By Dianne Molvig

For better or worse, the trend toward fewer but larger CUs continues.

The gradual but incessant migration toward fewer but larger credit unions continues—apparently unimpeded by economic ups and downs.

Hundreds of credit unions disappeared again last year, and nearly all were due to mergers, says Mike Schenk, vice president of economics and statistics for the Credit Union National Association (CUNA).

The number of disappearing credit unions peaked in 2004 at 365—an average of one a day. The annual average from 2005 through 2008 was 313. That dipped to 272 for 2009, with the total number of U.S. credit unions dwindling to 7,694. Only one or two credit unions a year are liquidated, Schenk adds.

Bottom-line pressures, exacerbated by corporate stabilization costs, spurred some of last year’s mergers, Schenk says. Plus, a growing regulatory burden and economies of scale resulted in mergers for many small credit unions.

Industry experts say merger activity is expected to plateau or decline, while “distressed” mergers will probably increase.

Big gets bigger
Statistics from Merger Solutions Group show that in the 221 mergers NCUA approved in 2009 (not including those requiring state regulator approval only):

• The average asset size of the merged (as opposed to continuing) credit union was $25.5 million.
• About 186, or 84%, of the merged credit unions were under $25 million in assets.
• Only three deals involved a “merger of equals,” in which one credit union’s asset size was at least 75% of the other’s.
• Eleven mergers reached across state lines.

As the numbers show, most mergers involve a small credit union merging into a larger one—often much larger. In fact, when regulators seek merger partners for struggling small credit unions, “there seems to be a perception that other small credit unions need not apply,” notes Schenk, also staff liaison to CUNA’s Small Credit Union Committee.

The committee is urging NCUA to reconsider. “In many cases,” Schenk says, “it’s more appropriate for small credit unions to merge with each other.”
It’s not always appropriate, however, to merge two small credit unions. But a merger of equals is “five times as much work” as a small-to-large merger, says Steve Winninger, CEO of Lake Trust Credit Union, Lansing, Mich.

On April 1, 2010, Winninger’s former institution, $850 million asset NuUnion Credit Union, Lansing, Mich., officially merged with $681 million asset Detroit Edison Credit Union, Plymouth, Mich. The new entity, Lake Trust Credit Union, serves an area encompassing two-thirds of Michigan’s Lower Peninsula.

“Our research shows we should reduce our operating expenses as a percent of average assets by 25% in five years,” Winninger says. “That’s good for our members. We want this organization to survive for our children and grandchildren.”

Winninger shares Lake Trust’s top executive duties with his counterpart at the former Detroit Edison, William Thiess. Winninger serves as CEO, and Thiess is president. They each have separate areas of responsibility and some overlap.

This arrangement “is like the three-legged race at the county fair,” Winninger says. “We each have to stick a leg in a gunny sack and learn to run together. We haven’t stumbled yet.”

Determining leadership roles is just one challenge facing mergers of equals. Thiess says the process requires “transformational” change. “You set out to create something greater than the sum of the two,” he says. “That’s easier said than done.”

He compares it to starting a credit union from scratch. “You question everything,” he says. “You’re always asking, ‘Is there a better way to do this?’ In a merger of big and small, you rarely ask that question—you just do it the way the big one does it.”

Gaining regulatory approval also was a huge task. State regulators, NCUA, and the Federal Trade Commission all had to weigh in.

“It was a lot of work,” Winninger says, “but it was the right thing to do for our members. The overriding concern of any merger discussion has to be member benefit.”

Split personalities
When you walk into the lobby, you wouldn’t guess Greater Cincinnati Firefighters Credit Union was merged into Kemba Credit Union, also in Cincinnati. The original fire bell still hangs on the wall, along with other firefighter memorabilia and photographs. The only visible clue to the merger is the outside signage listing both credit unions’ names.

In 2005, the $60 million asset Greater Cincinnati Firefighters approached Kemba, now $460 million in assets, about a merger. Kemba decided it was best to make the merged credit union a division of Kemba.

“Firefighters are a loyal, proud group,” explains Steve Behler, Kemba’s president/CEO. “We felt they needed to keep their identity.”

Resistance to the merger flared at first. “The firefighters thought we stole their credit union,” Behler says. “But now I hear nothing but good things from the advisory board, the retirees’ group, and the membership.”

Of 11 branch offices, three bear the Greater Cincinnati Firefighters name, along with Kemba’s. One of those offices sports a firefighter-themed décor. In addition, Greater Cincinnati Firefighters has its own newsletter. Its name appears on monthly statements going out to firefighter members, who also have their own specially designed credit cards.

