Don’t Wait Until You’re Down And Out To Partner Up

Pathways demonstrates how mergers can be an asset for small and midsized credit unions.


Pathways Financial Credit Union ($220M, Columbus, OH) is not your typical credit union. For example, a standard cooperative has only one brand to worry about managing — Pathways has four.

Born out of a simultaneous merger among three Ohio credit unions in the $50-70 million asset range — Powerco Credit Union, Western Credit Union, and Members First Credit Union — the resulting Pathways Financial Credit Union is more diverse and stable than its predecessors. And under the leadership of CEO Michael Shafer and president Greg Kidwell, Pathways has since navigated two additional mergers with the $2 million Burgess & Niple Employees Credit Union and the $27 million WECU.

Despite its merger successes, Pathways knows such a strategy isn’t the answer for every credit union.

“Systemic problems don’t just go away by merging,” Shafer says. Likewise, institutions that appear to be a perfect match on the surface might not be so copacetic upon closer inspection. For example, seemingly minute differences in fee strategies can cause cultural rifts over time.

Through its significant firsthand merger experience, Pathways has identified five best practices that any institution can use to smooth the merger process and create lasting success.

First Impressions Count

In many ways, Pathways’ reputation precedes itself in merger dealings.

“These two most recent merger opportunities presented themselves to us,” Shafer says. “We didn’t actively look for them.”

Professional connections among executives are a crucial channel for indentifying merger possibilities, especially when a credit union is exploring these options for the first time. Shafer’s previous credit union, Powerco, had undergone four mergers prior to the transition to Pathways. Each of those four mergers came about as a result of direct legwork on his part.

“You’ll get a lot of no’s before you get a yes,” says Shafer. “However, given the challenges of the current regulatory environment and the depressed rate environment, a lot of boards are becoming open to the concept.”

After clearing that first hurdle, future success with merger opportunities might hinge upon your credit union's track record.

“Now that people have heard about what we’ve done with Pathways, it’s easier to start those discussions,” Shafer says. “You have to do it right the first time or it could ruin your credibility in the future.”

Be Proactive Rather Than Reactive

“If a credit union waits until regulators are forcing them to look for merger partners, they’ve probably waited too long to be a great fit for Pathways,” Shafer says.

With one exception, all of the credit unions involved in Pathways’ mergers had capital ratios of 9% or higher. Burgess & Niple Employees’ Credit Union had lower capital, but Pathways considered the 700-member institution small enough — and their sponsor group attractive enough — that it was still a beneficial addition, Shafer says. But he makes it clear this is an exception rather than the rule.

“A good merger will allow you to add additional value propositions for the members — including new products, services, and better technology,” Shafer says. “As you grow, there are also substantial opportunities to leverage better pricing from vendors.”

Enhance Brands, Don’t Replace Them

One of the largest worries with mergers is that small credit unions will lose their identity, their service quality, or their localized perspective as a result of their growing footprint. But as Pathways demonstrates, a little strategic brand positioning can take care of that.

In its original three-way merger, Pathways kept each of its brands separate under the umbrella of the Pathways family. This allowed the credit unions to keep their regional equity among existing members.

Likewise, Pathways has continued this strategy with one of its two most recent additions.

“We manage our brands separately,” Shafer says. “We look at their financial performance, lending, and losses separately, so we can monitor their successes on an ongoing basis. They don't have to become profitable overnight, but we do make sure that we have a plan to get them there in time.”

Set A Plausible Timeline

Examining how a credit union operates from the standpoint of policies and procedures is a key process that must take place prior to a merger. Because every credit union is different, Pathways seeks to implement policies and procedures gradually over time, in an effort to minimize any potential culture shock among members. Sometimes, when aspects of a merging credit union’s policies complement the standardized policies and procedures Pathways has in place, they are added in order to benefit the entire membership.

A merger also typically requires a technological upgrade for the incoming institution. Although these partners must run on Pathways’ core system, the credit union does allow them to run out their existing vendor contracts for ancillary products and services.

When an institution has fewer than 1,000 members, mergers take less time and require fewer moving pieces. In these cases, credit unions can handle many of the merger processes in house, which saves bottom line costs but can still be labor intensive from a personnel and project management standpoint.

“Everything we do affects the members, so it pays to have good project managers on your staff so you can deliver,” Shafer says.

Pathways completed the Burgess & Niple Employees merger from start to finish in fewer than 60 days. The larger scale merger with WECU — which served 70 to 80 active SEG groups — was a six-month process. 

Mergers with community charters might also be more time consuming than their SEG counterparts because outreach and communication efforts must target a more diverse, fractured group of individuals.

Don’t Overlook Organic Growth

Mergers aren’t a fit for everyone, but few can argue against the advantages of scale and diversification the right partnerships will provide.  Although key performance indicators will change dramatically as a result of a merger, economies of scale don’t happen automatically and credit unions must have a structure and strategy in place to capitalize on growth benefits.

For small institutions that might not have checking accounts, their merger partner will have to work doubly hard to secure a primary financial relationship with members. On the other hand, credit unions in the $20-30 million and higher asset range often come in to the partnership with a share draft penetration of 50% or more.

“We’re interested in those deep relationships that build the credit union, including share drafts and loans,” Shafer says. “We’re on track for 15% loan growth this year — not including any merger activity.” 




July 22, 2013


  • I think the most insightful part of this article is the statement, " “If a credit union waits until regulators are forcing them to look for merger partners, they’ve probably waited too long to be a great fit for Pathways,”. NCUA's lack of prompt and corrective action is going to result in a big increase in liquidations. Credit unions are very resistant to mergers. The "healthy" credit unions that merged into Pathways are an exception to the rule. The rule is that mergers happen when there is no other alternative. After years of negative member growth, after years of negative net income, after years of share and loan losses, then on the brink of failure, merges happen. The main criteria for prompt and corrective action is the capital ratio. Yet many credit unions with high captial ratios are no longer "going concerns". They have no franchise value. A credit union that has negative member growth for three consecutive years is no longer meeting member needs. A credit union that is no longer relevant to the members has no franchise. That means it also has no value to a merger partner. The cost and effort of doing a merger is signficant and the risks are high that hidden problems such as the failure to comply with laws and regualtions can result in big clean up problems. A merger will cause the merging credit union to set aside other priority projects while it completes the merger. Therefore credit unions like Pathways will be very select in choosing merger partners.
    Henry Wirz