As the number of credit unions nationwide continues to shrink, strategic mergers among mid-size and large institutions could become increasingly common.
While that is widening the so-called “great divide” among large and small CUs, it also raises questions for merging institutions about how to preserve their historical identity and ties to original sponsor groups.
The number of federally insured credit unions in the U.S. declined by more than 3 percent in the third quarter from a year earlier, according to data from the National Credit Union Administration. That trend isn’t likely to end anytime soon as institutions continue to seek out merger partners for a variety of reasons, including the inability to recruit talent and lagging financial performance.
The NCUA’s 2017 annual report states that "a growing number of larger credit unions use mergers and acquisitions as strategies to grow and increase market share" and rising competition could drive "more mergers of equals—larger credit unions merging strategically, as opposed to the long-term trend of smaller credit unions merging into larger ones."
The decision by Inspirus Credit Union in Tukwila, Wash., to merge into Gesa Credit Union in Richland, Wash., is an example of such a merger.
Gesa and Inspirus executives took a hard look at their own operations before deciding to join forces. The two institutions were doing fine on their own – both were considered well capitalized at Sept. 30 and had increased their earnings by double digits for the first nine months of 2018 from the same period a year earlier, according to NCUA data.
But both CUs had also included possible mergers as part of their strategic plans, and members at each had indicated they wanted more branch options. Don Miller, CEO of $2 billion-asset Gesa – which still has more than two dozen branches in central and eastern Washington – said a merger was an efficient way to achieve that.
Once the deal closes, the combined institution will have roughly $3.3 billion in assets, making it the second largest credit union in Washington, according to a press release when the merger was announced.
“When we were looking at a merger strategy and how it would fit, we were filling out” other parts of Washington, said Miller. “With a merger, you have an established membership which is a much easier path than trying to build out your branch network yourself.”
The $1.3 billion Inspirus will gain even more branches from the transaction. It currently has just three locations compared with Gesa’s much broader footprint. But member needs are evolving and Inspirus decided it needed to as well, noted President and CEO Scott Adkins. Additionally, 30,000 of Gesa's 160,000 members live in western Washington and will be served by Inspirus branches once the deal is completed.
“We aren’t highly experienced with new branching but we are embracing the importance of it in the right way,” Adkins said. “Our partnership with Gesa will enhance our ability to open branches in western Washington and other locations throughout the state.”
Culture clash?
But Michael Bell, an attorney with Howard & Howard who advises CUs on merger issues, noted that mergers that may make sense on paper don’t always work out, in part because social issues – such as who will lead the combined institution, and the feeling that a credit union’s identity might be lost – hold them up, making truly strategic mergers relatively rare. Bell is also not convinced that the number of strategic mergers will pick up.
Compounding the issue, said Timothy Kosiek, a partner in the financial services group at Baker Tilly Virchow Krause, a public accounting and consulting firm, is that some credit unions hold too closely to their original mission, even if expanding would have a long-term benefit for their members today.
“There’s a component of credit unions – and banks on the smaller end – who believe that they serve this kind of social mandate versus why do we need to merge?” Kosiek said. “Some think that a merger won’t help create traction against that mission.”
There could also be a conflict of culture between the two institutions that must be kept in mind, especially around business models and risk appetites, said Ben Loveless, a senior associate consultant at RLR Management Consulting. For instance, if the merging institutions focus on different types of lending then a partnership is a quick and efficient way for each side to pick up needed expertise to expand the services they offer to members. But this can also lead to conflict and confusion among employees, he added.
“This kind of merger makes sense and gives the combined institution the resources to attract the kind of people that are going to grow a business banking portfolio,” Loveless said. “But there can be a clash of the underlying business models. That better be worked out before the merger takes place or there will be issues.”
Hitting a wall?
Gesa and Inspirus are by no means the only CUs to tackle this sort of merger, and industry observers said it would be wise for some healthy CUs – those that could continue on as independent entities – to consider partnering with other institutions to ensure their members are receiving the best services. But experts also warned that strategic mergers still carry plenty of risks.
“Neither party did this because they had to or anyone made them,” said Bell. “They took the time to look at their members and they realized that they were better together than apart. That takes guts. It takes a focus of driving value for members that is rare today.”
Some factors that drive mergers are ominous as fledging institutions are driven to find a partner out of need, rather than want. Of the mergers approved by NCUA in the third quarter, 17 cited issues such as poor financial condition and management, inability to find executives and declining field of membership, as driving the transaction.
But a strategic merger involves two institutions deciding to partner to strengthen their long-term prospects, even though neither one is troubled. Out of the roughly 50 mergers approved by NCUA in the third quarter, 33 cited “expanded services” as the reason for the merger.
“If you are analyzing your operations on a regular basis, you may realize that the ability to achieve success is maybe inhibited and could be inhibited through no fault of your own,” said Kosiek. “You may have hit a wall.”
Gesa and Inspirus are focused on getting their merger completed and then integrating the two institutions. But more mergers could eventually be in the future, said Miller, who will lead the combined institution.
“One of the things we are going to have are more resources and more synergies,” Miller said. “We will have more branches but we want to be smart and strategic about what they look like. Certainly a larger western Washington presence is something we would look at.”
