Inside Sound Credit Union’s Much-Debated Bank Acquisition

With credit union acquisitions of banks on the rise, the ABA has gone on the offensive. Sound CU shares why its recent purchase of The Bank of Washington makes good business sense and its strategies for onboarding former bank customers, employees, loans, and more.

 
 

CU QUICK FACTS

Sound Credit Union
Data as of 06.30.19

HQ: Tacoma, WA
ASSETS: $1.8B
MEMBERS: 131,824
BRANCHES: 29
12-MO SHARE GROWTH: 17.8%
12-MO LOAN GROWTH: 16.9%
ROA: 1.08%

When Sound Credit Union ($1.78B, Tacoma, WA) acquired $200 million Bank of Washington this summer, the credit union beat out bids from five other banks to win the business. The transition was well underway when local bankers and the American Bankers Association (ABA) started crying foul, vaulting the story to the pages of the Wall Street Journal. But Sound Credit Union CEO Don Clark shrugs off ABA’s criticism that credit unions are using tax advantages and expanded reach to raid the community banking industry.

“We see this as a competitive strategy by the ABA to break down the reputation of credit unions when more and more historical bank customers are discovering that credit unions offer member-focused and service-oriented cultures and comparable products,” Clark says.

Don Clark, CEO, Sound Credit Union

The deal, approved by the NCUA in March, was the first-ever credit union acquisition of a bank in Washington state and was one of a growing number of bank acquisitions nationwide. It’s hardly a buying spree, but bank and thrift deals increased from an average of three per year during 2014-2017 to 16 in 2018 and 18 in 2019, according to data from Callahan & Associates.

But it’s not just banks Sound is looking at; it has engineered credit union acquisitions, too. In 2011, Sound Credit Union, then with assets totaling $544 million, merged with a healthy Watermark Credit Union, which had assets of $564 million, as part of a strategy to help the two credit unions better compete.  Likewise, The Bank of Washington went up for sale because it faced challenges similar to that of smaller credit unions — lack of scale. The bank was struggling to meet the regulatory and technological needs to compete with larger banks, credit unions, and Fintechs, Clark says, and the bank’s focus came down to the sales price and Sound Credit Union’s all-cash offer.

“The decision for a bank to sell to a credit union is primarily driven by the board and management wanting to maximize return to shareholders,” Clark says, adding that the future of bank employees and accountholders also enters into the equation. “With credit union mergers, since there is no money exchanging hands, the areas of most importance during negotiations typically include how the members will be treated in the new entity, the value added to the membership from the merger, the future of the employees being merged in, the new board composition, and the legacy and history of the credit union being merged in.”

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Sound Credit Union’s acquisition of The Bank of Washington was relatively seamless for the bank’s former customers. A few weeks after NCUA approval, the bank’s five locations opened their doors as Sound Credit Union on Monday, March 25, 2019, expanding the credit union’s presence north of Seattle. Meeting that deadline required careful planning and coordination across member services, loans, technology, and human resources, according to Clark. Here’s a look at the key integration points.

Products And Services

From the outset, Sound Credit Union had to convert to share accounts all of the separate bank accounts at The Bank of Washington. Whereas those who hold checking accounts at a bank are customers, those who hold share accounts at credit unions are owners. That’s a distinction with implications for new members as well as IT systems. From a loan products perspective, the bank primarily focused on business loans and mortgage lending, so it had very few consumer loans. 

“Our ability to offer consumer loans to these former bank customers was a win-win feature of the deal,” Clark says. 

Additionally, Washington is one of 12 states that has legalized cannabis sales, and the bank was actively serving marijuana-related businesses. Sound Credit Union decided to continue serving this market but had to develop new policies and procedures to accommodate the businesses, which bring greater regulatory scrutiny and compliance audits.  

Communication And Security

Sound Credit Union wanted to offer a full suite of services on Day 1, even though the systems wouldn’t be merged for three months. To meet that deadline, it took certain key steps, including:

  • Adding transport layer security (TLS) encryption for the email channel between new and existing Sound branches.
  • Installing two workstations and corresponding peripherals at each new location to run all Sound applications and connect to the network, which meant adding routing functionality for Sound on the legacy bank network at each new location.
  • Setting up user access controls for Sound staff to begin learning the bank’s systems and processes.
  • Setting up user access controls for bank staff to begin learning Sound systems, including creating Sound domain accounts and email address for each employee.
  • Assigning Sound “ambassadors” to serve walk-in transactions and train existing bank staff. Referral branches were able to accommodate transactions or interactions that a branch might not have the training or equipment to support. 
  • Designating a Sound regional vice president to serve as the conduit for sharing communications between the teams to ensure items were addressed immediately.

Technology And Systems

The credit union had to wait to draft detailed integration plans until after regulatory approval. To plan for systems mergers, teams must have in-depth knowledge of the secondary system, but Sound’s IT team couldn’t access the bank’s systems until March. But that didn’t slow down the credit union.

“We were still able to meet our end-of-July system conversion goal despite this obstacle,” Clark says. “We also continue to face the challenge of not yet being on the same phone network with our new branches. Branch-to-branch communication will be much more efficient when we get those branches set up with a simple four-digit-extension.”

The first step of the technology migration was to scan both sets of networks to understand both IT environments. From this, Sound Credit Union defined and compared environments to identify gaps and decide which assets to keep or divest. 

