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REPORT

Credit Union Merger of Equals: A Preliminary ExaminationGeorge Hofheimer

chief research + innovation officer

Filene Research Institute

Table of Contents

2 EXECUTIVE SUMMARY

3 APPROACH

4 GENERAL CREDIT UNION DATA

4 HIGHEST ALIGNMENT AREAS

5 LOWEST ALIGNMENT AREAS

6 TWO CASE STUDIES

7 CASE 1: ALIGNED CREDIT UNION

8 CASE 2: MISALIGNED CREDIT UNION

10 CONCLUSION

11 APPENDIX

CREDIT UNION MERGER OF EQUALS FILENE RESEARCH INSTITUTE

Executive Summary

Over the last two decades, Filene Research Institute has studied credit union mergers from a variety of

angles.

→ In 1999, we examined 1,624 credit unions prior to their merger and their performance for

three years after the merger. The resulting report, “How Credit Union Mergers Affect Service to

Members,” concluded that in 80% of the mergers studied, members of the target credit unions

benefitted significantly from the merger.

→ In 2007, we interviewed 66 credit union executives and board members to determine the boards

of directors’ role in credit union mergers. In the resulting report, “The Board’s Role in Credit

Union Mergers,” we determined that the CEO and management led the merger, with only a quar-

ter of the boards of directors being fully engaged in the process.

→ Finally, in 2009 we constructed a complete database of U.S. credit union mergers. The report,

“Characteristics of Credit Union Mergers: 1984–2008,” overwhelmingly depicted the typical

credit union merger as a large, healthy institution acquiring a small, unhealthy institution.

Amid all this backward-looking scholarship, a weak signal has emerged in the credit union merger

landscape: “merger of equals” (MoE). MoEs occur when two healthy credit unions of similar size com-

bine their assets and capabilities. While relatively few data exist (see callout later in this research brief)

to describe or explain this phenomenon, MoEs, while not common, represent a potentially important

trend. It is difficult to say what is driving this emerging trend, yet qualitative discussions with credit

unions across North America mention the triad of:

1. The need for scale

2. Regulatory pressures

3. Consumer demand for more (expensive) services

Consequently, more and more credit union leaders are finding themselves wanting, or needing, to

address the question: How prepared are we for a merger of equals?

In 2012, Filene and SchellingPoint developed an approach that enabled credit union leadership teams

to efficiently and effectively answer this question. On a pilot basis we asked 10 U.S. and Canadian credit

unions, ranging in asset size from $150 million to $2.5 billion, to undergo an assessment of their orga-

nization’s readiness for an MoE.

Participants (CEOs, senior leaders, and board members) responded to two online activities, an opinion

survey and a convergence form (see appendix). These activities educated participants on the scope of


an MoE and provided them with a quick and safe way to share their personal opinions on the multiple

dimensions of MoEs. This document summarizes the 10 credit union leadership teams’ readiness for a

merger of equals and presents some general conclusions.

As we acquire more data about credit unions’ readiness (or lack thereof) to engage in an MoE, we will

continue to offer the tools necessary to ensure your team is aligned on your future MoE strategy, what-

ever it may be.

While Filene’s research indicates an MoE is a valid business tool in certain circumstances, we are not

advocating for—or against—one. We are interested in revealing the facts about a trend that will impact

many credit unions in the coming years. This research report provides an analysis of the preliminary

respondents’ degree of alignment and overall sentiment toward the subject of MoEs. This research

report details our interpretations of those participants’ inputs, provides a structure for discussing these

results, and pinpoints where discussion is required so credit unions can efficiently converge on next

steps around the MoE topic.

Approach

Take any business issue: rebranding, branch location decision, merger, or rollout of a new product. In

each case, the difference between success and failure is in the proper implementation of the idea. A fair

idea executed well is worth more than a good idea executed poorly. Credit union leaders recognize this

dynamic but often miss an important step in getting stuff done right: alignment.

Alignment, or coming together with likeminded thinking around a common purpose, is driven by four

types of thinking, which drive action or inaction in individual team members. Those four types of think-

ing fall into these categories: Goals, Unanticipated Consequences, Barriers, and Assumptions.

Goals

What benefits and desired outcomes must this project provide to our stakeholders?

