An In-Depth Look at the Merger of First Future Credit Union and California Coast Credit Union

Dianne Molvig
June 16, 2009 | COMMENTS

Last year's merger of San Diego-based California Coast Credit Union and First Future Credit Union was no exception. Each had roughly $900 million in assets and reported solid financials.

On the surface, blending two strong, thriving institutions might seem a sure recipe for success. But when two equals merge, the challenges multiply, say those involved.

“I would say a merger of equals is 500 percent harder than a merger in which one credit union is significantly smaller than the other,” says Marla Shepard, former CEO of First Future and now CEO of the new California Coast. “Every detail required negotiation, and that made it more difficult.”

“I'm not sure either of us understood the magnitude of what we were about to undertake,” says Jim McPheters, California Coast's former CEO, now retired. “It was a huge, huge task.

We had to revisit our bylaws, loan policies, personnel policies, benefit programs—everything each credit union had in place. When you're a merger of equals, you have to do that. It was almost like starting over again.”

As the merger's first anniversary on July 1 approaches, the two entities seem to have weathered the transition well. How did they do it? Here you'll get a look behind the scenes—and perhaps pick up some pointers for any merger that may lie in your future, no matter what sizes the parties may be.

Assessing the Matchup

It all began when Shepard called McPheters to broach the subject of merging. Her board had decided a merger was in First Future's best interests and had authorized Shepard to contact three possible candidates. California Coast was at the top of the list.

“One of the reasons the merger went smoothly,” she says, “was that Jim and I had an agreement in that first phone call on what was nonnegotiable.” If major disagreements had surfaced, Shepard says she would have moved on to call the next on the list.

The deal-breakers included the credit union name, CEO, headquarters location, computer system, staff retention policy, and approach to selecting the products/services lineup.

“In a merger of equals, both have to give up something big,” McPheters points out. “They gave up their name; we gave up our data system. They gave up their geographic headquarters; we gave up our CEO.”

Circumstances made some decisions easy. McPheters already had announced his plans to retire; Shepard was staying. First Future had a severe space crunch at its headquarters; California Coast had a new 104,000-square-foot administrative building with room to grow. California Coast was looking to replace its computer system; First Future was happy with Symitar. Both credit unions had similar member and employee philosophies, Shepard points out, which was a key reason that California Coast was at the top of the short list. Thus, she and McPheters could agree at the outset that no staff layoffs would result from the merger. Also, the new credit union's products/services selection would depend on what was most attractive to members.

Indeed, focusing on the members was the mandate from the beginning.

“One of the most important things we did was to approach the merger from the members' perspective,” Shepard says. “What would the benefits to members be? If you keep that in your mind as you go through the difficult processes of a merger, then that's always your guiding light in coming to agreement.”

Other factors also contributed to making the merger a good fit. The two credit unions' branch locations overlapped well, so they could reach new markets while closing branches where they had redundancies. First Future had a strong business lending program, while California Coast was looking to launch one. California Coast was heavily into real estate lending and First Future had a strong focus on vehicle loans, resulting in a well-balanced portfolio.

The numerous similarities and complementarities indicated they could be a better organization together than they were separately. In a merger of equals, “the deal has to be right,” Shepard emphasizes. “The fit and the strengths and weaknesses are important.”

Mixing Cultures

A key challenge in mergers is that each organization has a personality, or culture, of its own. As in any partnership, each has to learn to live with and appreciate the other's qualities and quirks.

Shepard points out that California Coast and First Future had different basic styles. For instance, California Coast placed high value on striking a balance between the demands of work and personal life. A major priority at First Future was getting things done efficiently. Such traits distilled into each credit union holding a preconception of the other's pace of conducting business.

“The perception from First Future's management and employees was, ‘It takes California Coast forever to make a decision,'” Shepard explains. “The perception from California Coast about First Future was ‘They move so fast, they may not be making good decisions.'”

The credit unions had to establish a common ground to exist as one. What has evolved is an environment in which work/life balance is valued, and in which there's also an emphasis on being a nimble organization that can act quickly.

Getting to that cultural mix required working out the attitudinal differences about how best to get things done. In the process “you have to pay a lot of attention to being diplomatic and not rushing your decisions,” Shepard stresses. “But, again, if you keep the best interests of the members as your guide, at the end of the day you're really not that far apart.”

Blending Organizations

In looking back at the merger process, “one of the things we did right,” McPheters says, “was spending time with the two boards of directors to get them both committed to the process and familiar with each other.” First Future had seven board members; California Coast had nine. The current number is 11. Because the National Credit Union Administration requires boards to have an odd number of members, “in a merger of equals, one of you will have a dominant position on the new board,” McPheters notes.

It was agreed California Coast would drop three board seats, and First Future would lose two. Deciding who would leave took a good deal of soul searching and discussion. “It's a hard thing to do,” McPheters says.

Still, in time, the board worked it out amongst themselves. One indicator of their success in doing so, McPheters says, is that First Future holds a letter of resignation for California Coast 's extra board seat. They have the right to activate that resignation at any time and request selection of a new board member who meets everyone's approval.

