Economies of scale have always represented a strong reason for credit unions to pursue mergers, and since the emergence of COVID-19, the rationale for achieving cost efficiency has become an even stronger motivation for mergers.
At the onset of the pandemic, many credit unions faced an urgent need to accelerate their transition to digital technologies. However, the investment in such technologies turned out to be cost-prohibitive for a sizable number of small credit unions, leading them to seek merger partners. For others, growth by merger has been a means for making the mammoth investments more palatable.
The Need for Scale
Scale is an important aspect of sustainability in financial services. Achieving optimal size (the definition of which varies by region, market, and other factors) is essential to the ability of credit unions to continually improve operational efficiencies, keep pace with an ever-growing competitive field, and invest in innovations for products, services, and delivery channels.
“Having scale is critical, as it positions credit unions not only to compete, but to quickly pivot during disruptive events such as what we’ve experienced with COVID-19,” says Steve Ewers, president and CEO of $950 million Members Cooperative Credit Union, Duluth, Minnesota. Ewers is one of more than two dozen credit union leaders to provide their opinion in “More for Members: Credit Union Leaders Plan Post-Pandemic Merger & Acquisition Strategies,” a three-part white paper produced by DDJ Myers.
The pandemic has been a complicating factor, in that it has exacerbated the difficulties that some credit unions were already experiencing in keeping pace with regulatory, compliance, and competitive forces. “Our world is changing faster than ever,” Ewers acknowledges. “If the pandemic has crippled their abilities and capabilities, and if they are unable to close any service gaps, merging with another organization is one possibility they should consider to enhance member value.”
Some credit union leaders caution that achieving scale alone will not solve an organization’s problems if there are other factors causing organizational distress. Matt McCombs, president and CEO of $970 million Vibrant Credit Union, Moline, Illinois, chalks this up to a common misconception that “if I’m bigger, it automatically means I’m better.”
“Size doesn’t naturally make you more efficient. It doesn’t always make you nimbler, but it does give you the resources to be able to leverage that mindset of nimbleness in the things that you do,” he says. “Size and scale give you the ability to navigate changes that occur or to force changes that should be occurring in your business.”
The issue of scale is crucial for the survival of credit unions, says Keith Sultemeier, CEO of $6 billion Kinecta Federal Credit Union, Manhattan Beach, California. Citing industry data stating that larger credit unions have a much lower expense burden than smaller credit unions, Sultemeier observes that consolidation allows continuing credit unions to leverage fixed costs across a larger base of assets, expanding their ability to make the necessary investments in digital technologies and enhancing benefits to members.
“That’s a very clear indicator of the advantage that larger credit unions have in achieving strong earnings levels and ensuring their ability to serve member-owners in the long run,” he says.
Other Rationales for Merging
There are other reasons for merging that have been brought to the forefront since the start of the pandemic. Many credit unions might look at a merger as a way to acquire new talent, especially given that a shortage of executive candidates in the second year of the pandemic has definitely made this a job-seekers’ market.
“I consider a merger as an opportunity to grow my team and my knowledge resources,” says Adele Sandberg, president and CEO of $300 million AEA FCU, Yuma, Arizona. “Assessing the team talent between the two institutions is important. You might be able to fill some gaps between the two institutions. I would hope that when people are looking to merge, they see it as an opportunity to grow a team that can make you stronger.”
Smaller credit unions, meanwhile, might be seeking a merger partner as a means of broadening their product offerings and delivery channels—especially important in this increasingly competitive environment. As an example, Wheteleco Federal Credit Union in Wheeling, West Virginia, which had under $5 million in assets and about 600 members, opted for a merger with $572 million Bayer Heritage Federal Credit Union in late 2020.
“Before the merger, they didn’t even have share draft accounts,” says Bob Burrow, president and CEO of the Proctor, West Virginia, credit union. “Now these members can have plastic cards with us, they can have checking accounts, they can have mortgages and everything else we offer our other members.”
Another compelling reason to merge is to provide a pathway for leadership succession. This is especially important based on an expectation that CEO retirements are going to skyrocket after a lull in executive departures during the first several months of the pandemic. Some CEOs had delayed their retirements, not wanting to leave their credit unions rudderless in the middle of a crisis. Others, having weathered a tough year, may be looking to move up their retirement dates.
For these and other reasons, McCombs predicts, “I think there’s going to be a large number of CEOs, over the course of the next year, who are going to be ready to exit the workforce.” The resulting void in leadership might be too much for a small credit union to overcome, both in terms of cost and effort, thus prompting them to seek a merger.
Assessing the Challenges
For credit unions that were already struggling to remain viable, the impact of the pandemic on vital performance ratios has exerted even more pressure on their ability to survive. That reason alone may be all that is needed for a credit union to expedite its pursuit of a merger deal.
“Technology costs and regulatory burdens continue to grow, and I don’t see that changing anytime soon,” Sultemeier says. “For most credit unions, merging isn’t so much a matter of pros and cons, but of surviving or not surviving.”
Click the link to download the three-part white paper “More for Members: Credit Union Leaders Plan Post-Pandemic Merger & Acquisition Strategies.”