FOREST GROVE, Ore. — Despite all of the talk and focus on mergers within the credit union community, 2009 is shaping up to be the fourth straight year in which the number of CU mergers actually declined.
The trend is playing out at the same time industry experts are debating the ability of mergers to improve credit unions' positions in their markets, if mergers are not pulled off correctly, especially in today's economy. The finds seem to run counter to sentiments expressed in a CUES study in which 60% of those surveyed indicated they expect to be in merger "discussions" in the next two years (CU Journal, Sept. 7).
According to data from Merger Solutions Group (see graphic at right), CU mergers are trending to barely exceed 200 this year, down from 236 in 2008, 246 in 2007, and 321 in '06. Merger Solutions Group President David Bartoo said that while there may be many more merger applications and merger discussions, "Due to asset quality and capital concerns, it's a much more difficult environment in which to put a merger together. There are fewer good credit unions out there to merge with because of the economic conditions."
Additionally, many good merger partners are simply not available because they have recently acquired a failing institution, Bartoo added. "They will be caught up in that effort for a period of time."
Are the credit union mergers that are currently occurring achieving the goals, such as greater efficiencies and improved ROA, set out when such consolidations are announced? Analysts are divided on the answer to that question, with a number sharing concerns about credit unions' ability to consistently achieve economies of scale without cutting staff-which many CUs are reluctant to do.
Ron Nice, president and CEO of the Denver-based Nice Enterprises, Inc., believes most of the mergers occurring today are successful in bringing to fruition the reasons for the merger. Credit unions fall short, he said, when they take the wrong approach.
"There are two merger camps, the merger of equals, and the acquisition. Sometimes in a merger of equals the credit union talks the merger of equals game, but its actions reflect an acquisition approach," Nice said. "That's where the disconnect is. If you try to do a merger of equals with an acquisition mentality, it won't work. The other credit union will push back. It believes its systems have worked, why does it want something new?"
The degree to which economies are being achieved, said Nice, is often driven by the asset size of the merging credit unions. While there's no "magic number," efficiencies can be more easily achieved when a merger creates an entity of more than $500 million in assets, according to Nice. "It is not a hard and fast rule, but generally, at this threshold, the credit union achieves significantly greater buying power and is drawing on a great deal of combined knowledge and expertise to compete and grow in today's market," Nice offered.
In the recently released CUES study, done in conjunction with Aite Group, in which a majority expects to be in merger discussions over the next two years, 73% of participants were from credit unions of less than $250 million in assets.
Many mergers are producing credit unions in the $300-million asset range, Nice said, adding it is still very possible to have a successful merger at that size-it's just a little harder. "It depends on whether the organization has a clear and sustainable competitive advantage, if its business model is completely plugged into that advantage, and it has wrung out the operational costs necessary to create synergism between their business model and their competitive advantage," Nice explained.
No matter the size, success also comes down to credit unions performing financial and cultural due diligence before the merger takes place, said Dennis Dollar, principal at the Birmingham, Ala.-based Dollar Associates. "If credit unions pursue a merger solely for the purpose of getting a merger and don't do their homework, some credit unions just bring themselves more problems."
Dollar said that in many mergers that are working he is seeing some reduction in workforce. "It is natural that some consolidation must take place to achieve economies of scale. You cannot go into a merger and say personnel is off limits. If so, the merger has a lot stacked against it."
In St. Joseph, Mich., Gary Easterling, CEO of the $950-million United FCU, acknowledged that credit unions are reluctant to cut staff when two healthy organizations combine. "Probably the most difficult thing to work with is the commitment made that no one will lose their job as a result of the merger," said Easterling, whose credit union successfully merged with First Resource FCU in 2006. "That immediately gets in the way and challenges your ability to reach economies of scale." United is reducing its staff through attrition.
Peter Duffy, associate director at the New York-based Sandler O'Neill, stated that CU mergers "typically are not including enough reduction of expenses and overhead to help drive efficiencies to justify the deal, and make the deal valuable to members in terms of better rates and more convenience."
Duffy added that some very good potential mergers do not get done due to lack of accountability. "Boards do not feel accountable to members so they don't merge. And because they have not been made aware of how the business has trended in the last ten years and how the new model has made it critical that many adjust from being a single sponsor credit union to a community-based lender."
Boards and management can also hurt mergers when they don't follow through, suggested Carol Stryker, principal of Symbiotic Solutions in Houston. "When a credit union is getting ready to do a merger, the board and CEO are really involved. They do the work to see if it's a good fit, and then sometimes they feel their work is done at that point, and hand it off to operations and say 'get it done.'"
That leads to poor follow through, especially when management does not give those executing the merger extra time to focus on the big job at hand, Stryker said. "They have to realize that the merger is a huge undertaking and that some other projects have to be put on hold."
