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.
It's important to make sure that they're notified of the process I've seen where the members have been in turmoil and they've gone to the special meetings and caused all kinds of disruption because they like the way things were. What they don't understand is financial capabilities don't allow them to continue in the way that they were. With that stated, it's important to make sure the members know what is happening from almost the beginning of time.
The board and management staff of both organizations that are taking over and the credit union is being taken over, need to make sure that at the management and board side that there's a mutual agreement on how they want to see something done before it gets out to the membership. They need to at least make sure there's a mutual meeting of the minds to make sure that it's going to continue before you cause disruption among the ranks. With that stated, once there's an agreement on how things are going to happen or would like to be happening, then the members should be notified of the regulatory process. There needs to be acceptance by them at a meeting.
I have always found that at that special meeting is where you can sell this program. You need to make sure that they are aware that there are probably better efficiencies coming. You probably have better access to your accounts through modernization, more money spent on technology, better applications, online access, online banking, better probably a larger field of membership to be served from within the communities and so on.
If you can market that at that meeting and demonstrate how the members are going to benefit and hopefully they will, if you can demonstrate to the members how they're going to benefit through this process, then your succession rate of getting accepted by the members increases tenfold. We've always tried to do that. I've always tried to make sure that when I'm at the meeting, I'm here to answer all their questions.
Once that happens and you feel that you're going to get approval, you have to go through the voting process. Marketing the voting, handling the branches at special meetings, sending out the proper documentation and the adverts that are going out either online or in the mail, establishing the pros and cons and getting a beautiful list to demonstrate to the members who are yet to vote of showing them what's going to be coming in their favor is a critical part to making all that work. When it's all done, you have to prove that point. That's why after post-merger, it's very important that you maintain what you promised, you show them the efficiencies take place and that the membership at the end gets what they were expecting. Hopefully, that's bigger and better services and products.
I imagine a lot of times that there are the products and services but if I have the ability to go to 123 Main Street and have my branch office down there, I get a lot of questions about, "What about the branches?” They want you to commit that branch is always going to be there but you might have 1.5 miles away. What kind of scenarios have you seen relative to that?
I also want to make sure that we maybe talk briefly all on branding a little bit after that. Very quickly on the branch side, we've had to close branches that were next door because you don't need two branches side by side. We always have committed that the existing branches would always remain open for 6 months to 1 year. It doesn't cost you that much that you're going to bleed out the organization by keeping it open for an extra 6 months to 1 year.
It's during that time that you make the proper transition and we'll talk about the continuation of branding. The idea is to keep the services as much the same as possible while you are transitioning all the other services like online bill pay, debit cards, credit cards, new checking accounts and online access that members are being impacted on. You try to keep as much stability in the process as possible because you're constantly making changes on the other side.
That's what we've always done and been able to do. Always the question is, “Not only the branches leaving but what happens about Susie Q who's been my main head teller that's been my best friend for the last ten years? What's happening to all the staff members?” The members usually have that question. The whole thing is retention for a period of time to keep the same and then you have to address them as you go along what's in the best interest of the organization. The branches itself is key.
You wanted to go back and talk about the branding. It’s the transition from 2 cultures to 2 brands.
I'll keep this somewhat simple but one of the things we've had a very good success rate at was retention. Throughout our whole merger, it is to make sure that we retain 90% or more of the members when we're done. How are we going to do that? We have done that for seven consecutive mergers and we can prove that. The same token is that one of the things that helped us was to learn a little trick on branding. I see people come in and say, “This credit union is merged. We're proud of that.” The day that the merger takes place, that's their name.
They got a new name. Everybody gets confused. Some of the members don't read all their mail. They don't all go to the annual meeting but the same token is that there's a lot of brand awareness. They don't open up their mail. Some of them are online, haven't got access or you're in their spam. One of the key things we have always done was to keep the name of the building as long as possible. Also on the statements, we've tried to co-brand the names. I always put the old one first and ours at the bottom but have one bolded and higher than the other because there's a transition when you're going from credit union A to credit union B.
We are proud to say, “We want our name on everything but we also know it takes a six-month period to get there.” You slowly evolve because when you talk about branding, people are saying, “Am I going to credit union A's website at Credit Union B's website? Who's the boss here? What's happening?” There are a lot of unknowns. We slowly migrate that in with little pieces every month. Maybe there's a dual-sided letter that went out. Maybe it's a double-headed letter to let them know that we're both the same.
Finally, they get to see the brand and the logo of the parent credit union over time to the point that they get it. You don't just slam the new parent's logo in front of everybody and say, “Come and accept us.” Do this branding in little pieces and realize that it's coming to the point in six months after they've logged onto your app and website. Every time you went to the old credit union website, it automatically fed them to the new one. After a while, that branding becomes automatic and that old credit union name goes away.
