Note: The following interview took place in the Summer of 2012. This fall, Powerco Credit Union, Western Credit Union, and Members First Credit Union emerged under the brand name Pathways Financial Credit Union.
A brand is more than just a name, it’s an identity. Credit unions can spend years planting, growing, and defending their brand, only to loose that ground to a one-sided merger or to conservatorship when economic trials weigh heavy. But better cooperative alternatives exist.
Economic uncertainty need not be the driver of a merger strategy, as demonstrated by three healthy Ohio credit unions ? Powerco Credit Union ($64.5M, Columbus, OH), Western Credit Union ($68.1M, Columbus, OH), and Members First Credit Union ($52.6M, Columbus, OH) ? who await regulator approval to join forces later this year.
The move will create an institution with a consolidated $185 million in assets, and will demonstrate how forward-thinking, strategic mergers could actually enhance localized brands, not destroy them.
We are three progressive mid-size institutions trying to grow our brands, but we will have the resources of a larger institution behind each of them, says Thomas Furrey, the retiring CEO of Western. We aren’t trampling over each other to grow, but instead are complimenting each other in a lot of ways.
Set to be succeeded at Western by Powerco CEO Michael Shafer, Furrey will take on a largely advisory role for the combined credit union in the days ahead. Post-merger, Shafer will remain CEO but will be joined in a leadership role by Greg Kidwell, current CEO of Members First, as the merged institution’s president.
Shafer, Kidwell, and Furrey each took the time to share their thoughts on this unique undertaking and explain how fellow credit unions can recognize opportunities for unprecedented partnerships in their own markets.
Tell me how this agreement came about? What factors inside and outside the institution influenced the decision?
Furrey: With my scheduled retirement in 2012, our board and I had begun looking at several options for succession. These included hiring a new CEO or looking at the merger option, including a partnership where the Western brand would be preserved. The top priority in any strategy was what would be best for our members and the future of our employees. It would also require turning over the keys to someone with the confidence and ability to grow the brand.
How did Members First enter the fray?
Kidwell: I had been made aware of the discussions taking place between Western and Powerco in mid-2010, and after considering the strategic possibilities of such a partnership and consulting with our board President, became actively involved in the process. We have always taken pride in being strategically innovative and forward-thinking in terms of serving our members, and the more that we studied the strengths of each potential partner and the synergies that could result in terms of member convenience and services, the more compelling it became to be involved.
What was the timeline to get from initial conversations to your current point in execution?
Shafer: I would describe our discussions for the first few years as being informal and sporadic conversations. We discussed the concept and our philosophies on how this partnership could work for three similar sized credit unions. Once we were all committed to moving forward, we had signed letters of intent from the three boards within 60 days.
Furrey: With the ongoing challenges facing progressive mid-size credit unions today and for the foreseeable future, it was felt that any resulting partnership had to achieve enough scale and size to be sustainable. Once all three CEOs were solidly behind the concept and the perceived and calculated benefits, the pace involving board members and then staff picked up very quickly. In November of 2011, everything dropped into place, and everyone was on the same page. From there, things increased dramatically in terms of moving forward. Discussion was replaced by execution.
When do you expect the merger be approved, and once that happens, what’s your timeline for completion?
Shafer: We expect that the merger of all three credit unions will occur in August or September of this year. The major system conversions will all occur within six to eight months post merger. Ideally, by the end of 2012, the members of each institution will be fully realizing the benefits created by the partnership.
How did the move mesh with the institutional goals and priorities of your individual institutions, along with the goals of your two peers?
Furrey: Our first priority was not the balance sheet meshing but rather defining management and leadership. Each of us had known each other for many years and Mike and Tom even worked together for ten years at Western. There was a high level of familiarity not only with the individuals involved, including their leadership styles, abilities, and strengths, but also their credit unions, boards, and employees.
