Growth by merger is not the only option

A strong rationale for credit unions to merge is as a means of achieving growth. However, mergers are certainly not the only way to grow. Credit unions also can achieve growth organically by adding new products and services, reaching out to new members via online advertising and social media, expanding their existing community field of membership, and/or by building mutually beneficial partnerships.

The decision about when to grow by merger, and when to grow by other means, is something that many boards and executive teams are grappling with as they position their credit union for the future.

Pursuing a Multifaceted Strategy

A good example of a multifaceted growth strategy comes from $3.3 billion Connexus Credit Union, Wausau, Wisconsin, as described in the three-part white paper from DDJ Myers, “More for Members: Credit Union Leaders Plan Post-Pandemic Merger & Acquisition Strategies.”

Over the last 12 years, Connexus has completed eight mergers, ranging from a very small Wausau city credit union with two employees to the addition of $350 million Minnesota-based Endura Financial Federal Credit Union in 2014. 

The pursuit of mergers is only one of three primary growth strategies at Connexus, behind a strong indirect lending program and organic growth, the latter of which is challenging in a saturated market. Building on what it has learned from those past mergers, the Connexus executive team in early 2021 developed and presented to the board high-level guidelines for future merger candidates. 

“We’re in the mode to be looking, but we’re at a point now that we’ve done enough mergers to recognize the substantial investment involved,” says Board Chair Ron Dins. “Whether it’s a $100 million credit union or a $400 million credit union, the amount of work is similar, so we want to be looking in the $300-million-and-up range for forward-thinking credit unions with strong member focus, a similar employee-centric culture, and a balance sheet that we can improve with our areas of strength.” 

$2 billion USAlliance Federal Credit Union, Rye, New York, has had a successful track record of growing via merger. However, since exceeding the $1 billion asset mark, President/CEO Kris VanBeek reports that the credit union has become more discerning about the threshold for proceeding with a credit union merger.

“As a $700 million credit union, moving forward with the merger of a $40 million credit union made sense,” VanBeek says. “At $2 billion, it makes less sense. If we’re originating $50 million or more in new loans every month, is a $20 million merger really worth it?”

In some cases, the answer might turn out to be yes—for instance, if an opportunity came along to merge with a small credit union that provides growth potential via an expanded field of membership. If such potential doesn’t exist, however, VanBeek sees investing in new products and services as a better path forward for achieving growth. 

Weighing the Cost

Mergers, of course, come with a cost that needs to be weighed alongside the potential for growth. Asset size of the merger partner is an important consideration, but there are other factors to be considered as well.

Barry Shaner, President and CEO of $1.1 billion Directions Credit Union, Toledo, Ohio, observes that the requirements for merging a $50 million credit union are not significantly different than the requirements for an organization four or five times that size. Both require regulatory approvals, systems and accounts conversion, member communication, rebranding considerations, and more.

“All that disruption comes at a cost,” Shaner says. “There are lots of reasons to do a merger—sometimes just because there are members who need help…but we do have to analyze the financial costs and benefits in terms of the new business we’re going to attain.” 

Part of that calculation should encompass whether it’s possible to achieve the same results with less investment of resources, he adds. “At our current size, a $50 million merger represents 5 percent annual growth. Could we achieve 5 percent growth in another way, perhaps with a big marketing push?” 

While the size of the merger partner is certainly an important consideration, Brandon Riechers, CEO of $3.5 billion Royal Credit Union, Eau Claire, Wisconsin, points out that it is certainly not the only consideration. Other reasons, such as cultural fit, are also important in determining whether the merger will be effective in helping the credit union sustain growth in the future.

“There’s a lot of truth to the fact that it costs the same to go through a $100 million merger as a $500 million or $1 billion merger,” Riechers concedes, “but if you go through a larger merger and find that it’s not as good a cultural fit, the growing pains in years 1, 2, and 3 are much greater and can impair continued organic growth during the transition.” 

Partnering Instead of Merging

An alternative to undertaking a full-blown merger with another credit union is to partner with that organization instead. If done well, partnerships can achieve growth for both parties as well as greater efficiencies and economies of scale.

Val Mindak, President and CEO of $290 million Park City Credit Union, Merrill, Wisconsin, reports that partnerships are an especially good strategy if neither institution is ready to merge. Park City has formed beneficial partnerships on several occasions, teaming up with other credit unions in such pursuits as real estate loans, commercial lending, and ALM strategies.

“We’re building relationships with these credit unions, and if they should decide to do a merger in the future, we know we’re going to be a natural partner,” Mindak reports.

Click the link to download the three-part white paper, “More for Members: Credit Union Leaders Plan Post-Pandemic Merger & Acquisition Strategies.”