Kemba retained all the merged credit union’s employees. One former Greater Cincinnati Firefighters Board member sits on the Kemba Board, and a special advisory board of firefighters meets quarterly with Behler.

Kemba’s roots go back to the Kroger grocery store chain. “We’re from the retail side,” Behler says. “We’ve had to learn what firefighters look for in a financial institution, and what does this brotherhood thing really mean? We have a couple of our people dedicated to visiting all firehouses on an ongoing basis.”

Could this model work for other small-to-large mergers? “I think the smaller credit union has to be at least $40 million or so to make this cost-effective,” Behler says. “There are costs associated with maintaining dual names, two newsletters, and so forth.”

Long-distance mergers
At first glance, merging two credit unions located 2,000 miles apart might seem impossible. But with current technology, it becomes easier to take care of merger-related communications and paperwork swapping, says Keith Reynolds, community president of the San Jose, Calif., division of $4.3 billion asset CEFCU, Peoria, Ill.

CEFCU acquired $200 million asset Valley Credit Union, San Jose, Calif., effective Dec. 31, 2008. NCUA accepted CEFCU’s bid to take control of the struggling Valley.

“The real issue was blending our two cultures,” says Reynolds, who now works and lives in San Jose. “It took us about nine months to really understand each other’s cultures.”

The merger’s appeal was the opportunity for growth and diversification, says CEFCU President/CEO Mark Spenny. “We have a 14-county area in central Illinois with a combined population of about one million,” he explains. “San Jose itself is just shy of a million, with millions more in the surrounding three-county area,” which made up the former Valley’s field of membership.

The San Jose area is much more ethnically diverse than central Illinois. So CEFCU uses different strategies to reach out to members and potential members in San Jose. It runs Spanish television ads and uses member-education programs to boost financial literacy among emerging immigrant groups.

With such adaptations, the CEFCU business model and culture fit the California environment, Spenny explains. “We now have one culture, and it works,” he says.

“We treat people with dignity and respect and supply them with good service and value. I don’t know anywhere in the world where that business model doesn’t work.”

Still, does a long-distance merger make sense strategically? For CEFCU, the answer is yes. “For 30 years,” Spenny says, “CEFCU has been diversifying geographically and economically in terms of our members. This is a continuation of that long-term path toward diversification.”

‘Incredibly inefficient’
Evie Rasmussen understands what’s happening with many of her CEO peers at small credit unions. They’re tired and close to retiring. “It’s heartbreaking for them,” she says. “The margins and growth aren’t there. It’s easier just to merge into a much larger credit union.”

One Seattle credit union is the result of the merger of five area credit unions ranging from $3.4 million to $7.6 million in assets. The five credit unions merged into the new $30 million asset Puget Sound Credit Union, where Rasmussen is president/CEO.

The five Seattle credit unions had a working relationship for several decades before the Dec. 15, 2009, merger. Even before the merger, they had one management team and used many of the same vendors. But differences remained in the form of separate boards and redundant technologies.

“We were incredibly inefficient,” Rasmussen says. “We had lots of employees and redundant operating systems. We weren’t willing to give up either. But the costs eventually became prohibitive.”

Merging was a logical solution. “We had to look for ways to run our business more efficiently,” Rasmussen says. “And we still needed to stay close to our members because they chose us for that homespun, personal service.”

With the merger of the five credit unions, the combined work force was eventually trimmed from 33 to eight. And joining a shared branching network helped Puget Sound reduce its offices from four to one. The last office it closed saved the credit union $30,000 a month. “That branch was basically an expensive ATM where money came in, and money went out,” Rasmussen says. The cost of shared branching is only $2,200 a month.

Cutting staff and closing branches are difficult choices. “It boils down to making good business decisions in the members’ best interests,” says Rasmussen.
Rasmussen hopes more small credit unions can find ways to stay viable. “We’ve been losing small credit unions for years now,” she says. “Nobody’s banging the drum and asking, ‘Are we going to let this continue?’ 

Buying bank branches
Banks’ troubles and record failures are creating unusual growth opportunities for some credit unions.

As of April 2010, $1 billion asset Royal Credit Union, Eau Claire, Wis., was awaiting regulatory approval to acquire 11 AnchorBank branches in northwest Wisconsin. This would not be “a merger with” or an “acquisition ofâ??” the Madison, Wis.-based bank itself, Royal stated in a press release.

Schenk foresees more such acquisitions, at least in the short term. “There are lots of weak banks wanting to sell branches,” he says, “and strong credit unions willing to buy them.”

