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Westerra Credit Union Case Study - Building New Leadership

Trends in Credit Unions

CURRENT QUESTIONS FACING THE INDUSTRY

Question:
What kind of impact does the failure of US Central and WesCorp have on the prospect of corporate mergers in the near future?

Answer From Ron Nice:
In the near future, I see very little. Because the Corporate business is one of scale, merging to gain scale for the benefit of their members is always on the minds of corporate CEOs and Boards and a real strategic option, but an option based as much on people, personalities and plans as it is on simple business case. It is definitely an option that will be adopted by several, continuing the longer term trend of corporate consolidation. Based on NCUA’s recent action, we actually may see more “mid-size” mergers, staying away from mergers into very large corporates. This is all contingent on how the new rules and regs will shake out regarding corporates – their focus, their business purpose, and natural person CU's response to corporate system over the longer term.

Question:
What kind of impact does the failure of US Central and WesCorp have on the prospect for natural person CU mergers?

Answer From Ron Nice:
Bottom line distress, and therefore significant reserve reductions due to regulatory action beyond the control of natural person credit unions creates or intensifies the economic need to consider merger as a real strategic option. I’m very aware that many savvy CEOs are already confidentially talking among themselves to explore this option, and more importantly, it isn’t just limited to CU organizations that are experiencing extreme reserve distress. It is also happening between and among several organizations that will easily weather the current financial ‘perfect storm’. This is because all CU CEOs and Boards are challenged by an increasingly competitive environment, the lack of ability to generate capital other than through retained profits which haven’t been there for a year, combined with the need to do what is in the economic best interest of their membership. That is why we are seeing increased interest and questions surrounding our Merger Kit and merger Brokerage consultation. www.trynice.com

Question:
Do you think the macroeconomic situation makes it more or less likely to see more mergers?

Answer From Ron Nice:
Over time, we will see merger activity increase from the present rate of roughly one per every business day of the year. Because mergers take 10 to 12 months to complete from start to finish, it will be a while before we see this increase, but it is coming. Distressed mergers directed by the regulator, will obviously happen much quicker, but they also take some time. We will begin to see the unintended results of the actions taken by NCUA in the last few months beginning to appear later this year, and throughout the next several years to come.

Question:
Who would be the most likely candidates for a merger?

Answer From Ron Nice:
Virtually, most Credit Unions, regardless of size and present financial condition.  Probably the only ones not considering this as a real option are those credit unions with a traditional or closed field of membership, who are also extremely profitable, are growing in membership, and have “off the charts” membership satisfaction.  And in those situations, they are looking at the current market and seeing an opportunity to help out their brother credit unions.  As a result of several successful, large, financially sound credit unions partnering together resulting in strong mergers, such as USA CU and T&C FCU forming Genisys CU in Michigan, or the nationally known multiple mergers forming the Westerra CU in Colorado, these combinations are no longer limited to organizations just experiencing financial distress.”  

Question:
Are bank conversations more likely to happen in light of recent events?

Answer From Ron Nice:
Unfortunately, yes. If (or when) Credit Unions are inhibited through their charter, regulatory structure, regulatory oversight in this current environment, or lack of legislative relief, it creates a market disadvantage as compared to Banks. When that exists for any period of time, Boards and CEOs will ultimately do what is in their membership’s best economic interest, which is their ultimate fiduciary responsibility. Unfortunately, depending upon what inhibiting changes continue to occur, that interest might best be served outside a credit union.”

CHANGING CREDIT UNION LANDSCAPE AND ECONOMIC ENVIRONMENT
Throughout the Credit Union System, the number of credit unions continues to decrease, while assets and members continue to increase but at a slower pace than in the past.  Economic pressures have forced all businesses, including credit unions, to take a realistic view of their products, performance and long-term viability/success strategies.  Credit unions, especially small and mid-sized credit unions, are finding it increasingly difficult to compete in today’s marketplace. 

By the year 2012, many industry experts estimate that the Credit Union System will have 200 credit unions with assets greater than
$1 billion.  These 200 credit unions will control 51% of the total Credit Union System assets and 42% of the total Credit Union System members. 

These trends represent a tremendous opportunity as more and more credit unions will explore the benefits of partnering with other credit unions.  Through mergers, credit unions gain the ability to expand with more branches, build capital, attract and retain quality staff and leadership, enhance buying power, and offer additional products and services for members – positioning the combined credit unions for greater success than each could achieve individually. Credit unions also gain the benefits of portfolio and membership diversification – minimizing the financial risk that can result from reliance on a single membership.

Through mergers, credit unions can strategically position themselves to better serve members (i.e., additional branches, enhanced products/services, etc.) and remain a viable player in the financial services marketplace.  The costs associated with a merger strategy are an investment in the future.  A strong capital position can enable a credit union to sacrifice some short-term profits (a reduction in return-on-assets) to better position the organization to meet the ever changing financial needs and expectations of members.

The National Credit Union Administration (NCUA) recently stated, “It appreciates the delicate balance credit unions must strive to achieve between the short-term and long-term needs of the credit union.  In this regard, we encourage credit unions to be committed to a sincere, conscientious, and well planned strategy to balance the net worth and earnings needs of the credit union with strategies to achieve longer-term objectives.”  

NCUA further added, “Lower ROA levels will be viewed positively if they are a result of a sound and well-executed strategy to balance risk exposure or incur costs to position the credit union to achieve longer-term growth and member service objectives.”  This is the exact, well-executed, strategy that some credit unions have employed through mergers.

Other economic trends will present tremendous challenges for all credit unions.  Net interest margins have declined in the last 10 years, and this trend is expected to continue.  Increased competition, stagnant membership growth, lack of differentiation from banks, slower loan growth, an aging membership, tighter liquidity, banks purchasing credit unions, and a slowing economy are just a few of the other challenges that credit unions will face in the next several years.

Credit unions will need to create the necessary economies of scope and scale to effectively compete in this changing environment.  As an example, banks hold 15 times more assets than credit unions.  We must find ways to generate new revenue opportunities, partner with more credit unions, expand into new markets/communities, attract the next generation of borrowers and savers, and gain operational efficiencies through aggressive expense management and technology, just to name a few.  Mergers enable credit unions to do just that.

ESTABLISHING A MERGER STRATEGY

It is important that every credit union have a merger strategy—a shared foundation for the CEO, the Board and the senior management team as a whole in your credit union’s approach to mergers.

Your Merger Strategy is how, in general terms, the credit union will pursue and address merger opportunities and handle the merger process.  It includes a “position statement” regarding mergers and their general desired outcomes, and a certain level of detail about critical aspects of the credit union’s approach toward, and perspective about, merging.

The Merger Kit Leads You Through the Development Process
Establishing your Merger Strategy is a key component of defining and creating the credit union’s strategic value for members.  Below is a Sample Merger Strategy Statement that includes content you will develop in Section 010 of the Merger Kit, Build The Case…

This sample shows the sort of statement every credit union should create:

For some organizations, this Merger Strategy can be developed in a single, well run strategic planning or Board education session, where the Board and senior management team interactively build the key points.  This enables the Board to provide general direction on the main aspects, then “hand off” to the CEO to finalize the documented Merger Strategy.

The second approach is less common, but also works well:  The Board delegates the process to the CEO, then reviews and approves the completed written strategy.

Consider retaining a merger expert (such as Nice Enterprises, Inc.) to deliver interactive education to your Board and/or facilitate your strategic planning session. 

Contact Nice Enterprises, Inc.