Strong benefits and cultural alignment can come out of a bank/credit union combination.
By Vincent Hui 
Over the last several quarters, the number of credit union mergers has generally been in the 20-25 range. The typical reasons: 1) field of membership expansion, 2) additional products and services, and 3) increasing scale to offset higher regulatory costs. One area where we are seeing more interest is a credit union acquisition of a bank. Two that come to mind are the acquisition of Calusa Bank by $1.2 billion Achieva Credit Union, Dunedin, Fla., and the acquisitions of Flint River National Bank and Farmer's State Bank by $323 million Five Star Credit Union, Dothan, Ala. On the face of it, a credit union acquiring a bank seems like such a mismatch—especially on the cultural front. However, there are more similarities than differences. First off, the majority of community banks with less than $1 billion in assets are privately held, typically by a small group of shareholders or a family. Their missions and vision statements are very similar to those of credit unions. They have a deep relationship focus and are often involved in their communities. So, these private community banks are very credit union-like except for two things: They do more business lending, and they pay taxes. Credit unions should be interested in merging with these sorts of community banks for the same reasons they look to merge with other credit unions: The merger partner has strong presence in an attractive community, additional products to offer members (e.g., business loans), can help mitigate risk and diversify the balance sheet, and will help provide the scale needed to leverage investments/defray regulatory costs. Why would a private community bank be interested in merging with a credit union? The answer varies, but many of the reasons mirror why smaller credit unions merge: They can’t afford the regulatory burden or necessary technology investments; they don’t have enough capital to grow and serve customers; and they lack a CEO successor. There are two other reasons that banks merge with credit unions. A merger with a credit union provides a liquidity event for shareholders to cash out, and an exit that minimizes the impact to the community and employees. As we know, bank mergers typically look to cost reductions to support the transaction—meaning layoffs. While there may still be layoffs in a bank/credit union combination, the transaction is usually more strategic in nature (e.g., allowing entrance to a new market), which is more conducive to retaining more employees to serve customers/members. Strong benefits and cultural alignment can come out of a bank/credit union combination. On the flip side, there are diligence and integration issues. Considerations like loan portfolio, employee retention, risk appetite/profile, and governance/management team composition are still relevant. The biggest difference between combining with a bank vs. another credit union is that the bank transaction will typically decrease the continuing credit union's capital ratio more than a credit union-credit union combination would, largely due to accounting rules and legal structures for moving the bank's net assets (but not its capital) onto the credit union's balance sheet. I encourage credit union boards and management who look at mergers as part of their strategic planning to consider small, privately held community banks in their merger strategy discussions. The opportunities to add value to members may surprise you.
Vincent Hui is a senior director with CUES Supplier member and strategic provider Cornerstone Advisors, Scottsdale, Ariz. Hui and other experts from Cornerstone will be at CUNA Governmental Affairs Conference next week, booth 474. Creating a merger strategy map for your credit union will be a key part of the curriculum at CUES' new Mergers & Acquisitions Institute, slated for June 27-30 at the University of Chicago's Booth School of Business.
