Join Mark Treichel as he interviews the author of NAFCU's Merger Manual, Mike Lussier. Mike also is the CEO of Webster First Federal Credit Union. Together, they discuss a myriad of merger topics, such as considerations for:
boards of directors
off-balance sheet liabilities
and much more!
Listen to the podcast here
Credit Union Mergers With NAFCU Author Mike Lussier
In this episode, we're going to be talking to the author of the Credit Union Merger & Acquisition Handbook: An Insider's Guide To Credit Union Mergers. This is a NAFCU-issued document that was written by Mike Lussier of Webster Federal Credit Union in Massachusetts. Mike, how are you doing?
I'm doing very well. Thank you.
For my readers, maybe you want to give a little bit of your background in the credit union industry, then we can dive into a little bit of discussion on mergers, the acquisition handbook, and wherever the conversation takes us.
First and foremost, I've been with the credit union industry since 1987. I pretty much had my entire career here at Webster First Federal Credit Union when I was appointed CEO back in 1990. I have a few years of experience as a CEO. Over the past few years, I've been on the board and past Chairman Of NAFCU, the National Association of Federal Credit Unions. Previously, when I first started my career, I was also on the Credit Union League of Massachusetts Board of Directors. I've also served on various boards throughout the industry regarding the Mass Share Insurance Corporation and other major vendors and organizational committees throughout my career. At this point, I've been around quite a bit in the industry serving credit unions.
You were President of the board at NAFCU when you took on the challenge of writing this book. What led you to want to write this book for NAFCU to get a guide out there for credit unions who were contemplating a merger?
I had served on that board for 9 years, of which the last 2 of my last 3, I was Chairman. During that time, there was quite a change in the industry or a rapid succession of mergers going on. I had also a history of being able to do mergers. I had my first merger when I walked in the door back in 1987 here at Webster. Since then, I've performed fifteen other mergers for our institution, which I believe is more than most institutions here in Mass.
Once I completed that fifth merger and when I was on the board of NAFCU, I had done 4 mergers in 100 days. They were all successfully done. At that point, the board had asked if I would write a publication or a book to assist others in the industry if and when needed. I did that. As soon as I got off the board, I worked with NAFCU to create this book.
Your IT department, with the conversions of those going on, must have been excited about that opportunity.
Between them compliance and HR, they all had their hair pulled out.
If a credit union is either contemplating acquiring another credit union or being acquired, what do you think are the most critical items that should be looked at relative to the suitability of a partner?
It’s often said, “Merger potential is always healthy or good for somebody,” and it's not. One of the items that people should always look at is what is their goals and the goal of the other institution. If there is something that is mandating or creating the necessity to merge or have to be merged, then you need to look at what are the reasons for that. If you are the acquiring credit union or you are the credit union that's being merged out, you need to look at the continuity of a lot of things during this process. It's not a matter of saying, “Someone needs the merger partner so let's merge these two credit unions.” Every credit union is different from the others.
They say merger potential is always healthy or good for somebody, but it's not.
You have to look to see how these items can join forces to both, maybe change the complexity of a balance sheet or the interest rate risk of a balance sheet. The ALM can be all messed up if it's not done properly. When you're going out looking for a partner, you've got to look at what are their goals, what is the strategy of the other credit union, what are they trying to do in the industry and what are you trying to do. There is uniformity between those two. Some of the major things that I know that we always look at are who's looking to merge and why are they looking to merge, whether it’s something that would assist our credit union to become bigger and better.
I won't give any specifics. When I started as an examiner, I was in the Midwest and there was a situation where a sponsored group was bought out by another sponsored group in the same industry. ABC company was acquired by XYZ company. They both had credit unions in the area, but ABC credit union did not want to merge into XYZ's credit union. XYZ wanted to take it over but culturally, there was a divide and the takeover of the company was a little bit hostile so there was some hostility there. Ultimately, the ABC credit union ended up merging with another credit union in that area. A big part of it is the cultures and what's going on with the people and the stakeholders.
That leads to something we'll probably talk about in a little while but it's not only the stakeholders but it's the culture of the board, the membership or the employees.
Let's talk about that. It's a good time to jump into that. You've got the stakeholders of the board, employees and members. How do those all interrelate in this whole merger scenario?
I'll probably take those three individually and talk about some of the aspects of each one because there are three critical parts of a merger process. Within the book itself, I go into different chapters even on that. I'd like to talk about some of the specifics of each category that are critical that people should be thinking of during a merger process. We're going to start with the board, the people that have to make the decision. Typically, the board of the credit union that is being merged out has a lot of feelings going on. There are a lot of emotions I should say. Why are they emerging? Those issues could be plentiful.
