Considerations for Adding a Merger to Your Credit Union’s Growth Strategy

In the credit union industry, size matters. Mergers offer credit unions a strategic opportunity to gain a competitive advantage through growth.

Credit union mergers and acquisitions have been on the rise for several years. In 1969, there were nearly 24,000 credit unions. Today, there are closer to 6,000. Much of this drop is due to merger activity.

Whereas in the past mergers were typically driven out of necessity when one credit union was floundering, today large entities are combining forces strategically—driven to boost their combined assets into one even stronger entity. In October 2015, the $1.9 billion United Federal Credit Union in St. Joseph, MI announced plans to merge with the $3.8 billion Lake Michigan Credit Union. Although it ultimately was not approved, this would have represented the largest merger in the credit union industry to date.

Benefits of Growth Through Merger

There are several strategic and interrelated benefits to growth by merger. Credit unions can:

1. Expand their field of membership. Mergers increase the membership base quickly and cost-effectively. This affords multiple downstream financial benefits.

2. Gain branch locations. A merger can instantly expand a large credit union’s branch network in a new or existing market. In addition to the physical presence, this approach gives the credit union a turnkey staff with solid relationships and loyalty with the membership. Moreover, growing the branch network by merger is far more cost-effective—and faster—than the organic approach of acquiring land, construction, hiring, and marketing. It can take years to recoup the up-front costs of organic expansion, whereas acquired branches can be profitable from day one.

3. Reduce costs of cybersecurity. All financial institutions are under enormous pressure to safeguard data from hackers. But cybersecurity systems are costly to implement. Larger credit unions can spread these costs across their broader membership base.

4. Offer members new technologies. Members expect their credit unions to offer technologies like online and mobile banking that make their lives easier. Without these capabilities, members are more likely to switch to larger credit unions or banks that do offer them. But again, these technologies are expensive to develop and maintain. Larger credit unions can more easily muster the resources to offer them.

5. Offer members new and more compelling products. By pooling resources, merged credit unions are better able to offer members a compelling suite of products such as home mortgages and investment and insurance products. Offering such products helps the credit union both in terms of revenue as well as in improved member retention. The larger member base and financial strength of a merged credit union also enables the credit union to offer more competitive loan and deposit rates, which in turn attracts and retains more members.

6. Attain economies of scale. Perhaps most importantly, mergers give every credit union the scale and resources to more easily tackle financial, regulatory, and competitive challenges. Regulatory compliance is a particular tricky issue. According to MiBiz:

Federal regulations are expected only to toughen in the years ahead, pushing compliance costs up and potentially forcing even healthy but smaller credit unions to look at partnering to generate economies of scale. There’s no clear consensus within the industry on whether $500 million or $1 billion in assets, or even higher, is the “magic point” to achieve economies of scale needed to carry the added fixed costs of regulatory compliance. We’re going to see a lot more mergers in the next half-dozen to a dozen years. It’s going to be tough for the $50 million, $60 million, and $70 million institutions to survive.

Importantly, all of these benefits can be attained without a significant capital outlay. Unlike a typical corporate acquisition with cash or stock, a merger is a pooling of resources that benefits both credit unions. The costs to the larger (“acquirer”) credit union are limited to conversion costs, consulting and legal fees, and opportunity costs. In return, the target (“acquiree”) credit union primarily wants their executive team, board, staff and membership to be well taken care of.

Click Here to Download White Paper “Growth by Merger”

Beginning the Merger Journey

Credit unions considering a merger should begin by developing a Strategic Growth Plan. The plan codifies the credit union’s specific objectives for growth (e.g., branch expansion, new markets to serve, new products to offer, etc.), as well as timeframes.

With the broad strokes painted, a credit union must next evaluate the criteria for selecting merger partners. A Merger Plan addresses six broad areas to examine in determining a credit union’s desirability as a merger partner:

1. Fields of membership
2. Membership demographics
3. Branch network
4. Product portfolio/expertise
5. Leadership strengths
6. Financial strength and performance

A list of viable merger targets can now be identified based on how well they match these criteria. The Merger Plan might also encompass how the credit union will reach out to the targets and a timeline for doing so.

These two plans represent the foundational phase for any merger process. The second phase involves building relationships with the merger targets to assess their interests. If this leads to a Letter of Intent, a credit union will develop a Merger Integration Plan to nail-down the details of how to proceed.

Exploring Merger Opportunities with an Experienced Advisor

Merging with another entity opens the doors of opportunity for credit unions—allowing them to grow without adding significant costs. It’s a delicate process, however, and an experienced advisor can prove invaluable in refining the growth strategy, developing the plans, and building the relationships with prospective merger targets.

Look for an advisor that has successfully managed dozens of credit union mergers, and has a proven methodology for managing the merger process from start to finish. In particular, choose an advisor who knows how to work effectively with CEOs and boards.

In addition, make sure your advisor has the right blend of cultural sensitivity and compassion to navigate personal and political obstacles that may appear in the merger process. Look for someone adept at finding common ground, overcoming joint challenges, and identifying innovative solutions.

By partnering with an industry-leading merger consultancy, credit unions can enjoy the many benefits of growing via a merger without the headaches and complications of this often time-consuming and emotional process.