Are Credit Unions on the Dawn of New Era in Mergers? Experts Say Maybe but Basic Best Practice Rules Remain Intact
WASHINGTON -- With all of the uproar that Wings Financial Federal Credit Union's unorthodox merger campaign created, if any thing, it sparked new dialogues on the core of the credit union model and what's really at stake to stay relevant.
The "Courtship Structures for a New Era" was the title of a May 16 Webinar hosted by Callahan & Associates, Inc. More than 50 credit unions tuned in to hear from three credit unions on their merger experiences and how one industry veteran continues to urge leaders that any alliance should keep the members priority No. 1.
For starters, credit unions are not chartering new institutions as fast as their bank counterparts, which is one of the reasons for the consolidation that is occurring, according to Callahan. More than 200 of the 300 mergers that took place in 2006 were among smaller credit unions with many in the under $1 million to $5 million range.
"Paul Parish and the Wings Financial controversy worked up the credit union system," said Chip Filson, president/CEO of Callahan. "One of the dynamics that has occurred is people are now stepping back because so much noise was raised. A number of people are asking themselves questions and looking at things that may not have been looked at before."
Filson said now that the Wings Financial scenario has passed, "everyone will do a better job" of knowing what their needs are when it comes to mergers, how smaller opportunities can be leveraged into bigger ones and whether there are other ways besides the "extended courtship" that can help restructure or create opportunities that were not possible years ago.
The $168 million Gateway Metro Credit Union had several strong reasons for bringing Guadalupan Credit Union into its fold including NCUA's request to save the struggling outfit. Deemed "the credit union no one wanted," the small financial institution served primarily Hispanics and an "aging" Caucasian membership living in a low-income area of St. Louis, said David Barton, president/CEO. The credit union was also not very profitable.
"In our market, credit unions are saying 'we're not going to merge with a credit union that's under $1 million or $25 million' because they think it's too much work," Barton said. "We think that's shortsighted. Why did we agree to take them over? Legacy reasons, which is credit unions being founded to challenge the status quo and improve the financial lives of those shut out of reasonable services."
Barton said NCUA provided some financial assistance to aid in the merger and the consolidation has also helped to create additional income streams for Gateway. The credit union just launched a new payday loan product and "Safe" accounts for those members who do not have tax identification numbers. Other new services include "Directo a Mexico" ACH service, stored-value Visa cards and Accel advisory services in Spanish. Gateway has also opened a branch in a nearby school where 30% of the students are members. The merger is less than a year old, but membership has grown by 20%, Barton said.
Meanwhile, in 2003, one of the largest credit union mergers ever took place between Western Federal Credit Union and TRW Systems Federal Credit Union. The combined credit union created a $1.1 billion financial institution serving more than 125,000 members. Nearly four years later, the alliance has spawned a massive branch network in eight states, increased product options, adopted a "lowest fee" strategy and an expanded call center with plans to open an additional call center in northwest Arkansas. The merger also blew loans through the roof, increasing them by 53% said John Bommarito, CEO of Western FCU.
"It was like Coke and Pepsi, we were so identical," Bommarito said. "Clearly, we broke the mold. Instead of being a jack of all trades and a master of a few, we now have specialized functions run by people who are better trained with new management above them that didn't exist before."
For Western's employees, the merger also brought in TRW Systems' defined benefit pension program and a "pay it forward" return on assets strategy, which resulted in "immediate returns to members and employees", Bommarito said.
"When you talk about a merger of equals, be objective, be open minded and let best practices prevail," Bommarito said. "Our priorities are clear. Members govern everything."
What helped $711 million United Federal Credit Union through its merger with First Resource Federal Credit Union during its nine-month timeline that started in July 2006 was constant communication with staff and daily and weekly updates along the way, said Shawn Birch project manager. Before the merger, United had $215 million in assets and served 22,000 members while First Resource had $480 million in assets and served 50,000 members.
"The staff needs to know [what's going on] before the members do," Birch said. "We came up with 'mission communication' and a member reference guide. The bulk of the questions [from employees] were on data conversions."
Birch said team leaders helped to keep the number one priority on track: integration of all operations. In the end, the merger, although an arduous process, solidified despite some lessons that were learned along the way. Birch said if they had to do it all over again, a converted database would have been created right away, a sufficient branch communication network would have been created earlier and the "whats and the whys" of systems, product knowledge and policies and procedures to aid training would have been implemented.
Even though the Wings Financial controversy ended a little over a month ago, some of the executives speaking at the Webinar didn't mince words about the fallout from the unprecedented merger campaign.
"We had a situation where a larger credit union tried to take over a smaller credit union, then the larger one offers $5 million net worth to bribe members at $200 per member," Barton said.
If hostility is felt from either side, then it might be worth it to the merger seeker to just walk away, Bommarito said.
"In the friendliest of environments it can be difficult to merge. I wouldn't dare try to integrate in a hostile environment with people who view us worse than Darth Vader," Bommarito said. "I wouldn't even want to try and convince staff [on merging]."
Bruce Jolly, a partner with law firm Venable, LLP, who helped Nationwide Federal Credit Union negotiate its merger with Nationwide Bank, joined the Webinar at the end to talk about the road mergers may now take in the industry.
"How do you reach a board of directors that is simply not ready to consider merging," Jolly asked. "There are a variety of techniques you can use but not one guarantees success. There's no clear path."
Jolly said it's quite different with banks, which can simply go straight to the stockholders, an option "that doesn't exist for credit unions."
"I do think it's all about the members," Jolly said. "[With Nationwide], we were able to convince [bank] regulators and members of the credit union that indeed, one of the key distinguishing aspects is members own the credit union and the equity in the credit union. There's a lot of disagreement in that statement. Nationwide presented an excellent opportunity to establish value."