Part 1: Merging for the Right Reasons
Part 2: Common Mistakes When Contemplating a Merger
By Christian Mullins
When credit unions merge, the opinion of industry insiders varies. Some feel that mergers are an inevitable result in any business. Others believe that, with the number of mergers far exceeding new credit unions, every merger weakens the credit union movement. The remainder fall somewhere in between. Regardless of your beliefs, it’s important to understand why these mergers happen in the first place. In Parts One and Two, underlying causes, both legitimate and otherwise, were given from a smaller credit unions point of view. Merging, from the larger credit union’s perspective, can be the difference between success and stagnation.
Asset growth. The most obvious of reasons, the remaining credit union, as a result of any merger, is larger than it was before. With year to year asset gains difficult to come by for all but the largest credit unions, a 2% natural growth rate, combined with a merger that yields another 5% gain, is a healthy year. In the first quarter of 2008, 19 of the 42 completed credit union mergers resulted in an asset increase more than 5%, with most of those greater than 10%, virtually guaranteeing a ‘positive growth’ year. In many cases, however, asset growth as a result of a merger is merely a beneficial byproduct of the primary intention.
Location and charter expansion. A credit union may decide it needs to expand, whether it’s into another part of a city, or an entirely new area. Through merging, a credit union is able expand their coverage within their charter, and the addition of brick and mortar was realized without the credit union having to build it themselves. Sometimes, a credit union will determine an opportunity for expansion exists in another population area, but one that currently isn’t included in their charter. While the credit union can apply to change their charter, the possibility exists that they will be denied. If two credit unions voluntarily merge, however, the process becomes much easier. In addition, the credit union now has an immediate foothold in their expanded area.
Less overall competition. In the credit union industry, it’s almost a sin to consider another credit union as competition. While that may be true for two credit unions that don’t have overlapping charters, any community chartered credit union is competing with every financial institution, not just banks. When a merger between credit unions occurs, one fewer choice is available to prospective members. Since certain consumers will only join a credit union, this increases the likelihood that the consumer will join theirs.
Pride as a motivation to grow. In any business, rivalries are formed over time. Many of these rivalries are friendly in nature, but some are not. In the worst realization of ‘keeping up with the Joneses’, credit unions may be willing to absorb others to remain competitive with their rival, or to further diminish their rival’s market share. While no credit union would list ‘to be better than FGH CU’ as a reason they absorbed another CU, it is reasonable to assume that, in select cases, this is a factor.
A credit union is a business, and businesses make decisions that are the best for their short and long term sustainability. For credit unions, they may decide that the best decision is to absorb another credit union. When a credit union approaches another with a merger offer, it is, in most cases, performing due diligence and exploring all options. For insiders who are anti-merger, the negativity surrounding a merger is often misplaced on the remaining credit union, while it is, in fact, the smaller one that chose to accept the offer. It is clear, however, that the continued trend of mergers is changing the credit union landscape forever.