Kidwell: Mid-sized credit unions that strive to provide a full compliment of products and services are challenged by a lack of resources in a variety of ways. All three of us have always taken a tremendous amount of pride in how we serve our members. It became increasingly clear that we could do an even better job of this by partnering together. When Mike refers to the word partnership, it’s not lip-service. We have made a commitment to one another to actively live it.
Shafer: For the most part credit unions have very similar institutional and business model goals but they often have very different approaches and ideas in achieving those goals. We have taken the approach that we want to take the very best ideas and practices from each of our partner credit unions and make those the standard in the new organization. Off the balance sheet we wanted to create additional members value, access, and convenience while delivering better products to the people that we work for.
How will the move help generate costs savings?
Kidwell: We are seeing a number of areas where we’ll be saving the credit union money by partnering, particularly in our core processing system and ACH/debit card processing. There are also those moderate expense savings like employee benefits and having just one audit rather than three different contracts.
Shafer: There are a lot of vender decision that have to be made, but we will choose each ongoing provider from among one of the three currently used, so they won’t be new to everyone. We’ll also use this opportunity to leverage our partnership and get better pricing.
Merger costs will definitely be mitigated by the savings we’re picking up from renegotiating these deals. Through proper planning and a little luck, our contracts are all fairly well aligned, so we won’t be spending a lot of money to break those.
How else will this process differ from what you might see in a typical purchase and assumption or merger situation?
Shafer: We view our approach as being very different from the typical credit union merger. Most of the mergers that occur in our market are needs-based mergers where the merging credit union really doesn’t have a lot of options to continue on their own. Our model is completely different in that we have three healthy credit unions that are choosing to come together for strategic purposes to create a stronger organization.
Post-merger, what will the loan portfolio look like? What opportunities do you see there?
Shafer: The new institution will hold almost $100M in loans. Each of us knows how to do the same things credit unions have always done, like autos and unsecured, but we all have a slightly different focuses that we can bring together to create a stronger, sharper lending engine.
While we operate in the same markets and do a lot of the same things, Powerco does not have any commercial loans, whereas Western has a decent amount and Members First has even more. Members First was at the Member Business Lending (MBL) cap, so they weren’t able to grow that, even though they were very effective at it. That’s an expertise we didn’t have a Powerco, and I’ll be able to learn from that.
Furrey: Both Powerco and Members First also have a fairly robust mortgage entity that will strengthen our own efforts. Members First sold its credit card portfolio in 2007, so membership there will again be able to enjoy new credit card options they didn’t have before.
What are the long term plans for the network of branches in the region?
Kidwell: The combined credit union will have six branches with good geographical disbursement at the outset. We have no plans to close any branches. Our initial challenge will be to grow membership and usage of some of the branch locations, but the potential certainly exists to do so. The branch network provides one of the major member benefits of the partnership. It would be fiscally impossible for any of the three credit unions involved to establish as many new branches as are created by the partnership.
Tell me about the branding aspect and how it will be addressed?
Kidwell: Our strategy will be to leverage the equity of our existing brands among our membership and our communities. The corporate name for the credit union, which has yet to be finalized, will be seen on loan documents, disclosures, and signage, but for the most part, it will be a background name. We will maintain our existing names and branding, and each of the credit unions will operate as a part of, or affiliate of, the newly combined credit union.
We believe we’ve narrowed in on a name. We are still going through the legal process, so we’re not quite ready to unveil it just yet. But we’re close in that process.
What will happen with your individual branch staff, executive staff, and boards?
Shafer: For the most part, the individual branch personnel will be unaffected by the merger. It is very important to us that our members continue to receive service from the same group of employees that they’ve become accustomed to. The executive management team will all be working out of the main office building and we are planning to have each credit union represented by an equal number of board members.
Kidwell: In addition, we also have the luxury of combining the management teams from our three progressive partner credit unions to form a senior management team that is much stronger than what any of our three credit unions could put in place on their own.
