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Why credit unions must plan for mergers that aren't on the horizon yet

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This story is the latest installment in Credit Union Journal’s ongoing special report on strategic planning, which will run throughout the month of July.

As the credit union industry continues to consolidate, mergers and acquisitions have become one of the primary growth strategies for institutions across the movement. And with strategic planning sessions about to begin at CUs nationwide, many experts say institutions on both sides of the transaction – those merging and being acquired – should be discussing the topic as part of their planning sessions.

CUNA Mutual Group’s Credit Union Trends Report for May 2019 – the most recent data available – shows 5,550 active credit unions in the country today, a decline of 172 from one year prior. Data from the National Credit Union Administration shows a decline in the number of mergers each year since 2014, but the number of active CUs is also slowing.

Mark Sievewright, founder and CEO of the Sievewright and Associates consultancy, said he “very much” expects the consolidation trend to continue and possibly accelerate slightly. He recalled making a prediction a decade ago that there would be fewer than 5,000 credit unions in the U.S. by the end of 2020.

“My latest point of view is we are likely to have less than 3,000 credit unions by the end of 2030,” he said. “The drive for scale in our movement is palpable right now, and I have a fundamental belief that the definition of what ‘scale’ means is changing as credit unions must invest to keep up with advancements in technology.”

Sievewright noted it was not that long ago a credit union with $500 million in assets was considered large. As a sign of change, he pointed to the proposed merger of BB&T and SunTrust to create Truist Financial, a deal partly driven by the ongoing need for big tech investments at institutions of all sizes.

“For credit unions, the new definition of ‘scale’ has moved further along the asset spectrum and is heading toward $5 billion in assets, which is where I think it will be 10 years from now,” he assessed. “I believe we will see more mergers between larger credit unions, not just smaller credit unions merging into their larger counterparts. Also, I believe more credit unions will ask to expand across state lines to create scale.”

Vincent Hui, managing director for Cornerstone Advisors, said there are two separate issues to consider: mergers of two credit unions and CU acquisitions of banks. The latter has proven to be one of the industry’s biggest trends for 2019, with the number of deals announced so far this year already exceeding last year.

“The number of mergers might stay the same or even decrease, but the average size of the merger will increase,” he predicted, noting average CU sizes have grown over the last 10 years.

Hui said that unless regulators or lawmakers find a reason to stop it, the number of CUs buying banks is likely to increase over the next 24 months. “Generally speaking an acquisition is easier, because credit union mergers have a lot of emotion, while bank acquisitions have less emotion. The bank sellers are simply looking for the best price. In a credit union merger, one credit union is not going to survive. Often the non-surviving credit union, especially its board, views a merger as a failure.”

One possible solution is having multiple CU brands under one name, Hui said. He noted some mergers have resulted in credit unions operating as “a division of” the acquiring institution.

“This helps people overcome emotional humps, and it is less disruptive for members,” said Hui. “The members might not care as much as management or the board, but it still helps.”

VyStar CEO: Don’t rule out organic growth

Brian Wolfburg, president and CEO of VyStar Credit Union, an $8.6 billion-asset institution headquartered in Jacksonville, Fla., has overseen three moves in the last year to grow the CU: it added 27 Florida counties to its field of membership, then it purchased Citizens State Bank in Perry, Fla., and early in 2019 it announced plans to cross the state line into four counties in southeast Georgia.

According to Wolfburg, CUs should look at merger and acquisition discussions during strategic planning time as part of their overall growth strategy talk. He said there are two ways to grow: organic growth or M&A, and both need to be “interwoven” into the strategy for the organization.

“Evaluate the organization as it is, focus on process improvements, and have the right products and services,” he counseled. “Once you have everything in place, look for ways to grow. We have chosen to pursue both organic and M&A.”

The first consideration is whether a merger or acquisition is the “right approach” for the organization, Wolfburg said, adding not every merger or an acquisition is the “right” move. Second, he said boards and management teams need to decide if their CU will be an acquirer or the acquired.

“If you are going to be the acquired, you are trying to fix issues that you cannot solve by going alone,” he said. “If you are the acquirer, you are trying to speed up your growth by bringing in assets or new markets. But don’t pursue a merger just because everyone else is doing it. Once you decide to do a merger, it has to be for the right reasons. Getting bigger for the sake of getting bigger is not the goal.”

Be ready before opportunity knocks
Hui emphasized the importance of starting conversations on the topic now since mergers can take so long.

“I have had several credit union CEOs tell me the return on time concept scares them off from pursuing a merger,” he reported. “It can take two years of conversations, and then the merger gets called off. There are a lot of conversations going on all the time, but conversations do not always mean mergers happen.”

VyStar’s Wolfburg said merger opportunities require a CU to move “very quickly.” He said credit unions have to know within a couple of weeks if they are going to move forward.

“As a CEO, you don’t want to go to the board or the senior management team when you hear about an opportunity. The discussion of ‘Should we merge?’ needs to be done before the opportunity presents itself,” he said. “Future mergers should be incorporated into the business plan.”

Asking the right questions

Hui said the strategic discussions regarding mergers must recognize that the institution will be markedly different once the process is complete.

“Traditionally, mergers were done to achieve three goals: one, financial flexibility through scale, second, building richer capabilities, and third, expanding the field of membership. As credit unions are becoming larger, what is important is not how they structure the deal, but how they structure the credit union after the deal. As it has a larger geographic footprint, or is expanding across state lines, what worked before does not work anymore.”

VyStar’s Wolfburg suggested every board member should be evaluating the strategic fit of a partnership and the value it brings the organization, along with any risk. He said board and management teams need to know if the CU is the winning bidder on a merger the succeeding steps will require a commitment by the entire organization.

The road to a merger starts with establishing steering committees and working committees, and includes working with vendors, working with regulators, going through lists of hundreds of items long, making sure employees are comfortable, making announcements to members, and much more.

More than just getting through one merger, Wolfburg said CUs should be creating a repeatable process. “The relationships we have created with vendors will be more valuable in the second, third and fourth merger we do.”

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