It could be because the institution isn't successful anymore. Maybe they've had bad management and improper asset liability. Maybe there are interest rate revenue issues. Maybe NCUA doesn't like its capital position or the way that they're run and it's being mandated by NCUA. Maybe they have a succession issue where institutions would rather merge than try to get a complete succession plan because there's a fellow credit union next door that can handle the membership properly. There are many reasons but when it comes down to it when the board of the credit union that is being merged out has to finally be told that either they may have a place on the existing board or they're done, they have a feeling that they failed their membership.
It's a tough thing to deal with a board of a credit union if it has failed because then they don't know how to handle the process. No one's ever been through this before, usually on that end. You need to spend a lot of time with the board describing the entire process and how it's going to benefit the membership. Truly down deep, their fiduciary responsibility is to make sure they're making that decision that's in the best interest of the membership. There are a lot of feelings there. There are a lot of things to deal with as far as, “Is the board going to remain on the board? Will a portion of them be there? Do some of the board members want to leave? Have they had enough?”
The other things and the final things I'll talk about are on the board side. There's a lot more in the book that goes into detail but what has the board received as benefits? Credit unions are non-compensated boards but there are also travel reimbursements. There are sessions that boards go out to conventions and educational resources that they do some traveling on. Some of them have certain health insurance that may be reimbursable and permissible by NCUA regulation. Some of those things get taken away. Those are minor issues but those are other things that you would need to make sure that you address with the board.
How about the staff?
We'll move into the employees where you got to look deep into the books of employees. The reason why I say that is oftentimes I've seen in a merger context when I'm dealing with an institution that the employees may have off-the-book liabilities or they're in the fine print of the financials, employee contracts, how are the employee benefits that you're going to offer these new employees compared to the benefits these employees have? A lot of the smaller credit unions that I found have more of the mom-and-pop association like, “If you needed to take a day off, don't worry about it. We'll see you tomorrow. If you need an extra few days of vacation because something happened, no problem.”
When you're a larger institution and you have 200, 300 or 400 employees and that 1 person always wants to take the extra day, you have to offer that to 400. The culture is a lot more operated as a business, the larger the credit union gets. That's something that people don't realize. You have to address this with these employees and get into the nuts and bolts of what their benefit plans are versus what you are offering.
On the opposite of something like that, a credit union that is usually merging with another credit union is typically larger and can usually afford a bigger and better employee plan. Whether it be health insurance, dental plans, maybe better-priced health insurance, a larger 401(k) concentration or a participation program. They probably have additional vacation available because they can afford that. It's those types of things you always have to look at because the first thing the employees of the credit union that's being merged in is, “What's my retention? Do I have job stability? What's going to happen with my continuing salary? Am I going to have a lesser or a better-paying job? What's the potential? Will there be changes in my salary?”
The priority for all employees is retention and salary. When a merger is taking place and you need to get a hold of the books of what the employees have been paid, have they been given some substantial increases prior to the merger you should be aware of? I found that in 30% of the credit unions that happens, believe it or not. Thirty percent that I've been through have had additional increases above normal prior to the merger when I've gone into say, “I'll retain your existing salary.” I've always addressed it and always asked to go back three years’ worth of everybody's last raise increases. I adjust that accordingly after we discuss that with the employees but it needs to be addressed.
When a merger occurs, the employees' first priority is retention and salary.
In those negotiations, do you have an agreement that they can't raise anybody's salary in the three-month courtship period or anything like that?
During my due diligence process, I automatically asked for the last two year's raise but I do specifically state that there'll be no increases at this time without at least talking to me about it. I have two friends here in Massachusetts that had been through this and they didn't do that process and they wish they would have.
You have the cultural issues of someone coming over and they have the same job responsibilities at the merging credit union. They're getting paid more than the surviving credit union and may not have the same level of experience and all that. With that whole equity thing that you mentioned, what I always have in the front of my mind when I was Executive Director at NCUA was, “Do For One, Do For All. The exception becomes the rule. You've got to be careful in all of that.”
The other thing is with the employees, you've got to also talk about when are you going to do this conversion. “If my salary's going to stay the same but my benefit's going to change, when is that going to take place?” There is no exact line, “It has to happen in 30 days.” There's a process. Some of the vendors might have signed up with health insurance and maybe already on the register until December. Maybe there's a renewal date of June or January. You need to look at the contracts of each one of the benefits to see. Sometimes it's cheaper to run that health insurance to the end of maturity than to cancel it earlier and offer them new products. Those are the little things that you'd have to watch for.
Handling the employees between your HR, doing it professionally and making sure what they have and where they're going is easy. What you have to look for that can cost you a lot of money is what happens to the 457(f) and 403(b) programs and the payouts of those. Maybe there's a Buoli/Cuoli Program in place for those employees or senior executives that is not specifically stated on the financial statement. I have seen improper accounting for specific retirement programs for key employees.
