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The urge to merge

What credit unions stand to lose – and win – when amalgamating

credit union mergers

In 2009, the economy of Hudson Bay, Saskatchewan, was in a tailspin. That year saw the second of two local sawmills close, victims of the financial meltdown radiating up from the United States. Gone were the union jobs and wages that had for decades sustained the remote community, which borders Manitoba near the centre of the province. All around town, businesses faltered and real estate values plummeted as families began to look to Alberta’s oil patch for opportunity.

That’s when the Hudson Bay Credit Union stepped in. From its sole headquarters on the main street, board and management of the nearly 60-year-old financial services cooperative cinched their belts and came up with a strategy to keep the town afloat. They dipped into their modest assets of $76 million to extend emergency loans to struggling commercial clients and eased monthly mortgage payments for its 2,500 members in a bid to ensure that the men and women who’d lost their livelihoods could, at least, hang on to their homes. Is it any wonder, then, that residents think of the brand as a faithful old friend? Indeed, even now that the town has recovered and families are back on their feet, they still talk about the personal relationship they have with the local credit union. It’s also what many members fear they will miss as Hudson Bay merges in January with a larger financial services cooperative, Affinity Credit Union ($4.9 billion in assets, 130,000 members).

The delicate merger dance

In almost every way, the merger will make a positive change. By building economies of scale, consolidated credit unions are widely considered to be more efficient. They have deeper financial pockets and are able to offer members virtually all the financial bells and whistles they can get by banking with the Big Five. But mergers are not without cost. While they may make sound financial sense, some question whether credit unions run the risk of losing a stake in the communities they serve in their pursuit to stay competitive.

“It’s a territorial thing,” says Lucille Tetarenko, Hudson Bay general manager for nearly a decade. “With smaller credit unions, you’ve built your reputation for 50 years or more. You’re in touch with your community and you can make decisions at the flip of the switch. You’re your own boss and it’s hard to give all of that away. But we think we’re getting as much in return.”

There’s truth in what Tetarenko says. In fact, the Filene Research Institute, which looked at 1,600 credit union mergers in the U.S., found that in 80 per cent of the mergers studied, small credit unions benefited significantly – improving their service levels by 25 per cent – while larger credit unions saw a bump of 14 per cent.

Still, the loss of a sense of community – or, at least, of community-based decision making – is a serious dilemma facing many credit unions as their numbers steadily decline across the country. In 1987, there were 1,497 credit unions in Canada outside of Quebec. Today there are 320, a drop of almost 80 per cent in 26 years. Much of the shift is due to mergers and acquisitions, although some smaller credit unions have gone out of business.

Competition drives consolidation

In most cases, finances aren’t the only factor driving the consolidation juggernaut. The credit union system is robust, with assets, deposits and loans all showing gains in 2014 over the same period last year, according to Q1 results published by Credit Union Central of Canada. Rather, a combination of factors appears to be reshaping the landscape. Chief among them are regulatory pressures and a need for scale, according to the Filene Research Institute.

There’s also little doubt that conditions have changed dramatically since the early days of credit unions. Serving the underserved and having home-grown roots are still considered their competitive marketplace advantages. However, today most people demand a full range of services and products and expect ready accessibility to branches wherever they are.

Keeping up with those expectations is a lot to ask. Vancity ($17.5 billion in assets, $501,000 members), the largest credit union in Canada, has assets equal to just 2.1 per cent of the Royal Bank and 4.3 per cent of the CIBC, the largest and smallest of the Big Five banks respectively. That was a finding highlighted in a recent report examining challenges to the credit union system in Canada, written by Phil Moore, general manager of the Greater Vancouver Community Credit Union (6,900 members, $2.1 million assets). In fact, the whole credit union system in B.C. has assets equal to just 1.8 per cent of the combined assets of the largest five banks, the report states. For a small cooperative, satisfying member needs in a highly competitive market has become nearly impossible.

“It used to be we were open 10 to 3,” says Tetarenko. “Today, we have to be open when the member wants us to be open. Plus, we have to have everything that everyone else has. It’s not a matter of ‘We’ll give it to you when we can afford it.’ It’s an expectation now.”

In the rural community of Shaunavon in southwestern Saskatchewan, demand for mobile banking – specifically the ability to deposit a cheque electronically using a camera phone – proved to be the tipping point for a local credit union in its decision to amalgamate with a larger entity. It may not seem like a big deal to people living in metropolitan centres, but in remote areas, convenience takes on a whole new meaning.

“If you get a cheque and you have to drive 70 miles to deposit it, access to technology is huge,” says Ron McKellar, manager of service at Shaunavon Credit Union ($130 million in assets, 3,000 members). Like Hudson Bay, Shaunavon merges with Affinity as of January.

Amalgamating mindfully

McKellar says the Shaunavon board has been considering a merger for nearly a decade, but discussions began in earnest in mid-2012. Directors chose to go about the process slowly and cautiously, mindful of a disastrous amalgamation effort attempted a few years earlier by a local co-op. At that time, the community, still reeling from a decision to regionalize both the health and school boards, rejected the move out of hand. “There was a feeling [the residents] were losing local control,” McKellar says. By comparison, the Shaunavon merger with Affinity received 96 per cent member approval when the proposal went to a vote at the AGM held earlier this year.

