NEW ORLEANS-Think there might be an interest in mergers among credit unions?
CU CFOs attending the CUNA CFO Council annual meeting here spent more than three hours sharing their own stories and participating in a Q&A related to mergers. The session included a panel of four CFOs who have wide experience in mergers and who responded to audience questions. Participating as panelists were:
• Wilma Wells, CFO, Genisys CU, Bloomfield, Hills, Mich. Genisys was formed in November, 2008 by merger of USA CU and T&C FCU, both at $650 million in assets. "It was a merger of equals," said Wells. "We were in the same competitive market, and one CEO was going to retire. It made perfect sense to merge and pool our resources. Kept all staff, and all executive staff (including two CFOs)."
• Scott Waite. SVP/CFO, Patelco CU, San Francisco. Now in 50 different communities and serving 1,500 SEGs, Waite has overseen five mergers, the last of which were two P&As from NCUA (Cal State 9 and Sterlent).
• Ashlee MiCale, SVP at the $1.1-billion Public Service CU, Denver. MiCale has been involved in five mergers and one P&A (Norlarco CU). With the latter, PSCU had 36 days from day it were awarded the P&A to the day it had to finalize the deal and open the doors as a new CU.
• Norm West, CFO, Alaska USA, who has overseen a number of mergers in Washington State, Alaska, and most recently California, where it did two P&As in San Bernardino, Calif. "We are still actively seeking other acquisition, and have looked at 23 credit unions in the last 16 months," said West.
Below is a look at what each of the four had to say in response to various questions:
Q: We are in the process of working with board on strategies on mergers, and the biggest question we get is how to find someone we would want to merge with.
West: We have all done what we have done for a reason. We are a large, multi-group CU, with about 4,800 groups. The opportunity to pick up some community charters under the emergency powers of NCUA was too good an opportunity. We're not looking for the little guys down the street, per se, although we have merged a few over the years. Sometimes there is strength in a merger, such as expansion in a location, but obviously there are all kinds of things to be considered in formulating that strategy.
As CFO, I want it to be relatively simple. Mergers can be bloody things if they don't go together well. Their members may be doing business with them for entirely different reasons than your members do business with you. We obviously don't look for things that are dissimilar. You don't worry about chasing members off if you have better products and delivery.
In our case, we are looking for community FOMs. We are a very large indirect lender; we do it ourselves and we've been very successful with it. We look for places to do that. I don't think anyone merges for the sake of merging. There are reasons you do it. Our credit union is very much a bank alternative; we take on banks. We are the largest depository institution in the state of Alaska. We're not always the best deal in every case, but across the board we usually are. Most of the state and federal regulators are aware we are actively looking. I get one or two calls a week or a month about a potential merger from examiners. We have spent a lot of time pursuing things we ended up backing off of in the end. In the beginning you have to ask yourself what are you looking for and what is your purpose.
Waite: When I look at an opportunity I think you look at it from either an offensive or defensive strategy. Often-times, offensive may be the first inclination. But defensively, what I mean is, what if one of your perceived credit union competitors takes them over instead of you? What does that do to your marketshare? We ask 'If we don't take them, what if The Golden 1 does and gains a bigger footprint in our market?' I would encourage you and your board to think of the defensive aspect. The other thing I think is very important is the cultural connection, no matter what you are going for in a merger. The culture has to fit; I know I get a lot of accounting questions, but a lot of this isn't related to accounting. How are those employees going to fit in our environment. We are a low-cost provider; other CUs might not be.
Q: What would you do differently?
Waite: We're state chartered and community chartered. If you live or work or worship in any of 45 defined geographical areas, you can join. So I think at our size it's important that the diversification factor can't be overlooked. With these two CUs imploded, we had to tell them your company has imploded, it's bankrupt. You can't over-communicate. You have to tell them 'This is who we are, this is what we do, and this is how your life will be better'
Q: Who approached whom in the Genisys merger?
Wells: It was in process for about five years because the two CEOs were friends and knew each other well. We had the same cultures-we thought-but you will find out that the cultures don't align as you thought they did. Two years before the final merger was being planned, we met with the boards of both CUs and they were not interested at all. But two years of working with them we were able to show there was a lot to gain for both CUs and both FOMs. You really have to nurture your relationships with other CUs. We nurtured several CUs before we had this merger, and several of them walked away. Several of them were the smaller CUs that were fearful of the larger credit union.