“As a result of the gap analysis, we created a new business banking product that will enable us to serve new types of business accounts including those for tax escrow,” Clark says.

For the core conversion, Sound Credit Union’s functional teams reviewed each bank product and mapped them to Sound products. Several test conversions helped identify and remediate missing or incorrectly mapped data for the full migration. 

“The most challenging portion for us was the difference in our core structure accounts, membership, and related addresses,” Clark says. “We determined that mapping the accounts to Sound memberships provided the cleanest and most accurate data conversion, and we were successful in migrating the data over.”

The transition also required replacing all endpoints at the acquired locations, mostly due to the age of the bank’s equipment. Sound Credit Union is still in the process of completing the network and phone cutover, primarily due to the complexity of telecom changes and permit requirements, Clark says.

Member Communications

A major part of the transition involved communicating the credit union’s commitment to the bank’s customer base and explaining the credit union mission. One of the reasons Sound Credit Union chose The Bank of Washington, says Clark, was that the two organizations “shared similar values.” 

Sound Credit Union promoted products and service offerings that were new to the bank’s customers, including consumer loans for vehicles, boats, and home equity loans. But the former bank’s staff and Sound Credit Union ambassadors also had to make new members aware of process changes. For example, the bank previously made personal calls to notify customers of insufficient funds. With Sound Credit Union’s automated system, manual check processing was eliminated, so the credit union worked with new members to create account alerts using home banking or mobile services to replace phone calls.

“We were proactive in working with The Bank of Washington to align our rates and fees prior to the acquisition to reduce the impact on our members,” Clark says. “There were a few customers who left stating they would never be a part of a credit union, although they did not share why they were opposed to credit unions. But most have given us a chance, and our acquisition retention has been very high.”

Following the acquisition, the credit union’s membership grew by nearly 4,000 members to 130,306. By the end of June, overall membership reached 131,824. Meanwhile, the credit union’s business services team worked closely with business members to ensure a seamless transition and to identify system enhancements to support them.

“While it’s still too early to see what type of retention we will have for loans and deposits, we feel confident that our consistent messaging and personal assistance will help us retain the majority of our new members,” Clark says.

Legacy Loans And Cards

Legacy cards and loans also were considerations. The credit union determined that the terms and conditions of loans for consumer credit cards were not as favorable as its existing Visa products, plus the bank’s third-party servicer was not able to work with credit unions. 

“As such, we elected to migrate these loans into a Sound Credit Union Visa product by issuing an offer to each new member that asked for their consent and acceptance of a new Sound card with a balance transfer of their existing card balances,” Clark adds. “In the event that a member preferred not to accept the new card option, we rolled those into a new unsecured term loan facility for the unpaid balance at time of conversion.”

The credit union also identified gaps in commercial loans offerings. Any loans that originated with features or parameters outside of those allowed by regulators, such as loan-to-value offerings and unsecured amounts that exceeded regulatory limits, Sound Credit Union worked with state regulators to obtain the appropriate waivers. 

A gap analysis also helped review the characteristics of each loan and loan type and the behaviors of the bank’s servicing system versus the credit union’s system for payment streams, interest calculation, codes, ticklers, and more. 

“Even with advance planning, new findings surfaced at the time of system conversion that were unanticipated, and we had to explore options in how to best accommodate,” Clark recalls.

Employees And Culture

The culture at the two organizations was similar, but the difference in size and administrative processes necessitated training on products, services, and systems.

“We treated each employee as a new employee to Sound and provided them the opportunity to attend new employee orientation and other training courses that focused on the how’s and why’s we do things in our credit union,” Clark says. “Not surprisingly, some employees who felt more comfortable in a traditional bank environment due to their past experience decided to seek other employment. After five months of joining forces, we are proud that we have retained about 65% of the employees.”

The Battle Of ABA Versus CUs

Normally, acquisitions become old news after just a few months, but Sound Credit Union’s acquisition touched off a public debate in August with dueling op-ed pieces in the Puget Sound Business Journal. The first salvo was fired by Laurie Stewart, president and CEO of Sound Community Bank in Seattle and chairman-elect of the ABA.

Stewart, whose bank was one of the unsuccessful bidders for The Bank of Washington, penned a scathing critique of the deal, citing the fact that credit unions are exempt from a 20% tax hike that supports colleges and universities in Washington state, noting that, “If your business is in one of the categories facing higher business and occupation taxes, you’re paying more simply because credit unions pay nothing.”

Two weeks later, Troy Stang, president and CEO of the Northwest Credit Union Association’s, fired back with a business journal opinion piece that pointed out that for-profit banks are focused on enriching investors on Wall Street, whereas credit unions are returning $330 million to the state, which works out to an average of $180 a year to each member household for groceries, child care, and more.  

“Not only do credit unions still pay payroll, property and sales tax, but our profits also go directly back to the families and communities we serve,” Clark notes. “Competition in the marketplace between banks and credit unions is healthy and good for consumers and members. Purchasing The Bank of Washington helped us meet our reason for living: to stand with our members, communities, and employees through all waves of life.”

Read more about credit unions acquiring banks in "How Credit Unions Make Members Out Of Customers Post-Bank Buy."

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Oct. 21, 2019


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