Q: I am a board member of a mid-sized credit union with a net-worth ratio hovering between 7% and 8%. Our board is considering merging into a similarly sized credit union. When does it make sense to merge?
A: Your situation is unusual in two respects. First, the majority of mergers are smaller credit unions merging into larger ones. Secondly, many credit unions consider a merger due to a poor financial condition. Although examiners focus extra attention on credit unions approaching 7%, your capital position is considered "well capitalized" by the NCUA.
I addressed this question recently at the New Jersey League Reality Check Conference. I noted that it generally makes sense to merge when one of two conditions exist:
1) When the members will benefit from the merger, in the long run.
• Enhanced products/services
• Greater convenience/access - branches
• Better rates
2) The acquiring credit union has stronger financials and long-term sustainability
• When the credit union's financials are poor and the likelihood of turning it around are not good.
• Loss of sponsor
• Highly competitive environment, saturated with peer providers
• Leadership is not up to the challenge
When evaluating the first condition, the board should consider that even if merger conversations do not indicate it will be the case, careful study of mergers shows that acquiring credit unions almost always lay off employees and close existing branches. A primary benefit of merging is to take advantage of economies of scale. Once the merger has been completed, promises to keep employees and branches are not enforceable. The prominence of shared branching and ATM networks increases the probability of consolidation.
When evaluating the second condition, the board should put more weight on the long-term financial prospects of their credit union rather than the current net worth ratio. There are numerous examples of credit unions that had poor financials but were "turned around" and today are thriving large institutions. I shared a personal experience at the conference of having turned around a credit union with a net worth ratio of 2%. Today it is still a thriving, viable credit union.
In both situations, the board should ensure that they consider all aspects of the potential merger and make all decisions in the best interest of the members. This should include an evaluation of more than one merger partner.
In summary, it makes sense to merge when the members will benefit in the long run. This decision is best made by the board of directors who have a fiduciary responsibility to complete due diligence and who understand their unique membership and financial prospects for the future.
Chuck Cockburn is president of Credit Union Strategic Planning, and formerly was a credit union CEO for more than 25 years. To submit a question, just go to the Letters to the Editor tab at left or click here.