The Safety and Soundness Report
The decision to merge can involve many different factors and motivations. It might be a way to increase your financial size or augment your membership. Maybe you want to create a larger and more identifiable brand – or diversify your product mix.
So what could little Louisiana Corporate CU ($150 million) of Metairie, La., possibly offer giant Corporate America CU ($3.7 billion) of Irondale, Ala.? Plenty, says CACU CEO Thomas Bonds.
The two corporates announced late last month that they had signed a letter of intent to explore a merger. Such a deal would be the third merger of corporates in as many months and mark a continuation of a widely anticipated industry consolidation.
On the surface, such a deal looks like a classic case of the whale swallowing the minnow.
The outspoken Bonds says nothing could be further from the truth.
“If you line up on a column what does Louisiana bring to the merger versus what Corporate America does I don’t know whose ledger would be the fullest,” he says in a wide-ranging interview.
“Louisiana Corporate is a fine institution, and they could do fine” without a merger partner, Bonds adds. “This is surely not a takeover.”
So what is it?
Extending their reach
Bonds sees the deal as a way for both corporates to extend their reach through combined memberships that have little overlap. The deal would give Louisiana direct access to an unusually far flung array of services that CACU provides members in-house. But it would also give CACU a window into at least one new business opportunity.
His perspective offers some insight as the corporate sector continues to shrink, and as natural person credit unions size up their prospects at a time when margins remain under pressure and loan demand seems moribund.
Both corporates took hits from the collapse of U.S. Central with Lousiana suffering a relatively bigger blow.
Corporate America has made it a point of pride that it is one of the larger and more stable corporates.
Louisiana posted a $7.4 million net loss in 2009. But chief executive David Savoie has said that the corporate was on track to return to profitability in 2010.
A clear attraction to Bonds is the opportunity to serve a broader base of members. Geographically, the two firms are neighbors, based on their headquarters, but they have few members in common. While Corporate America operates across the country, it has relatively few members in the state of Louisiana, where its would-be partner has focused its attention.
“That in and of itself is good for everybody and good for Corporate America, and allows us to spread our costs out more,” Bonds says, noting that the combined corporates would have more than 500 member CUs in 26 states.
“I don’t believe in economics of scale but I do understand cost accounting,” he adds. “Our total fees will be able to be reduced.”
Brokerage firm interest
The much smaller Louisiana Corporate also has a leg up on its giant rival in at least some areas, including an ownership interest in a brokerage firm, which Bonds says he is eager to exploit.
“That intrigues me,” he says. “There is some potential to leverage that, and bring those offerings under the combined entity.”
At the same time, like other small corporate CUs, Louisiana Corporate has relied largely on third-parties, notably U.S. Central, for many of the services it provides.
Now, the CU, which uses hot peppers in its advertising, reeling in customers with promises of “hotter” service, may find that the merger could spice up its bottom line.
Among other internally generated services, Corporate America has its own Web hosting and serving capabilities. It also operates a large branch capture system. By contrast, for example, Louisiana has offered capture services through a unit of a South Carolina-based CUSO.
We don’t ask as much of a middle man,” Bonds says, adding that should help lower costs at Louisiana, if the merger is consummated.
“They can have access through their own institution that they own to some of these products and services, instead of relying on somebody else, and they can control them, instead of relying on somebody else,” he says.
True mutual benefit
These types of things happen if you can marry up two organizations where there is a true mutual benefit,” he says.
As part of any deal, Louisiana members would have to convert their existing membership and paid-in capital shares to perpetual capital. But Bonds says no additional capital would be required of those members.
Louisiana member services would continue out of the Metairie offices with current staff in place.
Bonds would be the president and chief executive of the combined entity.
The letter of intent is effective through June 30. The proposed deal has been discussed with regulators. Both sides said in a press release that, after due diligence, the merger would proceed only if it was in the best interests of their members.
Bonds said not the least of the benefits is the fact that he and Savoie – both former federal regulators – have known each other for years.
“We know and trust each other. We were NCUA guys,” he says. “So when David tells me something, I believe him, and I know he has the best interests of his members in mind.”
Members of the failed Southwest Corporate Bridge Federal Credit Union voted last week to merge with Georgia Federal Credit Union.
Mid-Atlantic Corporate FCU is preparing to absorb Virginia Corporate FCU.
Corporate America itself has gotten into the game, to an extent, recently acquiring SmartSource Solutions, a Web services CUSO once owned by Constitution Corporate FCU, Wallingford, Conn.. Constitution was one of three corporates the NCUA placed into conservatorship last fall.
Such combinations are becoming par for the course for corporates.
“You are going to see continued consolidation for the next year or two as they sort out their new objectives and get appropriately capitalized,” says Robin Hoag, a principal at Doeren Mayhew, Troy, Mich., a leading CPA and consulting firm that closely tracks CU mergers.
Natural person credit unions, on the other hand, continue to sit on the sidelines when it comes to mergers because of the continuingly uncertain economic outlook.
Hoag says most of the NPCU mergers on deck will be ones encouraged or assisted by regulators, or combinations of equally strong institutions.
In the main, however, “we are finding that everybody has kind of moved to their corners to wait it out,” he says
Doeren Mayhew counted 179 CU mergers in 2010 – down from 222 in 2009 and compared with 305 in 2006.