A different merger twist played out last year at $51 million asset Kennebec Valley Federal Credit Union, Augusta, Maine. Members voted down a plan to convert Kennebec Valley to a bank and then immediately merge with a local $670 million asset bank. “This is an anomaly,” says Schenk. “I can think of no solid argument for an increase in such activity.”
 

Focus

• Most of the decline in the number of CUs is due to mergers.
• Overall merger activity among CUs will remain flat, but distressed mergers could rise.
• Board focus: Weak bank branches provide an unusual growth opportunity for CUs.

 

NEW MERGER RULES ON THE HORIZON

In March 2010, NCUA announced proposed changes to rules 708a and 708b that could affect future mergers. Part 708a addresses mergers of credit unions into banks, while Part 708b pertains to mergers among credit unions. The comment period closed last month.

The thrust of the proposed changes is to “require more due diligence prior to mergers into banks,” says Dennis Tsang, CUNA’s regulatory counsel, “and more disclosures to members in general. One of NCUA’s concerns is ensuring member independence in voting on mergers or conversions.”

CUNA’s merger working group is reviewing the proposed changes. CUNA formed the group, headed by Ohio Credit Union League President Paul Mercer, to address credit unions’ concerns about regulatory processes for mergers.

“We’d like to see greater transparency from NCUA in letting credit unions know about merger opportunities,” Tsang says. “We’re also concerned about current economic conditions and the significant regulatory constraints credit unions already face.”

 

THE ‘UGLY’ TRUTH ABOUT MERGERS

Understand that anything that can go wrong with a credit union merger will go wrong. That’s the “ugly” truth about mergers, Darrick Weeks told attendees at the recent CUNA Marketing & Business Development Council conference in Washington, D.C.

“Most mergers don’t work,” he says. In fact, most fail to live up to expectations. Weeks is vice president with ValueCheck, Highland Ranch, Colo., and a former credit union executive involved in three large mergers in the past four years.

Both internal inhibitors (the credit union name, volunteers, CEO, management, policies, and operations) and external inhibitors (competitors, regulators, and members) can stand in the way of merger success, Weeks says.

Most mergers don’t work due to:

• Lack of communication and trust;
• Misunderstanding the merger process;
• Negotiating “in the street”—discussing confidential merger details with people outside the credit union;
• No true member value;
• Not using qualified help at the right time;
• Focusing on the wrong things at the expense of the strategic results; and
• Doing the right things, but not in the right order.

Brynn Ammon, business development manager with Pen Air Federal Credit Union, Pensacola, Fla., points out a few key areas that can trip up the merger process, for example:

• Due diligence. Be sure you conduct thorough due diligence before the merger vote. Get involved from the beginning and drill down into the details.
•  Charters. Know and understand the rules of merging associated with your particular charter.
• Naming/branding. Issues include taking the name of the successor credit union, creating a new name, or keeping the name of the merging credit union.
• Products. It’s a mistake not to review the products of the merging credit union and look for gaps. Understand how these products will work after the merger and communicate it to members.
• Contracts. Make sure someone is reviewing all contracts regardless of their size. Review duplications in service and pay close attention to termination clauses. Send termination notices on time.
No merger will ever be perfect, but there are ways to increase the chances of a positive outcome, says Michelle Hunter, senior vice president of marketing and development with Credit Union of Southern California, Whittier. “Internal communication is key. This involves your senior management team, training department, and the staffs of both credit unions.”
Hunter recommends these communication strategies:
• Think of your communication plan as an external campaign or “marketing to employees.”
• Spearhead regular cross-department huddles or meetings. Take a leadership role and don’t assume employees know what they need to know.
• Create internal communications channels such as an intranet; special merger Q&A e-mails; a merger-only newsletter; face-to-face chats; department meet and greets; and a buddy system, pairing up employees from the different credit unions.
• Communicate often and make sure your message is consistent. Anticipate the most pressing questions.
•  Target external communications to members, the merging credit union’s members, select employee groups, and the public.
• Integrate various touch-points and channels such as direct mail, outbound phone calls for key changes, scripting for both credit unions, and Web sites.
• Be sure to follow state and federal regulatory timelines.
• Appoint a spokesperson before the merger process starts.
• Arrange special communications to key members, such as large depositors and founding members.

Mergers aren’t easy, but they’re worth it if you keep the people in mind. Always focus on members’ best interests and you can’t go wrong, Weeks advises.

Resources

• CUNA: business development resources: buy.cuna.org, select “marketing & business development.”
• CUNA Marketing & Business Development Council: cunamarketingcouncil.org.
• Merger Solutions Group, Forest Grove, Ore.: mergersolutions.com.
• NCUA: ncua.gov.