Three challenges with mergers

Credit union mergers have become increasingly common in the past few years, driven by a variety of factors such as regulatory pressures, technological advancements, and the need for economies of scale. While mergers may be able to provide opportunities for growth and enhanced member service, do they present a threat to the industry or are they a path to an industry’s survival? Mergers come with challenges, risks, and potential pitfalls that must be strategically planned and managed for.

A major challenge one might encounter at the beginning of the merger process arises in the due diligence process. Specifically, financial due diligence, and aligning culture, to ensure qualitatively and quantitatively the merger is good for the members. During the due diligence period, careful evaluation of the other credit union’s financial position is essential to determining whether the merger should and can proceed. Safety and soundness is always a major consideration of the regulators when considering a merger application. Usually, conducting financial due diligence, including modeling the overlay of both organization’s financials, is the first step after signing a Mutual NDA. Once complete, it can be a bail-out point for many credit unions. Executive compensation plans and credit risk tend to be areas where credit unions face challenges or risks that may not be apparent when reviewing a 5300. Failure to identify and address potential financial risks or liabilities may lead to significant losses or undermine the projected benefits of the merger. Beyond financial due diligence lies culture. Are you aligned? How do you go about this process in due diligence? What scorecard, metric or good old-fashioned method should you use? After thousands of mergers, we’ve learned a few things. One of them: trust is critical.

 

continue reading »