Anatomy of a Merger (Part 1 of 4): Merging for the right reasons

By Christian Mullins

Each year, over 200 credit unions elect to merge into other credit unions. Some of these lost credit unions were approached, while others chose to approach another financial institution. In the first three months of 2008, 43 credit unions, including one corporate credit union (a credit union’s CU), completed the merger process. There are many reasons, both good and bad, behind a merger, and every one, like every credit union, is unique. Unfortunately, the overwhelming majority of mergers are made for the wrong reasons, but there are scenarios where a merger is the best option for the credit union and their members.

An ineffectual or ‘weak’ Board of Directors. For many credit unions, especially those that are small to medium-sized, an active and committed Board of Directors (Board) is essential to success. Small CUs rely on the Board’s experience and perspective to compliment their knowledge of the credit union industry, coming together to solidify the credit union’s direction, both short and long term. If a Board, through inaction or indifference, cannot effectively assist the credit union, it is inevitable that the credit union’s ability to adapt and maintain overall stability will deteriorate. When this occurs, it becomes imperative to seek out Directors that have the credit union’s best interests in mind. If those Directors cannot be found within the membership, the time may come to seek a Board outside the credit union. This scenario is most common in a SEG (Select Employer Group) chartered CU with several thousand members or less.

The cost of technology is unsustainable. The explosion of the internet over the last 12 years, along with the increased dependency on ATM/Debit/Check Cards have allowed members to approach banking in an entirely new way. However, relying on online services come at great costs to any financial institution. The amount of hardware and software necessary to protect credit unions and their members from attacks has been increasing for years, and some credit unions have reached a breaking point. Dave DelVecchio, President of Innovative Business Systems, Inc, recently stated at BarCampBankNewEngland that credit unions have had to make the same basic investments in security products, regardless of size. While depreciation can offset some of the impact on a income statement, the initial expenditure may be beyond what a credit union can responsibly pay, forcing them into the difficult position of leaving the online world or merging into a larger credit union.

Additional growth is not available. Many credit unions know their member penetration percentage, which is the number of members divided by the total possible membership under their charter. For community chartered credit unions, it’s common to have a thriving credit union with a 2% penetration. SEGs, however, tell a much different tale. It is not uncommon for a SEG chartered credit union to penetrate 30%, 50%, or even 60% of their available membership. Once a credit union reaches 75% penetration of their membership, it is reasonable to assume that further growth is unlikely, though there are exceptions. If a credit union finds itself in this situation, and cannot maintain a net income sufficient to its needs, it is time to look at the two options available: expanding its charter or merging into a larger credit union. If adding additional SEGs or changing to a community charter is not an option, merging into a larger financial is the only option.

When a merger between two credit unions is announced, several reasons are given, but it’s rare to find a credit union list any of the reasons above as a primary cause. Unfortunately, most credit unions that merge don’t need to, and the credit unions lost far outnumber the credit unions being created. If a merger is seriously considered, whether this decision came on their own or were approached by another credit union, it’s important to be aware of some of the common traps that credit unions, and their Board of Directors, fall into.

Part 2: Common mistakes when contemplating a merger.
Part 3: Merging for Success
Part 4: Long Term Consolidation Effects