Unintended Consequences

What negative side effects could occur if we imple-ment this project?

Barriers

What constraints would we face in evaluating, ex-ecuting, and sustaining a successful project?

Assumptions

What business and personal factors are driving our need to consider this project?

The alignment concept—which goes by the acronym GUBA (Goals, Unintended consequences, Barri-

ers, Assumptions)—is an effective way to air issues and fix misaligned perceptions among participants


before a project is implemented. For example, if members of a credit union executive team have differ-

ent assumptions about why their credit union is pursuing an MoE, then the likelihood of a successful

merger decreases. If the team can reconcile and align these perceptions before the MoE begins, the

likelihood of a successful merger increases. In short, aligning teams is linked to better outcomes.

For the topic of MoEs, we summarize the alignment of all participating credit unions, all participat-

ing executives, and all participating board members. This research in no way represents all the North

American credit unions; however, we believe these initial insights fill a knowledge gap in the evolving

credit union MoE topic.

Research Approach Grounded in Nobel Prize Work

The research underlying this report is based on the 2005 Nobel Prize–winning work of

Thomas Schelling. His “Schelling Points” describe an activity that “gives a group of like-

minded individuals their common purpose.” The firm SchellingPoint employs this concept

to help organizational management align its actions around such diverse business topics as

mergers, large-scale collaboration, and marketing strategy. For information on Schelling’s

research, visit http://www.nobelprize.org/nobel_prizes/economics/laureates/2005/

schelling-autobio.html.

General Credit Union Data

Credit unions of different geographies, fields of membership, sizes, strategies, and histories completed

the MoE assessment (the survey and the convergence form). While it might seem incongruous to com-

pare the responses of such a diverse group of credit unions, the data tell an interesting story about

executive and board perceptions of an MoE.

Highest Alignment Areas

Executives and board members tend to align positively around certain concepts:

→ We must be confident our merger candidate shares a similar vision.

→ The merger candidate must provide us access to certain geographies and markets.

→ A merger of equals should improve our resulting internal efficiency.


→ A merger with an “equal” should provide us both with market advantages we cannot attain

individually.

→ Our members must be the most important stakeholder in a merger of equals.

A story is emerging on the MoE topic. If a credit union is considering an MoE, it will most likely look

for a philosophically similar institution with a complementary geographical footprint. The MoE should

result in economies of scale and scope for the merged institution. Finally, an MoE cannot be viewed as

a purely operational exercise, as member-owner considerations—primarily from the boards of directors’

perspective—must be a key consideration.

Lowest Alignment Areas

Directors and executives also tend to share certain concerns about MoEs:

→ I can’t imagine our culture meshing well with another credit union’s culture.

→ A merger would be taken by our members as an indication of failure.

→ We have too many people (members, employees) who will strongly resist a merger.

→ A merger offers no meaningful personal career opportunities.

→ We can thrive independently; a merger is unnecessary.

Most of the misalignment among credit unions lies in the soft, or behavioral, elements. Therefore, as

credit unions consider an MoE, they should be especially cognizant of the “human factors” associated

with the topic.

A Quantitative Update on MoEs1

Data on U.S. credit union mergers is of high quality since 1984. Using a similar methodology to

past Filene merger research2, we break down data through 2012 on mergers into those of equals

(target >= 50% of acquirers’ assets), absorptions (under 10%), and acquisitions (in between). The

results are, very similar but not identical to data analysis through 2008. Mergers of equals (by

count) are not quite becoming more common, even if they account for a share of targets’ assets

that over the long run appears to be increasing slightly. To muddy the picture further, this slight

increase is happening in, at best, a volatile fashion, such that assets in mergers of equals in, for

instance, 2012 (the latest full year) are below historical trends. Simple analysis explains why the

data is so volatile: as one very large merger of equals is happening in one year, but not the next,

the resulting data shows sudden spikes shown in the figures below. It is important to remember

that this type of data analysis is backward looking. Future trends in MoEs future may look like

past experiences, or may look very different should the competitive, technological, regulatory or

consumer landscape change in dramatic ways.


