If President Trump keeps his promises on regulation, credit unions may be entering into a time of some relief. It will be interesting to see how the pace of regulations changes in the next few years. Regardless of the direction of the regulatory environment, it is always appropriate for small to medium-sized credit unions (SMCUs) to consider the prospect of merging into a larger organization. While recent regulatory history has spawned mergers in the industry, a lack of scale and capacity unrelated to regulations still justifies considering mergers for SMCUs.
Frequently, SMCUs do not contemplate merging into a larger organization. Merging with even smaller credit unions seems to be the approach when growing through mergers is considered. Some SMCUs have bought small banks:
Legacy preservation strategies
SMCUs need to set a strategic objective of becoming exceptionally good at something. What that something is, of course, is contingent upon the market place and potential merger partners. SMCUs that offer strategic value to a larger partner can command board seats, naming rights or management positions. These elements will allow a smaller credit union to preserve at least part of its legacy when merging with a larger partner.
For example, a small credit union with an exceptional capital position can allow a cooperative to negotiate legacy-preserving qualities within the surviving institution. During the last decade, there also have been instances where a SMCU would have a strong capital position, but was behind the times in terms of technology. Part of the reason its capital position was so strong was because it had delayed investing in technology. Potential merger partners recognize the strategic value of that capital position and approach the SMCU. Usually, the highly capitalized institution, fearful of losing its legacy, will choose to spend its capital on technology rather than merging. Its members would benefit from better technology and an expanded footprint, which would cost the SMCU very little if gained through a merger. After months of capital investments in technology, the former highly capitalized SMCU is now just moderately capitalized, and often its market position is not much better even after those capital investments.
Capital is not the only asset SMCUs can bring to the table in potential merger situations. Some institutions may have strategic branch locations that would expand a larger organization’s footprint – a situation which presents opportunities for the smaller credit union to negotiate the preservation of its legacy. In other instances, SMCUs may have only one branch, but that branch may be strategically important and could allow the cooperative to improve member service while retaining its legacy, if negotiated properly.
SMCUs that recognize the member benefits of merging into a larger organization should determine where their greatest strengths lie. If they can’t come u with any, that presents a strategic threat. If that institution is ever forced to merge, its legacy will be lost forever, confined to an historical plaque on the all of the surviving credit union’s administration building. When SMCUs engage in strategic planning, they should seek to determine what makes them exceptional and come up with a plan to make the most of that.
Boards of directors need think seriously about the benefits of possibly merging into a larger cooperative. These discussions should occur before there is any prospect of a merger. SMCUs should map out scenarios that define what the environment will look like when an appropriate merger partner appears. They should define what makes them exceptional and why it is worth a few board seats or management roles within the surviving organization.
SMCUs that take the guardianship of their members seriously must contemplate merging into a larger organization. They should have a discreet, written plan of what they would entertain in a merger partner. They should have a concrete cost-benefit analysis prepared for when potential partners become interested. These conversations should be happening at the board level.
Potential plans for merging up should be approved by boards before opportunities present themselves in order to keep the process sober and unemotional. Having a plan in place makes strategic thinking more likely when an opportunity presents itself. And those credit unions who are especially strategically minded will be the ones to initiate those conversations with prospective merger partners.