“That letter of resignation has not been exercised at this point in time,” McPheters reports, “which says that these two groups are still working together and doing what's in the members' best interests.”

Another aspect handled successfully, Shepard reports, was integrating the leadership teams. “As soon as we announced the merger,” she says, “we got the vice president teams together to start working on things like which products and services we'd offer, what the fee structure would look like, and so on.”

At the time of the merger, California Coast had two vice president openings. Those empty slots helped when shuffling people around. Still, deciding which vice presidents would be senior vice presidents “was one of the hardest things of the merger,” Shepard says. “That took a lot of discussion.” In the end, the senior vice president team had an equal number from each of the former credit unions. In striving for balance, “we even went down to the manager level,” Shepard says. “The perception was clear: This was a merger of equals, not one credit union taking over another.”

All employees were guaranteed jobs and their current salary levels for one year. There would be no new hires, and through attrition the total staff count would fall by 100, to about 400 by July 1, 2009. Some people have been and will be redirected to new positions, with appropriate salary adjustments. Generally, people maintain their salary level, or even get a raise.

“You don't move a $50,000-a-year employee into a $35,000-a-year job,” Shepard emphasizes. “You just don't do that, and we haven't needed to.”

Even with the promises of job security, however, employees worried— and some probably still do, McPheters points out. “It's management talking,” he says. “They hear you and see your lips moving, but whether they believe you is a different issue. You have to demonstrate you mean what you say.”

Guaranteeing employees' jobs is also critical for member support. Employees talk to members, Shepard notes, and members will take a dim view of a merger that costs people their jobs.

Members also have other questions: Is the credit union getting too big? Will personal service suffer? First Future members had to face the fact that their credit union would vanish. They were the ones who had to vote to approve the merger.

Allaying members' concerns relies on showing them value right away, Shepard suggests. Such had been First Future's approach in previous mergers. With this merger, “we told members the number of branches was almost doubling, so convenience will be better,” she says, “and we're eliminating or reducing 30 to 40 fees. They voted and agreed the merger was a good decision.”

Other Tips for Smooth Mergers

McPheters and Shepard cite other steps that either helped facilitate their merger or that they'd do differently:

• Appoint a project manager. Designating someone as project manager helped to keep the process on track. This person set meeting agendas, kept everyone informed about agreements reached, and made sure the process moved forward on schedule.
• Hold weekly leadership meetings. This helped people to get to know each other and their work habits. Senior managers also shared what they were hearing from employees and members. “That was an item on every meeting's agenda,” McPheters says. “We needed to know what members and employees were thinking so we could address their concerns proactively.”
• Get everyone involved in decisions. When a special concern arose, the leadership team appointed a task force to investigate. “That didn't necessarily have to be only management people,” McPheters points out. “We got frontline people involved in decision-making, too. People will support what they help create.”
• Take notes. McPheters says he got in the habit of writing notes after every conversation on an important matter. “I had a huge file,” he says. “I could go back later and revisit my notes to make sure we'd done what we'd talked about doing.”
• Spend lots of time on personnel decisions. Taking time at the front end to thoroughly assess personnel files and interview people for key positions is critical. “Don't assume,” McPheters advises, “that a person who has been managing a department of a certain size will suddenly be able to manage one twice that size.”
• Assign sufficient phone staff. “We probably should have doubled the phone staff right after the merger,” Shepard says. This would have allowed better handling of members' questions, most of which related to home banking.

Almost a Year Later

An employee survey last November, four months post-merger, revealed high satisfaction ratings, as did a member survey the following month, according to Shepard. As of early March, the merger had resulted in $11 million in savings in operational costs so far.

But, “those savings don't just happen by themselves,” she emphasizes. “You have to be strong and disciplined about finding those economies.” For instance, savings resulted from diligently renegotiating vendor contracts, whenever possible, to cut costs. Savings also came from standing firm on eliminating overstaffing by not hiring new people and allowing attrition to run its course.

Without the merger, both credit unions would have had to lay off employees, Shepard observes. “What this merger allowed us to do,” she says, “was to decrease employees by 100, without creating any pain or being short-staffed.”

Challenges linger, of course. And dealing with both a still-new merger and the economy has boosted the stress level. But there are no regrets on the path chosen. “When Jim and I were talking right before he left last July,” Shepard recalls, “he said, ‘This is the right decision at the right time for the right reasons.' And that is absolutely true.”

Guaranteeing employees' jobs is also critical for member support. Employees talk to members, Shepard notes, and members will take a dim view of a merger that costs people their jobs. Members also have other questions: Is the credit union getting too big? Will personal service suffer? First Future members had to face the fact that their credit union would vanish. They were the ones who had to vote to approve the merger.

Allaying members' concerns relies on showing them value right away, Shepard suggests. Such had been First Future's approach in previous mergers. With this merger, “we told members the number of branches was almost doubling, so convenience will be better,” she says, “and we're eliminating or reducing 30 to 40 fees. They voted and agreed the merger was a good decision.”

This article was reprinted with permission from Credit Union Digest, the publication of the California and Nevada Credit Union Leagues.