ORLANDO, Fla.–A credit union that has experience in growing via bank mergers shared insights into the process with CU CFOs gathered here.
Two executives with Royal Credit Union in Eau Claire, Wis., shared some the of the lessons it has learned with the CUNA CFO Council annual meeting here. Addressing the group were Brandon Riechers, EVP and CLO with RCU, and John Hehli, EVP and VFO with the credit union.
Over the past 10 years Royal CU has taken in several smaller credit unions, but where it has really blazed new ground has been in acquiring community banks. It previously acquired 11 branches from Anchor Bank as a means of filling a market gap, and then later bought all of a bank in St. Paul, Minn., before recently also purchasing a bank branch in Apple Valley, Minn.
Riechers noted many community banks are feeling the same competitive pressures as credit unions, and that they often prefer to sell to a credit union if the price is right due to philosophical similarities. There are more than 4,500 community banks with assets under $500 million, the two CU execs said.
Why should a credit union consider a merger or acquisition with a bank? According to Riechers and Hehli, the reasons include:
- Enhancements to core capabilities. “You want to look for good synergy with the acquired target.”
- Geographic diversification or expanding branch network.
- Concentration diversification.
- Scalable efficiencies to create greater combined value.
- Expand market when saturated in existing markets.
- Can be less costly than a de novo.
- Industry consolidation (opportunities are available).
Any credit union considering such a purchase should make sure it’s taking into account the risks, which Riechers and Hehli said include:
- Different cultural values. “This is one of our biggest pieces. We will walk away from any deal that isn’t a good culture fit.” Hehli said Royal CU has turned down two or three opportunities in markets it is interested in due to bad culture fits.
- Resources drain for ongoing operations (what are the trade-offs?) “Recognizing there will be a resource drain and everyone has a project pipeline, which means realizing what’s going to be taken off the list.”
- If the primary focus is on getting bigger the partner is not a good strategic fit.
- Different vision of member service/value.
- Poor communication (uncertainty).
- Poor pro forma estimates.
To ensure a good decision is being made, Riechers said RCU has established priorities, or what it calls “filters,” for any deal, which it had changed and evolved over the past 10 years.
“But the important thing is to have a filter that your board and senior management team are in lock step about,” he recommended.
Among the key areas of a filter are asset size, number of employees (Larger = greater culture impact), concentration mix, FOM expansion, geographic focus and non-negotiables that need to be identified before negotiating ever begins.
“A lot of time a front-line employee doesn’t know if that institution is having financial problems,” said Riechers. “They may think it’s doing so well for the member or customer, but there are reasons it isn’t. So, there can be a disconnect sometimes that front-line employees don’t understand.”
Who can a credit union contact to help identify prospects? According to Riechers, good sources are local investment bankers, accounting firms and appraisers/Realtors.
In Royal CU’s case, for expertise it has turned to Mike Bell of the Michigan firm Howard & Howard (who has facilitated most CU/bank deals), as well as local attorneys. It turned to McQueen Financial Advisors for accounting and fair market valuations; to market studies from Realtors/appraisers and branch networking consultants, and for loan due diligence to the internal audit department and to various other third parties.
Riechers said the CU creates scenarios for a range of outcomes, including most-likely, best-case and worst-case, to help it avoid making any emotional decisions. But he added the process is also “more art than science,” especially projections for growth, market response, and retention. It’s planning also reviews overhead overlap, and what the acquisition does to balance sheet concentrations looking out at certain time horizons.
“The most important thing for Royal is to make sure we benefit our current members; that’s number-one,” said Hehli. “For instance, we are focused on expenses and it doesn’t make sense to us to acquire a bank where we have to keep their entire back office (due to contracts).”
Riechers stressed the need for communication throughout the process, including in contracts how and when communication can take place. Once agreed, RCU has conducted town halls for both new members and employees, and Riechers reminded that the existing membership base must also not be neglected by explaining why the credit union is making the move.
RCU also sends a “welcome packet” to new members, which Riechers said must be concise. “One of the things we have learned is there is a lack of understanding about what a credit union even is,” he said, especially among bank customers.
There is discussion of what’s in it for new members with enhanced pricing, product and services, as well as other benefits.
He added, too, that the credit union must be prepared to deal with a potential loss of staff with whom the former members/customers are familiar.
Data integration, of course, is critical, and Riechers said early access to data prevents many issues, “so it’s critical to negotiate that early.” Similarly, it’s important to work out early issues around data security and nailing down routing number and debit card handling.
“Expect every member to try and log into online banking at the same time once systems are available, so load-testing is critical,” said Riechers. “Make sure to stress-test your system.”