. Create a roadmap.

Oldag depicts a merger as a “massive array of tangled wires that must be carefully unplugged and re-plugged in to preserve members’ relationships with the surviving entity.”

He’s not talking only about the physical wires that hook up systems, but the many ways in which two organizations must connect to merge into one. Oldag advises building a roadmap for this undertaking and following it methodically. That requires agreement at the outset about the roadmap.

Decide in advance, for example, which products and back-office systems will survive. Which credit card program or auto lending solution will you go with? Which data processing system has the capacity to take you into the future?

“You need to figure out how to wire the two entities together,” Oldag says. “Don’t try to run two parallel organizations.”

NEXT: Be realistic about potential changes

3. Be realistic about potential gains.

First and foremost, mergers must translate into genuine benefits for members of the newly merged credit union. Possible benefits include better rates on loans and deposits or access to additional products and services.

Much of the financial benefit the emerging credit union realizes comes from cost savings, says David Mooney, president/CEO of $8.3 billion asset Alliant Credit Union in Chicago. “In our mergers, we’ve seen increased economies of scale and the elimination of redundant costs, which are significant.”

Over the long haul, acquiring credit unions “must work particularly hard to find cost savings,” according to “Impacts of Mergers on Credit Union Costs: 1984- 2009,” a report from the Filene Research Institute. “This could be because credit unions are unusually loath to lay off staff, opting instead for reductions by attrition or no reductions at all.”

This is especially true in mergers of equals among credit unions with more than $100 million in assets. In these mergers, it’s rare to find impressive economies of scale, according to the Filene paper. But even though improved operational efficiencies are hard to come by, it’s still the correct goal. So are opportunities to gain new business and boost wallet share.

Alliant has leveraged its value proposition and strong business development capabilities to attract more business from members after the merger, Mooney reports. But, he concedes, “Revenue opportunities are a lot more elusive than cost-saving opportunities.”

John Beverlin, president/CEO of $330 million asset Mainstreet Credit Union, Lenexa, Kan., has had similar experiences. Mainstreet has been involved in five mergers since 2008 with partners ranging in size from $2 million to $13 million in assets.


These transactions have allowed Mainstreet to grow its membership. But increased wallet share “has been slow to come by,” Beverlin says.

He attributes part of that to the economic downturn and to strong competition from regional banks in the communities where the smaller merger partners were located. Also, Beverlin adds, those small credit unions hadn’t done much marketing.

Since the mergers, “We’ve been working to build rapport and name recognition for Mainstreet in those areas,” he says. “But it’s a slower process than we expected.”

4. Conduct thorough due diligence.

One component of due diligence is to assess the merging partner. Alliant, for example, considers only partners that are a strategic and model fit, Mooney says. That, in Alliant’s case, includes credit unions that are sponsor-based and not heavily reliant on branches for member access.

In addition, Alliant evaluates the other credit union’s sponsor. What is its relationship with the sponsor? How engaged and committed is the sponsor? What value does the sponsor provide to the credit union?

Due diligence also must scrutinize the merging partner’s existing leases and contracts. Exiting those arrangements typically requires buyouts. This has been a hurdle in some of Mainstreet’s mergers, requiring months of negotiations.

“I suspect some service providers are taking advantage of small credit unions by roping them into seven- year contracts with call-back features,” Beverlin says. “I’d caution any surviving credit union to do careful due diligence on the other party’s remaining contracts.”

In fact, Alliant includes in its merger agreements a condition designed to ward off contract/lease buyout problems. If Alliant deems the buyout figure to be unreasonable, “we maintain the ability to walk away from the merger,” Mooney says. “And in one case, we did.”

Above all, don’t give due diligence short shrift out of the desire to hasten the closing of a merger deal.

“That,” Mooney says, “impairs your objectivity.”

