Are You Ready for the Next Wave of Mergers & Acquisitions?

With the pace of industry mergers already ramping up in 2024 and projected to increase, it’s more important than ever for credit unions to have a predefined M&A strategy and be ready for the inevitable calls from prospective partner organizations.

Here, we’ll share key lessons and advice from cooperatives that have merger experience with other credit unions and acquisition experience with community banks to help your team prepare.

Define Your Vision and Evaluation Criteria

Successful credit union mergers happen when members and employees from both organizations benefit. Start by asking how a potential partner could benefit each of your key stakeholders and vice versa. Could they expand your geographic footprint in a desired market? Do they provide complementary, incremental, or even better products and services? Does their team have capabilities in key areas like commercial lending that you lack, or technology? As a combined credit union, would this provide the scale to enable you to offer more competitive rates and fees to your combined members?

Running the numbers can be a quick way to see whether a merger makes financial sense, but other qualitative factors such as cultural alignment can make or break a transaction, so start the non-financial conversations early to assess fit and focus.

Understand Each Party’s Why

There are multiple reasons credit unions, and community banks, seek M&A partners. It’s important for you to have a clear understanding of what’s driving each party. Some common reasons we see through our work with hundreds of financial institutions nationwide include:

• Meeting members’ needs: Keeping up with the latest technology investments, offering the products members require such as mortgages and commercial loans and providing convenient distribution channels (both physical and technological) – all while retaining the same familiar faces members have grown to trust – can be big drivers of M&A activity. Increasingly, strategic mergers between two well run credit unions are escalating as represented by the increased number of mergers of equals across all peer sizes as they recognize the benefits that scale can bring to their combined memberships, employees, communities and financial statements.
• Lack of succession planning: At the board, executive or senior leadership level, the impending retirement of key leaders can cause institutions of all sizes to consider their M&A options.
• Partner as opposed to compete: Today, more and more mergers are based on strategic considerations than ever before (as opposed to historically purchase and assumptions). Credit unions are enduring the endless battle to retain and obtain employee talent, evaluating new branches in targeted areas to grow membership, building capital and expanding geographic diversity. Considering mergers with credit unions that may fill these gaps is often the impetus to exploring partnerships as opposed to competing.
• Growth aspirations: While financial institutions continue to seek areas for growth, limited fields of membership and geographic footprints can lead some credit unions to reach their saturation point. To meet future growth goals, they must consider other, non-organic options such as mergers to broaden their footprint. Mergers can also help alleviate the cost of opening and staffing a branch in a new market by partnering with a credit union that already has a branch in the areas of focus.
• Financial realities: Capital, liquidity needs and asset quality are paramount considerations today. An increase in net charge-offs or other financial losses can quickly turn into an inflection point. Geographic member diversity may be a way to strategically alleviate certain concentration risks over the longer term. In addition, scale may help ease some of these risks.

Have a Process in Place

Whether your institution decides to openly seek M&A opportunities or is receptive to in-bound conversations, it’s important to have an evaluation framework defined. When exploring a merger with a credit union, some key questions that should be part of your evaluation process include:

Would an opportunity provide member value via:

• Increased access to advanced technological distribution channels in current and future expansion areas?
• Reasonable economies of scale allowing more competitive offerings and improved pricing opportunities?
• An enhanced, more complete suite of products and services?
• In-person service and superior digital experiences that are adaptable and scalable to improve and enhance service?

Would an opportunity provide the combined institution value via:

• Efficient, multiple operational or “administrative centers” to retain employee talent in areas currently conducting business?
• Access to a greater talent pool, additional career opportunities and better compensation?
• Increased geographic and economic diversification to better position the combined institution for macroeconomic fluctuations and long-term viability?
• A larger organization with the ability to maintain and grow market share?
• Access to a larger asset base and more capital to leverage for member benefit (technology, additional products, member service)?

Would an opportunity provide employee value via:

• Additional specialized positions as well as succession plan opportunities?
• The creation of a larger institution with the potential to remain competitive on compensation and benefits (“Do No Harm” to employees)?
• New roles, products and services, and expanded training opportunities for employees?
• A competitive compensation structure with greater ability to incentivize employee engagement?
• Retaining more engaged and performing employees, while also offering a competitive retirement consideration for those at this stage of their career?
• Short-term (integration) and long-term career path opportunities?

Would an opportunity provide community value via:

• Allowing the combined organization to increase philanthropic efforts?
• Motivating employees to donate time, ideas and energy toward community causes?
• Creating a larger institution with the ability to maintain long-term relevance and better serve the broader community?
• Enhancing governance by retaining representation and diverse perspectives that represent the members/customers being served?

Watch for Red Flags

To help avoid wasting time, effort and money, ask the difficult questions early. Discussions should include the following questions, at minimum: How many board seats will each entity retain? Which charter would remain? What does the executive board look like? How will key technologies integrate? Who will be retained as the combined credit union CEO? How will the executive team be leveraged both in the short term (merger integration) and long term (steady state)? Do you have the IT resources needed? How do cultures align?

Arm Your Organization With Education and Advance Preparation

While not every opportunity will come to fruition, forward-thinking institutions are prepared to have those conversations and assess opportunities quickly. Boards of directors are also becoming increasingly involved in M&A discussions. From attending education and training sessions to engaging in early conversations to ascertain board dynamics and whether there are complimentary values, your member-owners’ elected representatives need to be prepared to thoroughly assess opportunities and make informed decisions.

If your credit union isn’t prepared, you may be missing out on potential member, employee and community benefits.

David Ritter is Managing Director, M&A Advisory for ALM First in Dallas, Texas.

Brandon Pelletier is Managing Director, M&A Advisory for ALM First in Dallas, Texas.