By David Ritter, CVA, MBA – Shareholder, Doeren Mayhew

Credit union mergers are occurring at the rate of approximately one per day in the United States. Given the current environment, it is safe to say that this trend will continue or even escalate. Some industry experts estimate that by the year 2020, only 3,600 credit unions will be in existence nationally from about 6,000
today. That’s a far cry from the nearly 9,000 that existed a decade ago.

As a consequence of today’s extremely competitive financial industry and expanding government oversite, regulations and compliance, it’s no surprise that mergers are 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.

Highlighted below are the eight phases of the credit union merger process.

1.  Merger Education and Rationale

The most important aspect of any merger process is understanding why you want to merge and what your credit union hopes to gain from collaborating with another credit union. Whether the goal is to expand service delivery channels, diversify member demographics, enhance employee and branch reach, or just prevent competitors from gaining an advantage, among many other reasons – each credit union should fully understand the rationale for mergers early in the process.

A quick refresher of the current status of the industry and your peers can be beneficial in helping the board of directors and management teams understand if or how a merger will help the credit union in the future.

Finally, understanding the rationale of the increased fervor for mergers will help you and your board understand the key touch points in the process. Some examples of rationale for a merger may include:

  • Increased transactional revenue
  • Greater presence in multi-dimen­sional/demographic marketplaces
  • Increased lending opportunities
  • Diversification of products and services
  • Larger “sphere of influence”
  • Proactive approach to remain rele­vant in industry and to members
  • Larger asset and capital base to further member value efforts
  • Ability to retain and enhance board and community in the continuing CU

2.  Strategic Planning

Before truly entertaining a merger, you must identify your credit union’s goals, objectives and the strategies that will help you obtain them. A thorough strategic planning session should not only help determine your credit union’s strategic vision and determine its value proposition for a merger candidate, but also identify the characteristics to search for in a potential partner.

Performing an internal/external assessment provides a roadmap for your credit union strategy by helping uncover its core competencies and limitations, untapped opportunities, merger non-negotiables and potential gaps where synergies could be found through collaboration with a targeted partner.

3.  Prospecting Analysis

Focused on identifying key merger candidates and narrowing down the list, the prospecting analysis will help identify the ideal candidates based on characteristics, cultural fit, focus, member added-value drivers and competitive advantage positioning. Consider taking a tiered approach to help focus on ideal, favorable and tertiary prospects.

Begin narrowing down your candidate pool by answering a series of questions related to how the candidates will benefit your credit union post-merger. How will they complement your credit union in terms of product/services, member service, fees/pricing and convenience to the members? Will the candidate help achieve your short- or long-term focus related to market share, market extension, product extension or product diversification? Does their culture fit well with your credit unions? How will your organization benefit the prospect?

A general assessment of the benefits and risks of merging with specific prospective partners related to a series of quantitative and qualitative measures will help answer the questions at hand.

Quantitative Measures

  • Financial characteristics
  • Financial compliments
  • Synergies and economies of scale
  •  Pricing, rates and costs

 Qualitative Measures

  • Member benefits
  • Credit union benefits
  • Employee/Stakeholder benefits
  • Organizational compliments
  • Geographic diversification/Compliments
  • Member diversification/Compliments
  • Product diversification/Compliments
  • Technological compliments

4.  Introductions

A so-called meeting of the minds, the introduction brings together CEOs and board of directors to explore, from both perspectives, the opportunities, challenges and value proposition concepts of a credit union collaboration. This phased vetting process begins only following the execution of signed confidentiality agreements.

