As total merger activity slowed slightly in 2018, with 192 approved consolidations vs. 200 approved by the NCUA the previous year, there seems to be a transition happening within the industry. Larger credit unions with $1 billion or more in assets are less likely to be acquiring smaller institutions with $100 million to $200 million in assets, while similarly sized institutions are more likely to consider merging. Mergers of equals do not comprise the majority of transactions, but the expectation is that we’ll continue to see instances where total assets of the combined institution exceeds $1 billion.
Why the Change?
Even for larger organizations, combining forces can create new economies of scale and allow for better – and more – member services. This is especially true when you have two similarly sized institutions operating within the same geographic area. Larger targets are also merging because there are less attractive, smaller institutions available. Many of the remaining, smaller institutions either don’t have a desire to merge or aren’t very attractive merger candidates.
What Should Credit Unions Consider?
Culture and Leadership: Before considering a merger, it is important to ask whether the two credit unions have similar cultures. How will the two organizations – and their leadership – be integrated? For smaller institutions, an impending CEO retirement may be a key motivation to merge. Whereas, larger institutions with two CEOs need to discuss and decide their leadership strategy very early on to ensure a smooth transition.
Branch Network: One factor that a lot of ALM First’s clients have stressed is their preference to acquire existing branches within their desired expansion areas instead of building new ones. This strategy can allow the acquiring institution to enter new markets with an existing deposit base to retain rather than try to attract new members and deposits from the ground up. Whether a single branch is acquired or a full merger occurs, the geographic footprint is a key consideration.
Employee Retention: One of the biggest fears everyone has when a merger or acquisition is announced is the future of their employment. I’ve found that the most successful overall transactions include educating current employees from the beginning. It’s important to let employees – especially member-facing staff – know what they can expect their new compensation and benefits package to be going forward. Benefits may be particularly important for staff with longer tenures. In order to run the combined organization effectively, it is critical to retain key employees within the existing branch network. These employees know the members, understand the area and have built strong community relationships over time.
Costs and Long-Term Strategy: Credit unions considering mergers should understand that any transaction like this is going to cost money. While mergers may be expensive initially, it’s important to do as much due diligence as possible up front to ensure a viable long-term business strategy. The merger or acquisition decision should be based on sound business strategy, with more detailed accounting aspects taking a back seat. For example, during the valuation process it can be easy for an institution to kill a deal simply based on the combined balance sheet or whether the transaction will have negative or positive goodwill. It’s important to look past the specific accounting entries, and consider what additional value will be gained and how members could benefit long-term. Overall, a merger or acquisition decision should be based on an opportunity to make the greatest impact for your members.
Member Impact: While there has been a lot of discussion about employee compensation and reporting any executive management buy-outs, members tend to be more concerned about how a new institution will affect them on an everyday basis. What additional services will they receive or have access to going forward? The amount of services added can be significant with a larger institution and can benefit the membership overall.
As more credit unions consider strategic growth through mergers, cultural fit and adequate due diligence will remain vital. We advise our clients that you can never do too much due diligence. This is especially true as more mergers of equals occur. Taking the time to ensure both institutions are making a sound business decision is the most important step. If done properly, the combined institution will be able to offer its members additional services and provide new benefits to its community over the long-term.
Brandon Pelletier is Director, Strategic Solutions Group for ALM First Financial Advisors, LLC. He can be reached at firstname.lastname@example.org.