FIGURE 1

FIGURE 2

Two Case Studies

MoEs Rather than talking about the MoE topic in a detached manner, let’s examine two case studies of

credit unions’ readiness to engage in an MoE. We tend to learn best from the extremes, so we examine a

“completely aligned” credit union and a “misaligned” credit union.

Determining whether your credit union is ready, not ready, or somewhere in between on an MoE

requires the leadership team, board of directors, and select staff to undergo a readiness assessment sur-

vey (see Appendix), which is then analyzed by SchellingPoint using the process described in the above

sidebar.


Case 1: Aligned Credit Union

The slogan for this fictional credit union is: “We are ready to start the MoE process now!”

The respondents are highly aligned when they believe:

→ There are (or will be) business conditions that cause (or will cause) us to consider an MoE.

→ MoEs are a valid business tool.

→ There are defined benefits against which an MoE can be evaluated.

→ There are no constraints to evaluating, executing, or sustaining an MoE.

→ Evaluating and proceeding with an MoE should not negatively impact members, staff, the busi-

ness, or the survey respondents).

Revisiting the GUBA framework introduced earlier, we find this credit union to have the following opin-

ions of an MoE:

GoalsWhat benefits and desirable outcomes would this project have to provide to our stakeholders?

The respondents in this case believe that a merger of equals would provide across-the-board benefits

because they have aligned views on:

→ The member benefits an MoE should produce.

→ The MoE’s potential impact on the candidate credit union’s financial performance.

→ How an MoE would advance the organization’s capabilities.

Unintended ConsequencesWhat possible negative side effects could occur if we implemented this merger of equals?

Overall, the respondents foresee no negative side effects to evaluating and proceeding with a Merger of

Equals because:

→ An MoE would not produce significant negative impacts on the staff or members.

→ An MoE would not produce significant negative impacts on business performance.

BarriersWhat constraints would we face in evaluating, executing, and sustaining a successful project?


Overall, respondents foresee minimal barriers to successfully evaluating, executing, and sustaining a

merger of equals because:

→ This is the right time to have a conversation about an MoE.

→ The credit union’s ability to successfully execute an MoE is high.

→ The credit union’s ability to successfully sustain an MoE is high.

AssumptionsWhat business and personal factors are driving our need to consider this project?

There appear to be strong reasons to consider a merger of equals because:

→ The credit union’s performance is weak.

→ The organization’s internal drivers to change are strong.

→ The credit union’s external drivers to change are strong.

Next StepsGiven the alignment of this fictional organization, the suggested next steps would include:

1. Clarifying core goals, especially around the required member benefits that would result from an

MoE.

2. Preventing unintended consequences, particularly related to the notion that an MoE would not

cause material personal or professional problems.

3. Removing barriers, especially concerning a clear organizational understanding of what an MoE

would entail.

4. Confirming key assumptions, especially around the belief that the credit union’s performance is

driving a need to explore an MoE.

Case 2: Misaligned Credit Union

Next, let’s examine a misaligned credit union. In this case the credit union’s respondents’ views range

from strong agreement to strong disagreement on all elements of an MoE. The slogan for this fictional

institution considering an MoE is: “Rather than a clear answer—yes, we should or no, we shouldn’t—fur-

ther discussion is required.”


Again revisiting the GUBA framework introduced earlier, we find this credit union to have the following

opinions of an MoE:

GoalsWhat benefits and desirable outcomes would this project have to provide to our stakeholders?

The respondents are misaligned as to the listed benefits they would require of a Merger of Equals

because:

→ They do not agree on the member benefits an MoE should produce.

→ Their views on the required financial performance outcomes of an MoE are misaligned.

→ Their views on how an MoE should advance the credit union’s capabilities are misaligned.

Unintended ConsequencesWhat possible negative side effects could occur if we implemented this project?

Respondents are not aligned on the likelihood that evaluating or proceeding with a merger of equals

would trigger negative side effects because:

→ There is misalignment on whether an MoE would produce significant negative impacts on the

staff or members.

→ There is misalignment on whether an MoE would produce significant negative impacts on busi-

ness performance.

BarriersWhat constraints would we face in evaluating, executing, and sustaining a successful project?

The respondents are misaligned as to whether factors will constrain the organization from evaluating,

executing and sustaining a successful Merger of Equals because they disagree about:

→ Whether this is the right time to discuss an MoE.The organization’s ability to execute a success-

ful MoE.

