There is a clear industry trend of credit union consolidation. Small credit unions are an important signal of the roots of the credit union industry – many are still very close to their members and are on hands-on in the way they do business. We need to make an effort to keep as many of these small credit unions independently sustainable as possible. However, there is a reality that some small asset sized credit unions will need to merge, often due to circumstances outside of our individual control. Economies of scale are not achieved until close to $200 million in asset size, a hurdle that will continue to create barriers for small credit unions, especially since technology will still rapidly change.
My perspective on this is more personal since the $9 million asset sized credit union I worked at for 7.5 years merged with Great Lakes Credit Union in Bannockburn, IL on August 1, 2019. CUNA recently highlighted the merger in a podcast. As a leader of the organization, it was not an easy decision to make. When I took over North Side Community Federal Credit Union (CFCU) in 2015, the organization was in a difficult place. I was an internal promotion and was familiar with what the challenges were. I was also determined not to see the credit union merge. In the end, that wasn’t what was possible. In 2010, the organization had borrowed secondary capital from the US Treasury through the TARP program. The credit union had also experienced a series of successive years of large losses before 2015. Although I was able to raise additional secondary capital (a balance sheet tool unique to low-income designated credit unions) and turn around profitability challenges it would not be change large enough and fast enough to remain independent. I learned a few lessons throughout the process that are important takeaways for small credit unions. My preference is that together we can find ways to reverse the industry trend of the disappearance of small institutions but when we can’t there are things to be considered.
1. Don’t let pride get in the way of making the right decision: When it became apparent that my credit union would need to merge, it did not make it easy to decide to move forward. In fact, I had a board of directors that trusted me and may have supported me all the way to institutional insolvency. The temptation to continue trying everything I could to stay independent was strong. However, North Side CFCU was chartered with a mission to serve underserved communities and we were in a small urban geographic charter that was rapidly gentrifying. It became apparent that more and more members coming in to open accounts were younger millennials with strong incomes. We did not have the full suite of products and services to serve a demographic that was seeking a different experience, and even if we tried everything we could, what was happening around us did not align with our business model. We would not have been able to serve our community properly as an independent institution.
2. Do your due diligence: if you are a small credit union seeking a merger partner, there will likely be multiple institutions interested in acquiring your organization. That does not mean they are the right fit for your membership. Just because a credit union makes an attractive offer does not mean that you should merge with that institution. Sometimes, even organizations that seem to have a strong mission fit aren’t aligned in practice and philosophy. Don’t get lazy because the organization is larger and has more resources. Ask questions. Try to understand their organizational challenges and structure. Interview. Treat a merger partner with the same due diligence and care that you would any other vendor relationship. You have a responsibility to your membership to do this.
3. Stay ahead of the issue before it becomes a problem: Don’t wait until the problem becomes too big and the regulators start having merger conversations with you. You won’t be able to do proper due diligence and make the best decisions if you don’t have options. If you wait until it is too late, you won’t be able to say no to a credit union that isn’t a good fit. You want to be able to do that. You will have more ability to ensure that you are making a decision that is good for your members and your employees. If there is any possibility that you may need to merge, stay two to three years ahead of the conversation. If your goal is to stay independent, then continue to do everything you can, but explore your options in the meantime. If things become a problem, you will have already had the conversations and relationships in place to move forward before your credit union is forced into a merger without control over the process.