NEXT: Face up to hard choices



1. CUNA Councils

2. CUNA’s Guide to Mergers: enter 28868 in the search box.

Filene Research Group

The Rochdale Group

5. Face up to hard choices.

During some early mergers, Numerica tried to keep everything the same afterward, Lehn says. The merged credit union retained its own name and was designated as “a division of Numerica.” All staff kept their jobs, and the other credit union’s products and services were grandfathered into Numerica’s offerings.

While such an approach softens the blow, “it often means it takes a lot longer to get the new organization to where you want it to be,” Lehn says. “We’ve learned that we can’t be running more than one credit union.”

At Alliant, one of the key lessons learned when merging credit unions is the need to be highly disciplined about cutting duplicate costs, Mooney says.

That means eliminating redundant staff positions, facilities, and systems. “That’s not pleasant or easy,” he says. “But no one, particularly the membership, is served by excess costs” from redundancies left in place.

Excess expenses eventually become a drag on the merger process, Ferris cautions. That’s why he advocates making tough choices sooner rather than later.

In early discussions about a merger, “It’s easier to just talk about the good things,” he says. “But at some point, that leads to a breakdown in the process, and then emotional decisions take over.”

6. Take care of staff.

Mergers don’t necessarily result in staff cuts. In Mainstreet’s five mergers during the past five years, the other credit union approached Mainstreet to initiate the merger. Part of the deal was guaranteeing people would keep their jobs.

This strategy worked fine for Mainstreet because the merging credit unions all remained open as new Mainstreet branch offices. Typically, Mainstreet already had more members in those areas than the smaller credit unions had.

“So keeping those offices open gave our members another branch that was more convenient for them,” Beverlin says.

But cuts are inevitable in many mergers. The best approach is to let people know quickly about the status of their jobs, Mooney advises. Otherwise staff morale—and member service along with it—can plummet.

Members care about the people in the credit union more than the name on the door, and they’ll notice what’s happening. A perception of unfairness to staff can lead to members’ ill will toward the emerging credit union.

“What you don’t want,” Mooney says, “is for members to ask an employee, ‘What’s going to happen to you?’ and the employee just shrugs. If he or she says, ‘I won’t be here but it’s all right,’ you’ll see a much better reaction from members.”

Some employees will stay on to help navigate through the merger, knowing their jobs will end after some months. It’s essential to provide these employees with an attractive retention package, Oldag says.

“I can’t say enough about how important it is to reward the people who stay and help with the merger,” he says. “It shouldn’t be just the CEO who gets a nice bonus, but all the key people who stick around to help with the transition.”

7. Be forthcoming and transparent.

Staff, directors, and members all have a stake in a merger’s outcome. Attaining the best result requires transparency and truthfulness, Lehn emphasizes.

“We let people know what things will look like when their credit union is part of Numerica,” she says. “That approach might take more time initially, but it has paid off for us in the long run.”

Open communication with members of both organizations is important. Lehn suggests inviting incoming members to visit your website, stop by a branch, “or do whatever they feel good about to become familiar with you.”

Mergers often stir hurt feelings and a sense of loss. Board members from the soon-to-be-merged credit union, for instance, may have been volunteers for years, even decades. Letting go can be difficult.

That’s why Oldag recommends avoiding such steps as voting off board members for efficiency purposes. “Let the board shrink itself through attrition,” he advises. “When people are ready to leave, they’ll leave.”

One tactic Beverlin has used to help board members through the transition is to engage them early, before serious merger talks occur. When the credit unions with which Mainstreet eventually merged began interviews with prospective merger partners, Beverlin asked a few of his board members to attend when he gave his presentation. People struck up conversations.

“The other credit union’s board members chatted about situations they’d encountered,” Beverlin says. “Our board hadn’t faced some of those issues in years, but they empathized. Everybody hit it off. I think one of the fears on the part of the smaller credit union is that ‘they’re not like us.’ ”

Any and all efforts toward openness and transparency will go far in dispelling what may be the biggest threat to positive merger outcomes: fear of the unknown.

“We want people to know what will change and when it will change,” Mooney says. “Uncertainty is distracting. It undermines attention to member service and the overall quality of the merger.”