→ The organization’s ability to sustain a successful MoE.

AssumptionsWhat business and personal factors are driving our need to consider this project?


There is misalignment about whether valid reasons exist to consider an MoE because opinions differ

about:

→ The organization’s performance.

→ The organization’s internal drivers.

→ The organization’s external drivers to change.

As in the example of the aligned credit union, the suggested next steps for this fictional organization

would include confirming key assumptions, clarifying core goals, preventing unintended consequences,

and removing constraints around an MoE. However, since this organization is so misaligned on the topic

of an MoE, this type of process would act as a shortcut to confirm that an MoE is unlikely in this organi-

zation’s near-term plans.

Conclusion

Less-than-obvious opportunities—such as a timely merger—tend to sneak up on organizations. Empiri-

cal research leads us to believe that credit union merger activity will continue for the foreseeable future.

While most mergers will likely follow the typical pattern of “a small, unhealthy credit union merging

into a larger, healthy credit union,” MoEs or more strategic mergers are important to consider. Use the

available tools to help you judge your readiness for this type of business decision, so you will be better

prepared for the unexpected.

If you are interested in learning how to determine your credit union’s readiness for an MoE, contact Filene’s Impact team at [email protected].


Appendix: Credit Unions’ Opinions on the Topic of Mergers of Equals

Should a credit union wish to understand how aligned its team (management, board, staff) is on the topic

of an MoE, the team would be asked to respond to a series of statements on the topic. These statements

are based on extensive interviews with industry participants. Once a credit union administers the MoE

Alignment Survey, Filene will provide the results and actions steps in order to determine its readiness for

an MoE. This process would also make sense prior to an MoE between two institutions. For a limited time,

Filene can walk your credit union through this process.

MoE Alignment Survey → A merger could lead to relocation or other family changes I would not welcome.

→ A merger could trigger a competitor that would lead to more problems than we have now.

→ A merger of equals should bring members of both credit unions a level of service we can’t pro-

vide individually.

→ A merger of equals should bring members of both credit unions financial benefits we can’t pro-

vide individually.

→ A merger of equals should bring members of both credit unions products and services we can’t

provide individually.

→ A merger of equals should improve our resulting internal efficiency.

→ A merger of equals should improve our resulting loan growth rate.

→ A merger of equals should improve our resulting membership growth rate.

→ A merger of equals should improve our resulting net worth–to–assets ratio.

→ A merger offers no meaningful personal career opportunities.

→ A merger offers no meaningful personal financial rewards.

→ A merger with an “equal” should provide both credit unions with market advantages we can’t

attain individually.

→ A merger with an equal is the best option for attaining our aspirations.

→ A merger with certain credit unions could actually close us out of certain new markets.

→ A merger would be taken by our members as an indication of failure.

→ A merger would be taken by our staff as an indication of failure.

→ A merger would enhance my ability to achieve what I want to achieve for our members.

→ A merger would mean I’ve failed as a leader of this credit union.

→ A merger would mean that we’d wasted the efforts and investments we’ve already made devel-

oping some key capabilities.

→ A merger would offer me enhanced financial opportunities.


→ A merger would offer me new and enhanced career opportunities.

→ A merger would probably mean we’d have to lay off some staff.

→ A merger would put my position at risk.

→ Another shift in the economy could catch us halfway through a merger and damage both credit

unions.

→ During the consideration of a merger, we’d have to slow or put investments and initiatives on

hold, and that would hurt the credit union.

→ Even if mergers of equals are right in the short term, larger credit unions raise the specter of

taxation.

→ I can’t imagine our culture meshing well with another credit union’s culture.

→ In this industry, growth is strength.

→ In this industry, size is strength.

→ It’s hard to envision the financial consequences of a merger with an equal; that is, the combined

balance sheet and valuation.

→ Laying off our staff is a last resort before we’d fold altogether.

→ Mergers of equals are usually successful in delivering their intended benefits.

→ Merger of equals is a trend in the credit union industry.

→ Merging with an equal is overly complex.

→ Our internal efficiency is trending as required.

→ Our loan growth is trending as required.

→ Our membership growth rate is trending as required.

