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MOEs could be the answer as CUs seek increased scale

Ten or 15 years ago, small credit unions looked at the $100 million-in-assets mark as a threshold where many of their scale-related worries would begin to ease.

That is not the case anymore.

"A $100 million credit union now is where a $20 million credit union was then," said Hidden River CU CEO John Murga.

Some credit unions are looking to bulk up through mergers, and in some cases even mergers of equals. Those latter deals are especially appealing because institutions are able to scale up much more quickly than by acquiring a small credit union.

Economies of scale are crucial today, especially in a rising-rate environment, because expenses are highlighted that much more, Murga said. "You really need to watch the dimes and nickels," he added. The larger the acquired credit union, the more expenses can typically be saved through a merger.

Pottsville, Pa.-based Hidden River in 2016 completed a merger with $14 million Schuylkill FCU, and Murga said in an interview that the $142 million–in-assets credit union would now look at a merger of equals. "If I could find another institution that's the same size as mine or a little bit below and they would be a willing partner ... I'd be all for it," he said.

Culture and personalities often come into play in MOE negotiations, as do issues including who will run the new company and which institution's name will continue on. Such obstacles often kill MOEs before they begin.

But two New England institutions are trying to make it work. Sanford, Maine-based York County FCU and Brunswick, Maine-based Atlantic Regional FCU in February agreed to a merger of equals. Atlantic Regional has $363 million in assets and more than 21,000 members, while York County has $303 million in assets and more than 23,000 members.

Although it is not exactly a merger of equals, another recent deal has elements typically seen in those mergers. Members of Bridgewater CU in early March approved the merger of the Bridgewater, Mass.-based credit union with Lawrence, Mass.-based Merrimack Valley FCU. As of the end of 2017, Merrimack had $596.9 million in assets, while Bridgewater had assets of $356.9 million.

John Howard, President and CEO of Bridgewater CU, said in an interview that the two sides have found common ground on issues such as the name of the new credit union and how the new board would be constructed.

"It wasn't a situation where one was trying to win over the other," he said. "It was 'let's look at the obstacles and let's address them.'" Six of the nine current Bridgewater board members would join the new board, with two directors retiring and Howard himself stepping down from that role. Merrimack Valley's bylaws do not allow for a paid employee to be on the board.

Additionally, Merrimack Valley President and CEO Peter Matthews Jr. will retire in connection with the closing of the merger. Howard, who will lead the new credit union, said succession planning for Merrimack Valley led in part to merger talks.

The expense ratio and how it could be helped through increased scale was also a big factor in the merger, Howard said. Merrimack Valley's ratio is 2.51% while Bridgewater has run at about 2.96%, so the combined company should be in the 2.61% to 2.65% range. "You'll see efficiencies from that size immediately," he said.

That deal is also unusual because of the size of the two credit unions. Peter Duffy, managing director at Sandler O'Neill & Partners, said in an email that the average size of merged credit unions in the last 10 years was only $10 million to $40 million in assets. He said the Merrimack Valley/Bridgewater deal may be a sign that the long-term difficult operating environment is sinking in with even larger credit unions. "Putting the member needs first means finding them the best value possible," he said. "Even if that means [merging] into a larger credit union."

Merrimack Valley's charter will be kept, but Bridgewater CU's name will remain on its branches for the foreseeable future, Howard said. Merrimack Valley's name will be used only on branches in the north region.