These meetings are often facilitated by an independent third party to ask the difficult, yet important questions on behalf of each credit union and keep the rhetoric down. Typically questions relate to:

  • CEO aspirations and pressure points
  • Credit union characteristics
  • Board characteristics
  • Capital levels and financial performance
  • Cultural compatibility
  • Member and other stakeholder value
  • Membership demographics
  • Geographic concentrations

During this process common “hurdles” that tend to derail or cause turmoil in collaboration talks regarding the continuing entity are discussed, including:

  • Name of continuing entity
  • Leadership team
  • Board of directors
  • Charter types
  • Operating systems
  • Headquarter location

By the end of the introduction meeting it will be apparent if there is an opportunity to move forward with a collaboration or if discussions should cease.

5.  Structure  and Negotiation

With the stakes high, the structure and negotiation phase can often be the most intense. However if the “hurdle” questions are resolved in the introduction phase this becomes a much smoother process. Getting your legal, accounting and other merger advisory team members to collaborate during this stage of a merger is critical to getting a favorable outcome for everyone involved. Your advisors can help draft a beneficial collaboration agreement.

6.  Transaction Analysis

During the transaction analysis, due diligence, fair valuation of the credit unions’ balance sheets and the fair valuation of the enterprise value are determined. Due to its highly technical financial nature, rely on your CPA firm to assist in determining the calculations.

Due Diligence

The due diligence process will support management with the identification and quantification of undisclosed financial issues that could impact the merger, as well as provide a better understanding regarding the financial condition of the prospective partner not disclosed in the financial statements. Loan evaluations, capital/equity, allowance for loan loss and current contracts are just a few of the components that are looked at during this stage of a merger.

Fair Value of Balance Sheet

Calculating fair value of a merging credit union is a complex multi-step process, yet a necessity to accurately reflect the values related to assets and liabilities on the continuing credit union’s balance sheet. The value of the merger is determined by estimating the fair value of its assets and liabilities including:

  • Current assets such as investments and loans
  • Fixed assets
  • Intangible assets such as core deposit intangible, goodwill or bargain purchase
  • Current and long term liabilities
  • Contract and commitments
  • Enterprise value of the earnings capacity of the merging entity

Financial Projections of Combined Credit Union

Helping to determine the financial success of the combined entity, estimated financial statements need to take into consideration synergistic benefits and one-time merger costs such as the following:

Examples of Potential Synergies

  • Salaries/Compensation/Benefits
  • Online services (i.e., website)
  • Advertising and promotional expenses
  • Outside services
  • Professional services
  • Education/Travel/Conference expenses
  • Data processing systems
  • Dues
  • Operating fees (e.g., licenses)
  • Annual meeting expenses
  • Intangible asset amortization expenses
  • Office operation/Occupancy expenses

Examples of Potential One-Time Costs

  • Legal counsel
  • Employee buyout contracts
  • Signage changes
  • Temporary telephone lines
  • Contract cancelations
  • Member vote
  • Training
  • Brochure changes
  • Moving costs
  • Write-offs
  • Consulting fees
  • Travel

7.  Closing/Regulatory Requirements

Before the deal can be signed, it has to be acknowledged by regulators and ultimately get the seal of approval from credit union members through a voting process of the merging credit union.

The National Credit Union Administration and the applicable state regulators require a merger package be submitted detailing the reason for the merger, proposed effective date, a consolidated financial statement, among other data prior to the member vote.

Depending on size of the transaction a Hart-Scott-Rodino antitrust filing may be required too.

8.  Implementation/Integration

With an approved merger in the near future, putting a proactive plan in place to ensure member transparency, a proactive communication and integration plan must be crafted and adhered to properly integrate systems and processes is important for a successful future.

Leverage your COO’s experience to facilitate the integration process. They likely will have the skillset and knowledge to assist in identifying overlooked synergistic benefits that can be capitalized on to create dynamic implementation and integration strategies.

From Start to Integration

Credit union mergers requires a strategic plan that is carefully planned and carried out. The merger process can be challenging and complex, but if each phase of the process is well executed, the merger can be accomplished quite effectively for the greater good of the membership. Rely on a team of independent advisors, like Doeren Mayhew’s strategic advisors, to help guide you the process and drive a successful collaboration.