Affinity, the second-largest credit union in the province, with 75 branches, was selected from a short list of three choices, in part because its operational structure will allow the smaller credit union to maintain the front-of-house staff and management team members have come to know in the local branches. That continuity was critical to members, McKellar says, adding, “If that hadn’t been on the table, [our board] might have looked at the merger a little differently.”

McKellar says the pending name change on the credit union’s front door and the removal of local decision-making to a head office in Saskatoon was not a significant concern. The days of the small farmer with a section of land and a few pieces of machinery are just about gone, he explains. These days, members, many of whom operate huge commercial farms, are far more interested in estate administration, insurance services, wealth-management options and access to vastly increased lending limits.

“Size does make a difference,” McKellar says. “Being able to access a lending pool or pool of experts is valuable. In most rural credit unions, everyone is a generalist. With a larger credit union, you are able to tap into additional resources, and get agricultural and commercial-lending expertise. That is all now possible.”

Thinking ‘globally’ but acting locally

Terry Enns has given much thought to the pros and cons of the merger issue over the years as he’s watched beloved small-town brands fall by the wayside to make way for larger entities. Enns is board chair of Central 1 and director of First West Credit Union ($7.7 billion in assets, 177,000 members). He spoke to Enterprise as a lifelong credit union member, not on behalf of the organizations with which he is affiliated.

Enns accepts that mergers make for bigger, stronger credit unions. He was a key player in the creation of First West, which operates throughout the province as Envision Financial, Valley First and Enderby & District Financial. But he firmly believes that members want decisions on their financial future to be made by someone they know and trust – someone who is sitting across the desk, not across the province. He has often asked himself if it is possible to achieve one without sacrificing the other.

“It’s a question of ‘How do you be big but act small?’” he says. “Truly, that’s what our members value – that local feel and touch.” The answer at First West is a model that allows individual credit unions to retain their original name on the door when they merge. Enns recalled the delighted reaction from members of Valley First, a 60-year-old credit union in the B.C. Interior, when, as merger talks gained steam, they were shown beforeand- after photos of the exterior of the branch headquarters.

“There was a technical change in the signage on the door, but, for the most part they are still dealing with Valley First with some small print saying First West,” he says. Subject to regulatory and member approval, First West is now in the process of consolidating with Island Savings Credit Union, ($1.5 billion in assets, 49,000 members). The same rules around branding will apply. “One of the most difficult things with credit unions in mergers is changing the name. So, at the time, we said to ourselves, ‘Why are we always changing the name and losing brand equity and losing that sense of feel and touch?’”

Bill Maurin is president and CEO of Ontario’s Meridian Credit Union, ($10 billion in assets, 250,000 members,). He agrees a name change can be hard on member loyalty, but believes sometimes it can’t be helped. In 2005, Meridian became the province’s largest credit union through a merger. The two merging organizations were of similar size, both with roots that reached deep into their respective communities of Niagara and Guelph.

The new name was as much about diplomacy as it was about a fresh start, says Maurin, who explains neither institution wanted to appear as though it had been taken over by the other. In 2011, Meridian added another 19 branches and 50,000 new members to its reach when it paid $10 million to acquire Ontario’s Desjardins Credit Union, an offshoot of Quebec’s Mouvement des caisses Desjardins.

Maurin says Meridian has very deliberately sought to nurture the community ties fostered by the original credit union brands by adopting a philosophy it calls “neighbourhood banking.” That means Meridian employees are given the training, ability and power to make decisions on the spot based on their connection with individual members and circumstances specific to the region or to an industry. Maurin admits it’s not a perfect solution, calling the effort a balancing act. “All credit unions seek to maximize value to their membership,” he says, “but if we want to put ourselves out there as a fully credible competitor to the banks, we have to stand up and compete with the same services.”

Maintaining community roots

In Hudson Bay, the economic crisis has passed. But at the local credit union, change is just beginning. Affinity, like Meridian and other credit unions that have merged with smaller cooperatives, has opted to retain as many employees at the branch level as possible in the consolidation. That means branch staff, including managers, will stay put, although their authority will not be what it once was. The credit union could have continued to operate for years to come on its own, according to Tetarenko, but that wouldn’t have been in the best interests of its members who want 24-hour banking along with other services, she adds. Keeping up with regulations was already stretching the credit union’s capabilities. “There’s no such thing as ‘We are small. We don’t have to do that.’”

As for local governance, times are getting tough there, too. In a small town, a credit union finds itself forever competing with the Lions Club, Kinsmen and the school board to find someone willing to be a director. Still, when Hudson Bay managers decided to merge with Affinity, it did so with local representation as a guiding principle. Affinity’s board structure allows the smaller credit union to maintain three delegates at the board table. Affinity has also promised to honour the various community commitments Hudson Bay has long supported with pride – money-management programs at the local school, the family crisis centre, the Terry Fox Run and Scout troops. “We are one of the largest donors in the community. We probably touch every organization and committee. That had to stay in place,” Tetarenko says.

For Tetarenko and the staff at Hudson Bay, the pending loss of direct local control is made bearable knowing that the spirit of the credit union will remain solid. “As long as people are getting service and good rates with reasonable service charge packages,” says Tetarenko, “I don’t know if they really care whose name is on the door.” ◊