Credit unions interested in growing through mergers and acquisitions of other financial institutions should adhere to one main rule.

“Always be willing to walk away,” advises Brandon Riechers, executive vice president and chief lending officer at Royal Credit Union in Eau Claire, Wis. “Don’t base the decision on emotion, or it’s too easy to rationalize.”

During the past decade, Riechers and Royal have relied on that principle to continue Royal’s growth arc through a series of acquisitions aimed at expanding beyond its saturated home market. He and executive vice president and chief financial officer Jon Hehli described their approach in a breakout session at the CUNA CFO Council Conference.

The credit union absorbed several small credit unions as well as bank branches and a whole bank. The reasons include expanding its geographic footprint, filling in a market gap, preventing another financial institution to enter its territory, and access to more visible locations.

Royal receives a half-dozen inquiries each month from financial institutions seeking a merger partner, but never wavers from its litmus test. “The most important thing is, does the move benefit our current members?” Hehli states.

Reasons for considering a merger or acquisition include:

• Enhancements to core capabilities.
• Geographic diversification or expanding branch network.
• Concentration diversification.
• Scalable efficiencies, resulting in greater combined value.
• Expansion from saturated existing markets.
• Cost savings versus building new facilities.
• Industry consolidation (capitalizing on available opportunities).

Potential risks include:

• Different cultural values. Royal seeks credit unions with smaller asset sizes and complexity to minimize the impact of organizational culture. “We’ve turned down two or three opportunities in markets where we should be going because we realized the cultural differences are just too big a hurdle,” Hehli says.
• Resource drain for ongoing operations.
• Too much emphasis on getting bigger; partner not a good strategic fit.
• Different vision of member service / value.
• Poor communication, which creates uncertainty.
• Poor pro forma estimates. Create a worst-case scenario as baseline for removing emotion, Hiehl advises.

To aid the discussion on whether a potential merger is appropriate, Riechers and Hiehl advise establishing a filter that brings the board and senior management team into lockstep. Identify non-negotiable factors, and consider variables such as:

• Asset size. How much risk does the credit union want to take on?
• Number of employees. Royal inherited more than 100 bank employees from one of its acquisitions a decade ago, and still occasionally hears rumbling related to a preference for past practices.
• Concentration mix.
• Field of membership expansion.
• Geographic exposure.

Credit unions can identify prospective merger targets by reviewing Call Report data to find institutions with desired characteristics, but also should rely on experts with their finger on the pulse of banking and real estate, such as:

• Local investment bankers.
• Accounting firms.
• Appraisers / Realtors.

Considering two or three merger and acquisition possibilities at once is ideal, Riechers says, because that’s a good balance between having solid options and adding too many variables into the mix to accurately measure the best option.

►Click here for more conference coverage from CUNA News, and get live updates on Twitter via @AdamMertzCUNA, @cumagazine, and  @CUNACouncils, and by using the #CFOCouncil hashtag. Learn more about the CUNA CFO Council, a member-led professional society for credit union executives, at cunacouncils.org.