→ Our members would be the most important stakeholder in a merger of equals.

→ Our members would not support us after a merger.

→ Our Net Worth–to–Assets ratio is trending as required.

→ The distraction of pursuing a merger could cause the day-to-day business to suffer.

→ The potential partner credit union would have to be on the same core processing system.

→ There’s immaterial risk of some other credit unions conducting a “merger of equals” in a way

that hurts our business.

→ There are geographies and markets that I’d want a merger candidate to provide us access to.

→ There are key partner and business relationships that we’d need to be able to retain.

→ There are merger candidates out there with compatible financial and risk profiles.

→ There are merger candidates out there with a compatible strategic vision and attitude toward its

members.

→ There are no competitive threats driving us to consider a merger with an equal.

→ There are no member demands driving us to consider a merger with an equal.

→ There are no regulatory trends driving us to consider a merger with an equal.


→ There are products or services that I’d want a merger candidate to bring to us that we don’t offer

or do well today.

→ There are things we need to do before we could actively start the process of considering a

merger.

→ The right merger should provide access to new technologies we are unable to afford.

→ The right partner would be a credit union that serves a similar industry.

→ The right partner would be a credit union in our geographical area.

→ The timing of this discussion is wrong. We shouldn’t be putting time into this subject now.

→ We are achieving our goals and delivering on our mission and vision.

→ We are unlikely to lose our sponsor(s) in the foreseeable future.

→ We are unlikely to see our CEO retire in the foreseeable future.

→ We can thrive independently. A merger is unnecessary.

→ We don’t know how to conduct a successful merger, so the risks are high.

→ We don’t need to act now. Our competitors won’t take all the suitable candidates out of the

game.

→ We have too many people who would strongly resist a merger.

→ We might go to all of the effort only to have our members not value our increased capabilities.

→ We won’t be able to dedicate the right resources to the due diligence process.

→ We won’t be able to invest in the necessary third-party expertise (e.g., on the valuation and other

aspects of the merger).

→ We won’t be able to fund a merger with an equal.

→ We would disenfranchise a significant set of our current members if we were to merge with

another credit union.

→ We would need to be confident that a merger candidate shares a similar organizational culture.

→ We would need to be confident that a merger candidate shares a similar vision.

→ We would need a merger candidate that shares a similar risk philosophy.

→ We would create a transition board of directors that would take too long to wind down.

1 This section is based on correspondence with Luis Dopico, PhD, MacroMetrix who is one of

the co-authors of Filene’s past merger research.

2 “Characteristics of Credit Union Mergers: 1984-2008,” Filene Research Institute, 2009

Endnotes

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About Filene

Filene Research Institute is an independent, consumer finance think and do

tank. We are dedicated to scientific and thoughtful analysis about issues affect-

ing the future of credit unions, retail banking, and cooperative finance.

Deeply embedded in the credit union tradition is an ongoing search for better

ways to understand and serve credit union members. Open inquiry, the free flow

of ideas, and debate are essential parts of the true democratic process. Since

1989, through Filene, leading scholars and thinkers have analyzed managerial

problems, public policy questions, and consumer needs for the benefit of the

credit union system. We support research, innovation, and impact that enhance

the well-being of consumers and assist credit unions and other financial cooper-

atives in adapting to rapidly changing economic, legal, and social environments.

We’re governed by an administrative board made up of credit union CEOs, the

CEOs of CUNA & Affiliates and CUNA Mutual Group, and the Chairman of the

American Association of Credit Union Leagues (AACUL). Our research priorities

are determined by a national Research Council comprised of credit union CEOs

and the President/CEO of the Credit Union Executives Society.

We live by the famous words of our namesake, credit union and retail pioneer

Edward A. Filene: “Progress is the constant replacing of the best there is with

something still better.” Together, Filene and our thousands of supporters seek

progress for credit unions by challenging the status quo, thinking differently,

looking outside, asking and answering tough questions, and collaborating with

like-minded organizations.

Filene is a 501(c)(3) not-for-profit organization. Nearly 1,000 members make our

research, innovation, and impact programs possible. Learn more at filene.org.

“Progress is the constant replacing of the best there is with something still better.”

–Edward A. Filene

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