Don't get caught up in pounding your chest saying, “We did a merger,” and slam that down on your marketing right away in front of the old members because they retaliate against that a little bit. Walk your branding in. Make sure they're aware of it. They'll come to accept it. It takes time. 6 months to 1 year is pretty much the process to the point that we even would say we would change the logo in the front of the building and keep their old logo saying a division of webs. I'd say, “Division of Webster First,” but six months from now, I tell the board, “Your face is still out there but in six months, that's going to be our logo in front of your building.” That's been very acceptable.
Shakespeare said, “What's in a name?” There is a lot in a name then you add that to change. People don't like change. You're familiarizing them with you and letting them transition from the old to the new. That sounds like a real wise plan.
The most important part is to make sure the conversion, backroom conversion and processes are done correctly and efficiently. The last thing you got to worry about is changing the name of a branch.
Most of that deals with what happens before the merger. You've tiptoed into the branding and what happens after the merger. Any other thoughts about what happens after the regulator, credit union members and boards have approved and then you're one unit? You're 1 month passed when the 2 joined forces officially but that's not the end, that's just the beginning. What else plays out?
Once everything is at that point, it's all a lot of backroom items and operations that have to be addressed. You're talking about the major items addressing all the off-sheet or balance-sheet items I talked about. Looking at any type of vendor buyouts, notification of closing vendors that you're not going to use any longer, making sure that all those have been converted and changed over or in the process how's that going to happen? Getting through that process.
In the old days when I did a merger, I had a core processor. All I had to worry about was the core processor that had handled my deposits and my consumer loan portfolio. In 2022, you have mortgage processes, vendors that handle your commercial lending, your debit cards, ATM cards, online banking, remote deposits, applications and the core processor itself, Equifax and credit reporting processes or your loan applications. Everybody has a million vendors. Every one of those vendors has a separate contract. Every one of them has a certain liability payout if you break that contract.
How is the conversion? Is it the same vendor that you're already using? Maybe you can make a deal that there is no other or you are changing over from one to another. With that stated, that's a lot of the items that have to be taken care of after the merger that the members don't see but they're going to ultimately be affected by the results of each one of those. You have to always be remembering, “How quickly can I change this? How many changes can the member have during this process? What sequence is best for the membership?”
At the end of a merger, a lot of items need to be taken care of that members don't see but will be directly affected by.
All those items need to be taken care of. Even getting back to your ATM, “Who makes the ATM cards? What check processes? Who do you buy your checks from? Is it Harlan, Deluxe or online?” There's a lot to handle. I can't state enough that all the contracts are put on the plate of somebody during the due diligence process. I've always mandated that I want a complete library of every vendor that they use. What are the contract dates? Somebody in my due diligence process has reviewed all those and we know what liabilities are in front of us pre and post-merger and we handle them accordingly. Those are the major things that have to handle.
I conserved a lot of credit unions in my many different roles at NCUA, from small ones up to US Central and Wescorp. One of those first things NCUA always does is try and get their arms around what contracts are out there. Do they have a good log of the contracts? Oftentimes, you think you know what all the contracts are until the vendor calls you.
Here's a key point. We laughed and said, “Watch what will happens to the employees ‘salaries prior to the merger because the board always wants to take care of them.” This is like wildfire but as soon as any vendor realizes that you're even contemplating a merger, they know that you probably heard it. I've seen this so many times and it's unbelievable where they'll come into the credit union and say, “You need to make some more money. I'm going to give you half price on this product. Your debit cards are going to charge you,” I'm making a number up, “$0.1 a piece instead of $0.2. If you're going to save 50% fee, we're going to sign a 5-year contract with you.”
That way, you immediately make a short-term gain but it's a long-term loss for the credit union. I have walked in many times where your major contracts were signed during this process. I have to eat the last five-year buyout of it. I always tell people as I do with the salaries, “Once we start talking, there are no other further vendor discussions or contracts to be signed.” That doesn't happen out there. That's a very key expensive opportunity for someone to fall into if they're not careful.
I'm sure there's 1 question or 2 that I should have already asked but haven't. Have I left out any important questions that I should have asked before we wrap up here?
Not that I can think of. I will say though that on the final note when it's all said and done and everything's completed that it's very key that the marketing continues strong for both the branding part aspect. Always talk about the additional benefits that you've brought to the table for the benefit of the membership.
During a merger, always talk about the additional benefits that you've actually brought to the table for the benefit of the membership.
That's a great place to wrap. If someone wanted to get in touch with you and/or figure out how to get a copy of the NAFCU book that we talked about, what would be the best way for them to reach out to you?
They can always get in touch with me at MLussier@WebsterFirst.com or call me at (508) 671-5051. As far as the book is concerned, they can always purchase the book right off the site of NAFCU at NAFCU.org.
Mike, I want to thank you much for sharing your wisdom on your many years in credit unions and the mergers that led you to write the book and sharing some of that with my audience.
Thank you for having me. I appreciate it.