Mergers and acquisitions
It’s no surprise that mergers and acquisitions are considered a viable solution for credit unions in terms of growth, sustainability, staying relevant, and providing enhanced value to its members. Yet many credit union executives and board members find the merger process to be daunting. A successful process requires vision, cultural awareness, risk management expertise, financial valuation acumen, business model sustainability, attainable economies of scale to achieve growth and, ultimately value-added attributes to stakeholders.
Even if you know your merger partner well, you have a fiduciary responsibility to members to dig deeper into the most impactful areas including financial, legal, products, and human resources. The goal is to understand how the entities would best be combined into one credit union, including a cultural fit that is aligned with your business goals, and is in the best interest of your current and acquired members.
- Address the tough, deal-breaking questions first, before a commitment between the two entities is made.
- Review at least three years of financial statements to identify trends.
- Review loan portfolios, loan files, underwriting standards, collection practices. charged-off loans, delinquent loans, expenses, department budgets, investment programs, investment portfolios, audits, and internal control audits or opinion audits, as well as NCUA exams and state exams for state-chartered credit unions.
- Review board minutes and interview staff and board members to discover any areas of concern.
- Understand system compatibility and the efforts and resources needed to convert or integrate.
- Check and validate employee and volunteer personnel files to ensure there are no current or past dishonesty, fraud, or bondability issues. Remember, a loss discovered by the previous organization can impact your insurance coverage going forward.
As more credit unions enter into merger agreements, the need for effective communication intensifies both internally and externally. It can be the difference between a successful merger and a chaotic one. Follow federal and state timelines regarding merger communication to all, including member groups, regulators, and the media. Share the announcement to both membership bases at the same time and maintain consistent, frequent updates on merger progress and important timelines.
It is also a good idea to place other special projects or initiatives on hold during the merger process. Using an FAQ document is a common practice, as well as preparing staff for increased questions and activity.
Mergers and acquisitions can drive measurable benefits for credit unions and their members. However, they are a time-consuming and emotional process that can come with unanticipated complications, challenges, and mistakes if proper oversight is not in place.
A proactive oversight plan should be developed and in place to ensure member transparency and adhered to properly integrate staff, systems, and processes for a successful future.
A cybersecurity analysis should begin as early as possible to map out and understand areas of risk for both organizations involved — including data privacy, security issues, and data breach risks. Carefully understand commitments to vendor contracts.
An exhaustive evaluation process involving credit union leadership, legal, and human resources should help you understand how the entities will best be combined into one. Be sure to carefully consider:
- Who will be retained?
- What positions will they hold?
- Will there be branch closures, changes in location or remote/flexible work arrangements?
- Salaries or pay rates?
- Benefits offered?
- Seniority with the continuing credit union?
- Employee bonuses?
- Severance pay for employees not retained?
- Contract buyouts for contracted employees?
Before the deal can be signed, it must be acknowledged by regulators. The NCUA and the applicable state regulators require a merger package be submitted detailing the merger reason, proposed effective date, a consolidated financial statement, among other data prior to the member vote.
If you are acquiring a non-credit union entity, be aware that there are several legal and regulatory issues that must be considered in connection with a potential acquisition of an FDIC insured bank by a credit union. Not surprisingly, this process is more complex.
Acquiring a bank is a much more complicated undertaking. First, the amount of time, costs, and legal process it can take to complete a transaction of acquiring a stock-based financial institution can be a challenge.
Additionally, a credit union must decide whether they can adequately serve the accounts the bank already has. For example, the NCUA dictates business loan caps credit unions must meet. Credit unions cannot have a business loan portfolio that exceeds 12.25% of their net worth. If a credit union purchases assets from a bank with a large commercial loan portfolio, some of these loans may need to be modified or divested.
Field of membership can be another tricky side of a credit union-bank acquisition — as not all back customers can be instantly converted into credit union members.
Despite how complicated such a deal can be, credit unions can benefit more from these kinds of acquisitions. They can be a good way to grow membership, expand products/services, deliver balance sheet benefits, introduce new workforce talent, and even be a defense mechanism from a competitor expanding into your geographical area.
Once a credit union merger or acquisition is complete, it is critical to have a strategic post-implementation plan that is carefully executed. Post-implementation should include:
- Detailed timelines and milestones.
- Clear roles and responsibilities.
- Continuous communication with existing and newly merged members.
- Processing and verification of merger transactions on the financial statements and regulatory reports.
- Change management for employees of both entities.
- Monitoring decisions and risks throughout the entire process.
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Employment practices risk management resources — www.epl-risk.com
NCUA merger rule provisions