WARRENVILLE, Ill. — It was the largest merger in the history of credit unions. It married the $4 billion Empire Corporate with the $5 billion Mid-States Corporate, but would a merger of that size work? “Economies of scale” has become a worn out term, but this deal was supposed to show that a larger organization could do more for its members than two smaller ones. The merger took many corporate leaders by surprise because on their own Empire and Mid-States were already two of the largest corporates in the country. However, the leaders consistently said by joining forces they would create a true top-tier corporate that would be around for the long haul and be an asset to the industry.

Empire and Mid-States became Members United on July 1 of last year. Members United CEO Joe Herbst, formerly CEO of Empire (Albany, N.Y.), and Members United President Dave Preter, formerly CEO of Mid-States (Warrenville, Ill.), say this merger is living proof that big mergers can work to the benefit of members. “On the wholesale corporate level we have found and we have proven that size matters. The efficiencies you gain are big,” said Preter.

“I've been saying for years that the market is going to drive this. The tea leaves are getting easier to read. On the wholesale level scale does matter. As we see fewer and larger credit unions, they are going to demand more services from the corporate level,” said Herbst.

So why hasn't the corporate network consolidated even more rapidly? Preter said there are credit unions that are willing to pay a price for supporting more corporates. That price is coming in higher fees and lower rates. Credit unions are willing to pay this price because they don't want to lose that local flavor, local expertise.

But Preter and Herbst believe credit unions can have the best of both worlds. Between Empire and Mid-States, they have completed five merger deals. Mid-States merged with the corporates of Indiana and Minnesota and Empire merged with the corporates in New Jersey, Rhode Island and South Dakota. In all cases, Empire and Mid-States kept a local presence. Members United now operates offices in Albany, N.Y.; Eagan, Minn.; Indianapolis; Jamesburg, N.J.; Sioux Falls, S.D., and Warwick, R.I. Preter and Herbst admit that may not be the most efficient model, but it is the best for credit unions.

“If you take a look at the current numbers, our expenses are going to be high. You can't compare us to our peers because we have so many more people in the field. We took the approach that the ultimate goal was not to drive economies of scale, but to deliver a world class corporate,” said Herbst.

Part of that means having a presence in the areas it services. “We employ a relationship model. In communities we service we have offices where we employ several people. This is a relationship business. If we're going to serve credit unions all over the map, that is an expense we're willing to have,” said Preter.

Members United does have somewhat higher operating expenses than others. Year-to-date its operating expenses are approximately $38 million with an ROA of .10%. Similarly sized Southwest Corporate ($10.45 billion) has $34.7 million in operating expenses and .21% ROA.

But Members United's expenses are going down, said both leaders. A lot of what's baked into its current numbers are one-time expenses from the merger, such as severance packages for staff members that were let go, costs for integrating two systems into one, etc. Going forward, the corporate will continue to benefit from a number of back-office efficiencies in accounting, auditing, Web services, legal, and others.

An example of systems savings is its new front-end system, PremierView. Since both corporates were on the CCUN 400 in-house system on the back-end, they could develop one new front-end system, instead of two.

Herbst said on its internal operations Members United nearly cut in half staff members and systems, but member-facing positions, such as business consultants, were kept in place. “We really believe in the delivery side. We didn't want to change the feel for the members,” said Herbst.

Getting down to hard numbers, Members United is projecting a $3.2 million savings in 2007. It's already shown its commitment to deliver better yield. It paid nearly $1.5 million in additional dividends in the last six months of 2006.

It also raised its rates on its Membership Share Account in October resulting in nearly $850,000 to members.

Speaking of members, Members United now serves 2,100 credit unions nationwide, approximately double the number of WesCorp, the nation's largest corporate.

Herbst has been thrilled with the commitment those members have shown. Members United has garnered approximately 550 new contracts for a variety of products and services since the deal closed in July. Herbst said that proves members aren't taking a wait and see approach; they are taking advantage of new products.

Then there are the areas that don't show up on the balance sheet. Herbst pointed to the corporate's new Innovation Team. It's a separate division Members United created to research and eventually develop new products for credit unions. The unique thing, said Herbst, is the products are dictated by member credit unions, not Members United.

Members United is also one of the last standing in terms of brokerage services. Large corporates have partnered with U.S. Central to deliver brokerage services, pointing to the cost savings U.S. Central can bring for a business that still doesn't have that much volume for corporates. Members United's Balance Sheet Solutions LLC CUSO provides investment advisory, portfolio management and broker/dealer services all in-house.

“It's still a very minimal part of our business. It's a break even business for us, but it's a long haul business. To be in business for the long haul we think you need a total balance sheet solution, ” said Preter.

Preter said he's been pleasantly surprised by the high member service marks Members United is getting. “We do a quarterly survey to the membership and member service results are getting higher, higher than they've ever been. We don't know why. We know we're doing a good job delivering products and services, but you might think they'd be the same or lower because of the merger,” said Preter.

Both leaders know this deal will be under the microscope for some time and they welcome the scrutiny.

“Our merger really dispelled the philosophy and myth that mergers don't create efficiencies. Our merger proves members are better off,” said Preter.

“I've learned that together we're stronger than we are apart. Credit unions have a foundation of cooperation and working together is going to make us winners,” said Herbst. –pgentile@cutimes.com

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Members United Leaders Say the Merger is Working; Projects $3.2 Million Savings in '07

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