TACOMA, Wash.-The merger of Sound Credit Union and Watermark CU became "official" on Sept. 1, but the head of surviving Sound CU said the task is far from complete.
The merger of two $550-million CUs to create a $1.1-billion credit union has been characterized as "a perfect fit" by the parties during the process.
The credit unions' histories are similar, as each was chartered to serve telephone company employees and subsequently expanded fields of membership to serve the entire state of Washington. Both institutions were seeking to add branches between Seattle and Tacoma.
In adition, from a succession standpoint, Sharon Sanford, Watermark CU's president, was scheduled to retire later this year.
The merger is the largest among credit unions in the history of Washington state, the two CUs said.
Richard Brandsma, president and CEO of Sound CU before and after the merger, said the two organizations have already combined financials, executive management and boards of directors. The board for the ongoing organization is comprised of equal representation from both credit unions. Still to come: integration of member accounts, services, online banking and online bill pay.
"We are feeling good about where we are at and what needs to be done," Brandsma said. "The technical pieces certainly are pretty critical, which is why we are using a third party to help our IS team. There are so many different processes and different vendors to deal with, but we have already done a large majority of that work. One example is having to decide which home banking model to use, which is not an easy process."
Brandsma shared with Credit Union Journal the many steps that must be taken and problems that must be solved over the next nine months. At one point during the interview he was temporarily unable to find a particular document, causing him to quip, "I've had so many merger meetings this year I have about 10 merger files."
The list includes: resolving Fair Value Accounting issues, combining the staffs of what used to be two separate CUs, HR staffing, aligning fees, facilities planning, culture differences and member communications.
The Big Hurdle
Of these, "Culture is probably our biggest hurdle right now," he reported. "There are a lot of little things. At Sound we don't have assistant managers in our branches, but Watermark had assistant managers at almost every branch. I am hopeful everyone will buy into the process and realize it is just a matter of accepting different ways of doing something."
Don't Want To Drive
Some issues are resolving themselves rather neatly, Brandsma continued. The merger technically is not resulting in any layoffs due to attrition. Watermark CU had been based in Seattle, and with the headquarters of the combined organization moving to Sound's facility in Tacoma, many Watermark staff made a decision not to make the 30-mile drive.
Even with some staffers opting out of continuing with Sound, Brandsma said it is bringing "a fairly large number" of former Watermark employees to Tacoma, which has led to remodeling approximately 10,000 square feet of space that had become vacant last year. At the time, management made a decision to leave it open to allow for growth, but now it fills a critical need.
Sound Credit Union is "somewhat fortunate," Brandsma assessed, in that both it and Watermark are on the Symitar system. The two CUs will be using a third party to help manage the process of working out the technical side, which has instilled confidence.
Dealing With Fair Value Accounting
"We feel the integration will be a smooth one," he predicted. "Our IS staff is working on getting all the pieces in place. In 2010 we purchased a new mainframe which gave us tremendous capabilities, so we don't have to worry about hardware. Being a $500-million credit union before the merger, we had 12 branches and knew how to operate a network."
Fair Value Accounting is "a big deal," Brandsma continued. He said FVA requires an acquiring credit union to take all of the merging credit union's assets and loans at "fair market value."
"We have to use an outside accounting firm for this. Almost all loan portfolios are discounted in this economy, so it is a pretty complex process. The firm has to look at each loan individually for the entire portfolio."
Brandsma noted that many credit unions remain unhappy with FVA because the third-party accounting firm approaches a merger in the same way as a portfolio purchase.
"We don't look at it as a purchase, we are just acquiring the loans. In the past, two credit unions would have just combined two sets of books, but now we have to value the assets of the credit union that is merging into the continuing CU and create an allowance."
The Fair Value Accounting process is listed under due diligence, he continued. Every asset that is owned by the merging credit union has to be valued, including appraisal of all Watermark branches.
"In this economy, almost all real estate has been downgraded in value, meaning the facilities are being booked at a loss. It impacts the continuing organization's ongoing capital when buildings and loans are worth less."
The Piece That's Important
Human resources staff communication is "critical," said Brandsma, because in a merger there will be a number of employees changing their benefits programs. Sound and Watermark have "pretty much completed" that task.
"The member communications piece is very important. Watermark members voted 95% approval for the merger, so it is very important we keep them up to date at every point in the process."
On the operations side, Brandsma noted this is Sound's 13th merger and Watermark also has had several, meaning both are familiar with the process. Sound had 12 branches, Watermark nine, so the combined organization has one person overseeing branches in the Seattle area and another overseeing the branches in the Tacoma area.
"Every credit union has a different layout in their facilities," he explained. "We are hoping the combining of systems will take place by the end of February, although we are giving ourselves until the end of June to make sure we have adequate time to do everything right."
What this merger has demonstrated, Brandsma declared, is rarely are there two credit unions that have the same culture, "and Watermark and Sound are different," he said. "Any change is not fun, and the Watermark staff is finding out the way Sound does things is not the same. One thing we had in common that really drove this merger is both credit unions really believed in member service. That has allowed people to accept some change."
Rebuilding Capital
The combined organization's capital ratio will be below that of Sound before the merger (11%), but it expects to regrow that number fairly quickly.
"However," Brandsa added, "the combined organization has some efficiencies that will allow us to rebuild capital shortly. We believe we will have a very strong, progressive and aggressive credit union in the Puget Sound area. In these difficult times it is nice to see some sunshine, and we think the combined organization will have tremendous potential for growth and strength going forward."
