Market Stresses Are Forcing Mergers

Every credit union member wants to belong to a safe and secure organization that serves and anticipates their needs. Providing state-of-the-art, secure services takes strategic investments in hardware, software and people. Financial innovation and advancing technologies bring new ways to serve members. Data analytics, artificial intelligence and predictive services using state-of-the-art expertise and technology create a personalized member experience, improve operating efficiencies and increase financial strength of the institution.

The COVID-19 pandemic has accelerated the need for reliable mobile banking and technology. In addition, an increase in bad actors and cybersecurity threats has put incredible stress on our technology platforms. The Office of Comptroller of the Currency’s most recent report from November 2020 warned that the pandemic-related economic downturn is increasing credit risk as individual debt service capacity is diminished, and compliance costs are increasing further due to altered and evolving work environments. Financial research firm BAI described how the pandemic has altered the delivery of service and accelerated mobile banking, making bricks and mortar less important to members. More than half (52%) of banking consumers increased their digital usage and most (87%) plan to remain mostly digital after physical locations reopen.

The current realities require substantial capital in a rapidly emerging, complex risk environment. Firms with larger total assets can better afford to invest directly in the technology, staff and controls needed to compete and manage risk. Smaller institutions with assets of $500 million or less will struggle to compete. They face similar significant investment requirements as their larger competitors for essential technologies, and for hiring, training and retaining increasingly skilled human talent.

For smaller credit unions, combining forces with a larger entity is often the answer that senior management and boards find to be in the best interest of their members, as filings with the NCUA affirmed. Over 70 credit unions filed merger plans with the NCUA in the last six months of 2020. A few merged due to poor financial health; however, the vast majority cited improving member services as the reason. Members are better served by credit unions that have the resources to offer them current market services in a safe and secure environment.

Boards and senior management must have the capacity and determination to put good governance front and center. A well-planned and thought-out strategy that encompasses many considerations is critical. It is incumbent on the CEO and senior leadership team to provide the direction and communication that people need. Strategies must be founded on a strong organizational culture based on vision, mission and values that are clearly understood and embraced by the staff. Strategic communication is crucial to engage employees, and any strategy must include space for talent management, learning and training that allows for innovation and creativity. Employees, especially with the pandemic continuing, are under increasing stress, and their engagement and understanding of their employer’s chosen strategic choices is imperative.

There are important considerations for merging institutions that the board and leadership must understand. For example, credit unions have a significant footprint in their communities and usually are an important philanthropic force, and this presence should endure after a merger. The roles of the various stakeholders, including senior management and key employees, must be carefully studied and addressed going forward. The board of the merging organization has served honorably for years, and their contribution and participation in the surviving credit union will be an important signal of respect for the board and the membership they serve.

Full engagement of leadership and the entire organization around newly-shaped, shared objectives and common values will determine any institution’s strategic success. Our work with credit union clients revolves around member well-being. Effective strategy creation requires a thorough member-focused analysis that accounts for competitive forces and works to mitigate risk. It could require a major organizational change, like a merger, which encompasses cultural fit, organizational integration, ethics alignment and talent retention. Regardless of strategy, the purpose is always the members’ benefit.

Our experience in credit union mergers highlights three important learnings:

1. The board must understand and embrace the purpose of a merger.

2. Senior leadership needs to be engaged and take responsibility to communicate the purpose of the merger throughout the organization.

3. The board and senior leadership must communicate the purpose of the merger to their members so they have a clear understanding of what a merger means for them and their families.

A successful credit union merger has serious implications to the lasting community brand for your members and employees. Great sensitivity to these critical constituencies will define whether both of these groups remain loyal to the newly-formed entity.

Stuart R. Levine is Chairman and CEO for Stuart Levine & Associates LLC in Miami Beach, Fla.