Furrey: One of the advantages seen at the outset was that there was not a lot of duplication of talent in the structure or any inefficient redundancy. Right now, our marketing coordinator desk is empty, and we had other folks that had to pick up those efforts in marketing. But Members First has an accomplished marketing specialist to lead that charge, and we’re going to benefit from their experience and resources.
Kidwell: The merger will also give us the ability to have a fully staffedcompliance department, something that none of us have now. We all wear a lot of hats, and that compliance hat has been particularly heavy. It will be very prudent to have people dedicated just to that area.
How will the acquired membership mesh with your existing membership base?
Shafer: Members First and Western are community-based credit unions and Powerco is more of an SEG-based credit union with multiple groups. Together, we will be able to better serve several different communities and we will have the stability of hundreds of SEGs utilizing our credit union. We believe that this diversification will make us even stronger going forward.
How closely did your previous product offerings overlap with your two partners and where are their differences that will have to be taken into account?
Furrey: In the long run, the goal is to migrate what is now three of everything into the very best solution for our members and for their needs.
Shafer: With most loan and deposit products our services are very well aligned. However, there are several examples where a particular niche product or service just makes sense for the membership of one of our partner credit unions. In those cases, we look at the product, try to improve upon it and will continue to market it to the members of that credit union. This after all is one of the subtle differences that make credit unions unique.
Tell me about the due diligence process, taking on accounts and assets underwritten by another institution? Do you have any tips or best practices for communicating and working with regulators throughout this kind of process?
Shafer: This is a hugely important part of the process and one that we have taken very seriously. We have contracted with a number of firms including CPAs and legal so that the work was done thoroughly and independently. All of the Boards were very clear that they wanted comprehensive due diligence conducted before moving forward.
Kidwell: We designated a project manager for the regulatory process, and we have established a practice of conducting regularly scheduled conference calls with our regulator to keep them totally up to speed on our progress. We have an excellent relationship with our regulator, and they have been very cooperative and helpful throughout the entire process.
In terms of due diligence, we have really broken it down into three parts: internal due diligence that we worked directly with each other to perform; third-party due diligence conducted on each other by our respective audit firms; and the fair market valuation process performed by an independent third party in order to determine which charter should be designated as the ongoing one in terms of best forward earnings potential.
Furrey: We certainly made an investment in the due diligence and the asset evaluation process. But where we’ll recoup that is in the information gained, which will result in the strongest balance sheet possible.
How can other credit unions identify when and where this type of agreement might make sense in their own potential markets?
Shafer: We have talked to other groups of credit unions throughout the country who are considering something similar. We believe that the key to this strategy is creating a partnership with like-minded peers that understand that the model is about preserving the brand and building a stronger organization that has more to offer.
The hardest thing is to have the initial conversations without the other institutions getting offended, but you can see of there’s potential and move forward accordingly. Every credit union is different and this doesn’t work for everyone. In our case, it works.
Post merger, what’s on the horizon over the next several years?
Shafer: One of our first priorities will be to organize our member service departments so that our members will receive the same high-quality service regardless of which brand location they visit. We anticipate that a lot of time will also be spent working to consolidate the back offices of the three credit unions into one.
Furrey: It will take a year or so to migrate to the best practice status of our products, procedures, policies, and personnel. During that time the focus will continue to be on growing the brands and competing for business in the defined market places.
Kidwell: Our employees are by far our greatest asset, and they will play a key role in determining how quickly we can get to the other side of this. I personally am amazed at the amount of work that we have accomplished together thus far.
Would the credit union ever consider branch/asset purchases or additional mergers in the future or will you focus be more on internal processes and development for the time being?
Furrey: Absolutely, we feel this is a perfect model given the right circumstances under which progressive, mid-size credit unions can benefit. This model is flexible and scalable for that exact reason.
Shafer: Although we currently have no immediate plans to add additional credit unions to our partnership we are certainly open to the idea in the future. We believe in what this concept has to offer other mid-sized credit unions in our state and we are excited about what the future may hold.