Dreams of regional dominance driving out-of-state mergers
Distance makes the heart grow fonder – at least, that’s what some credit unions are betting on in their merger strategies.
As the credit union industry continues to consolidate, more institutions may turn to merging with others that are geographically distant from their headquarters. During the first six months of 2018 alone, eight mergers were completed where the surviving institution was headquartered in a different state than the merger partner, according to data from the National Credit Union Administration.
Analysts have said this strategy makes sense as a way for these institutions to grow and develop more diverse deposit bases and loan portfolios. But there are risks involved as well. Credit unions willing to take on institutions far removed from their home base and traditional geographic field of membership must also make sure their partners are a good fit culturally and work to ensure good communication.
“You will see more mergers like this,” said Peter Duffy, a managing partner at Sandler O’Neill. “The credit unions that are looking to grow are concerned about the lack of reasonable mergers in their credit union space. It is a way to get scale. It is a way to diversify your customer base, which diversifies your risk.”
Credit union executives might be more open to these types of mergers for a few reasons, experts said. Credit unions were often the first financial institutions to move across state lines, said Ben Loveless, senior associate consultant at RLR Management Consulting. For instance, credit unions with a field of membership related to a certain religious denomination that had churches across the country were able to establish a wide branch network, he said.
Additionally, growth-minded institutions may have trouble finding reasonably sized merger partners within their existing markets, forcing some to look elsewhere, Duffy said.
One of the latest to adopt a cross-border strategy is Nuvision Credit Union, which CEO Roger Ballard said has plans to become a regional player and has adjusted its merger strategy to reflect that. Over the last decade, the institution has looked for ways to use technology to hire and retain talent for positions that can be done remotely, such as call center staff. Currently about 10 percent of its employees, both full- and part-time, work off-site. That has given Nuvision experience in handling a workforce that is geographically dispersed and set it up for mergers with partners further away.
After merging previously with Wyoming-based First Cheyenne Federal Credit Union and Unified People’s Federal Credit Union, which were both based about 1,100 miles away from its Huntington Beach, Calif., Nuvision earlier this year merged with Denali Federal Credit Union, which was based in Anchorage, Alaska.
“We would not have retained the talent if we didn’t offer a flexible work environment,” Ballard said. “We let people work from home and have flexible hours. We’ve applied that to this regional model.”
Being in a variety of markets can lead to more product offerings, a more diverse membership base and being less concentrated in any one area, said Michael Bell, a lawyer at Howard & Howard, who advises credit unions on mergers.
“We have a national economy but we also have regional and local economies,” Bell said. “If you can operate in some diverse locations or regional economies, then you are stronger, safer and more likely to be profitable.”
Nuvision, which now has $2.2 billion of assets, has found value in being in markets with a different competitive landscape and lending opportunities, Ballard said. For instance, more members look to build their own homes in Cheyenne, Wyo. than in Southern California because the land is more affordable. Its goal is to eventually reach at least $100 million of assets in each of its markets, he added.
“Having $80 million in a small market, you can be a pretty big fish,” Ballard said. “If you are willing to look at smaller markets, the media buys are more cost effective, so the cost of marketing and even operating can be lower than in some larger markets.”
But there are a couple of keys to making sure these types of mergers work. First, it is necessary to make sure the two institutions are compatible, industry observers said. This requires work to ensure “an us-versus-them mentality doesn’t develop,” said Guy Messick, a partner at the law firm Messick Lauer & Smith.
“The ability to communication in a cohesive manner without having to be in the same place isn’t always easy,” Messick said. “You need to make sure your culture is consistent.”
That starts with two institutions with similar fields of membership, said RLR’s Loveless. If the membership differs too much at the merging institutions, he added, disagreements over how resources are deployed could develop. For instance, if a credit union that serves a certain community merges with one that serves a specific industry that doesn’t have a presence in that same community, that could create a problem.
“Do we fund mortgages for the community or do we do credit cards for the industry that we serve?” Loveless said. “Having dissimilar fields of membership that creates an internal struggle doesn’t work.”
Communication is another important component, said Dena Jalbert, CEO of Align Business Advisory Services. But this can be overcome with proper technology, including file sharing, videoconferencing and other virtual tools. Getting employees together once a year, though difficult to do, can also be helpful, she added.
“You should over-communicate with emails, phone calls, meetings, letters,” Jalbert said. “You should do anything you can to constantly communicate with those folks and make them feel that they are part of the larger organization.”
Nuvision’s Ballard said the credit union plans to continue to look for additional mergers in the Western U.S. It could build out its presence in Washington and Arizona, but management would consider other opportunities as well, he added. The primary concern is finding a good fit culturally.
“There are a lot of like-minded credit unions and scale does matter,” Ballard said. “But the merger has to make financial, operational and strategic sense. It isn’t about growth at any cost.”