I've also seen seven months before the trigger was pulled to decide to merge, the Buoli programs and 457(f) programs were put in place. As those will state, as soon as there's a significant change in management and/or the board, those programs get paid out. Typically the payout of those is far beyond what any institution has even accrued. The institution couldn't afford it because it didn't have enough capital, to begin with. That's why they're merging. Those are the things that I've seen cost institutions millions of dollars, not hundreds, on payouts because of improper review of off-the-balance sheet liabilities for employees. That's important
We would often at NCUA get asked, “How do I find out all these credit unions merge? Why doesn't NCUA alert me?” NCUA has what's called a merger registry where you can say, “I'm interested in all of Massachusetts or the East Coast.” The reality is other than approving on the back end, NCUA and/or the state regulators aren't involved in the courtship. The courtship happens at league functions or golf courses. “Let's chat. If you ever want to merge, I might be interested.”
In some areas, there's a belief that NCUA is involved in more of those than they are but then flipping that coin, were you ever involved in anywhere there was like NCUA assistance that was being a troubled institution maybe with net less than 4% net worth where NCUA was shopping it? The merging credit union had a little bit less control because NCUA was going to be paying some money. They were going to most likely pick the cheapest bid.
I won't mention a specific credit union but I was involved heavily with one of those in Boston. As a former state credit union that went federal, we had a certain county. In my case, Webster First Federal Credit Union had Worcester County in Massachusetts. I could not reach beyond the county because of the way the field of membership and the rules and regulations were set back then. With that stated, the only way you could automatically extend your field of membership and only one way is if there was an NCUA-assisted merger, I called it in my terms but it's where NCUA had to take over an institution because there was no other alternative. It had to find a merging partner to go through publicly and announced it.
Other credit unions, including myself, were given the opportunity to come in, do due diligence, review the process and make an offer to NCUA to see how much they would either give us or how much we would take it over for and then go from there. We did that quite a few years ago. We've expanded our field of membership through Middlesex, Essex and South Ex County, including the whole city of Boston. That was probably one of the key benefits of doing that. That's probably one of the only benefits because typically when NCUA gets involved, that credit union is in pretty bad shape and you better have either the net worth, efficiencies or financial ability to take over that additional risk.
If you do get that field of membership, it can be a great scenario. The NCUA technical term is an emergency merger. If they can define it in an emergency, which is a clause in the Federal Credit Union Act, then it doesn't matter what field of membership of a credit union A and B is. They can let you add that field of membership. They've also extrapolated the definition of what an emergency is. If you can demonstrate that the credit union would be insolvent within 2 or 3 years because of how that credit union is operating, they can deem it an emergency. They've stretched that envelope probably about as far as they can while still being within the rules of the Federal Credit Union Act.
They're a little nervous with these changing interest rate environments and all these compliance risks and IT stuff. I get it. There are a lot of institutions that are struggling out there. Some of the ones are going to be very successful but others are still going to continue to have problems in this industry.
I've got a podcast episode, It’s me talking about some articles I've been reading about bank mergers and credit union mergers. Stock prices, investment values and portfolios have gone down so there's a slowdown in bank mergers because the math doesn't work as well. What I'm anticipating is because the acquired credit union's going to have to write those, hold the maturity portfolios down, they're going to have to realize that loss when there is a merger, “That could speed up the number of credit unions mergers that are coming down the pike.” Any thoughts on that?
One of the items regarding the financials in our industry is when I started back in 1987. There were 19,800 or 19,900 credit unions. When I was teaching down in Annapolis, we were talking about the number of credit unions in the industry that’s about 4,850. It's typically about 25% of what it was when I started my career and that continues but there are only so many mergers left. There's no more than 300 a year because at that point, we'd be out of the industry.
There is a continuance of need to review the credit unions that are merging. In Massachusetts, I did a study here. 18% of the credit unions were making either 10 basis points or less, of which 15% of the industry was in the red before these interest rate changes. It's interesting to watch how people are handling this. Some of the institutions have changed and made managerial changes and operational changes. They're coming out of it but there's going to be a continued need to review the merger process over the next 5 or 10 years.
I was looking at some numbers before we got on and for that other show that I did. There are 146 mergers of credit unions through September 2022. If you annualize that, it comes out to about 194 for 2022, which is an increase from 161 for 2021 or said another way about a 20% increase in 2022 if you look at what's happening so far. It's picking up a little bit. Mergers might hit 200 in 2022.
Back in 2017 or 2016, there was 1 a day, 6 or 7 days a week, 52 weeks a year.
Let's talk about the members. We haven't touched on the members. We saved them for last because they're the most important. They're what it's all about. What are your thoughts relative to mergers and members?
When we look at it and the final result of everything we've talked about, it boils down to, “What's in it for the members?” That's why you're doing this. The members own the credit unions, not us. The employees work for the institution. They work for the members indirectly. The board runs the show and sets the policy by which we all run. It’s the members of the ultimate beneficiaries of the decisions being made by that board of directors, our staff and our senior management team.