Q: How did the merger of USA CU and T&C work?
Wells: It took some creativity, but we did it. Both CUs had the same number of senior managers. When the two CUs merged we did have two EVPs that split the duties; one became EVP-CFO, the other EVP-CIO. At the CFO level, both of us were pretty much doing the same job functions. The two of us got together and reviewed what we did, asked what do you want to keep and what do you want to get rid of. I love accounting, he doesn't. He loves analytics and investments. He became the chief investment officer and works with CUSOs and insurance products. We had two VPs of operations; one became a senior VP after we doubled the number of branches we had. We developed regions for the branches. Had two VPs of HR; one of them became VP of facilities--apparently it was something he enjoyed and that he was doing anyway at USA. It's working out well so far; our goal through attrition, and I am retiring next year, is that within five years they are going to lose half the executive team through retirements. And with the staff it is the same thing. There was only one department we had to cut staff, and it was my department in accounting, which had 18 people. They didn't lose their jobs but they were redeployed.
Micale: With the Norlarco situation, it was a bit different. With a purchase essentially all of the employees are terminated on the last day of the CU, and it's up to the acquiring CU to decide whom you wish to hire. They become new employees, although you can give them seniority. With us we saw they definitely had a different staffing philosophy in branches than we did; they had double the number of people we have in branches in part due to a very inefficient data processing system. We made offers to 95% of staff; the 5% were in executive management. To this day we have about a 65% retention rate of the staff we hired from 25 months ago, and that's pretty good given that most of those are at the branches. It took us about 18 months to really right-size the departments. Initially we did have more staff than we needed, but it self-corrected pretty quickly.
Q: How did you handle the boards?
Wells: It was a little difficult with the boards. It took months of talking with them openly about what would be best for the credit union and the membership. They were going out to dinner and getting to know each other, and realized that neither credit union was trying to take over the other. They started working together and determining how the board would be structured. What they ended up doing was our CEO, who was treasurer on the board, gave up her board position, and we did have three board members that determined it was time for them to step down. It gave us the perfect size board.
Q: Who mediated the board discussion?
Wells: Through our whole merger process we used a consultant, and I highly recommend that. There are things in the merger process that I never realized we had to do, such as file paperwork with the Department of Justice. The consultant mediated any of their discussions and kept things on track. He didn't pull any punches. He let them know, 'This is what you have to do.'
Q: Is merger of equals possible?
Wells: You have to be careful, with a surviving charter, that you're not stepping on anyone's toes. And everything gets blamed on the merger. We also have to remember that the staff is going through this. In USA's case, they had just gone through a data conversion, and now there was another one. USA's charter survived, T&C's routing number survived (because we had more activity). We chose a new name because it was going to be a whole new credit union. The name Genisys does mean new beginnings, but for us it came from the original FOMs. T&Cs was General Motors. USA's was Unisisys. That made a big differnce with the board, and gave us a whole, fresh start.
Q: What would you do differently?
Wells: The consultant we worked with had a requirement that no one was to be involved but the boards of directors and the two CEOs. (Management) was left out until the worker bees were needed. Then we would find out our titles had changed, our offices had changed and our responsibilities had changed, and that caused a lot of dissensions on the executive teams. We had to get past that. Also, while it was a merger of equals, we had two totally different wage and benefit structures. Trying to manage when one group is getting one wage and benefit package and the other is getting different wages and benefits also caused a lot of dissension.
Q: What about the status of contracts?
Waite: In (our most recent merger) we got a list of 200 to 300 contracts and looked at where we had overlapped. We used the acquired CU's personnel to help. We looked at every contract that was month-to-month. In the repudiation process (in a P&A), once NCUA gives the notice of repudiation, you can't control the process; you're on the clock. One $100-million CU had sold its headquarters building and then leased it back at $85,000 a month. We sought to immediately repudiate that and cancel what was at the beginning of a 10-year contract. Then we had to beg to stay in the building for an extra month!
West: Under a P&A NCUA liquidates the CU and they have the ability to cancel contracts, including with members.
Wells: Contract review was probably one of the biggest things we went through. We did have to pay to terminate some contracts early. In some cases, the name change following the merger cancelled the contract. With others it was month to month. The biggest thing for us was credit cards. The other credit union had sold its portfolio. Ours is in-house. Their contract was very binding so for the next five years we cannot market our card. We can market it to anyone who has been turned down.
