Nexa Collections

Guide for Mergers and Acquisitions of Credit Unions

Mergers and Acquisitions (M&A) in the credit union sector involve various important aspects, including strategic, operational, and legal considerations. Here’s a detailed overview:

Key Merger Team

During a credit union merger, various experts are essential to ensure a smooth and compliant process.

  1. Mergers and Acquisitions Consultants: Specialists in guiding the overall merger process, including identifying potential partners, facilitating negotiations, and managing integration strategies.
  2. Accountants and Financial Advisors: They conduct due diligence, financial analysis, valuation of assets, and prepare pro forma financial statements.
  3. Lawyers: Legal experts ensure compliance with regulatory requirements, draft and review merger agreements, and handle any legal issues that arise.
  4. Human Resources Professionals: HR teams manage employee communications, retention strategies, cultural integration, and organizational restructuring.
  5. IT Specialists: Important for integrating technology systems, especially online banking platforms, and ensuring data security during the transition.
  6. Communication and Public Relations Experts: These professionals manage internal and external communications to maintain transparency and manage the organization’s public image.
  7. Regulatory and Compliance Experts: They ensure the merger adheres to all relevant regulations and guidelines, particularly those set by bodies like the National Credit Union Administration (NCUA).

Strategic and Operational Aspects

  1. Common Reasons for Mergers: The primary reasons for credit union mergers include expanding services, addressing member growth prospects, and dealing with succession planning. The majority of these mergers are between small and larger credit unions​​.
  2. Value Creation for Members: Mergers can positively impact members, especially of smaller credit unions, by offering enhanced technology, a broader range of products, and better rates. Larger credit unions benefit through membership and asset growth, access to established branch offices, and diversification of their market and balance sheet​​.
  3. Due Diligence and Organizational Fit: Successful mergers require thorough due diligence, with organizational and cultural fit being critical determinants of success. Mergers are not guaranteed to be successful, so assessing compatibility is crucial​​.
  4. Industry Consolidation: Mergers are common across financial services, including banks and fintechs. An example is the proposed merger between the Mountain West Credit Union Association and Northwest Credit Union Association, serving more than 300 credit unions and 12.3 million members​​.
  5. Alternatives to Traditional Mergers: Credit unions also explore unique collaboration formulas such as sharing back-office services and creative leadership models. For instance, the merger of three Wisconsin credit unions – Best Advantage, CitizensFirst, and Lakeview – was a collaborative effort. Another example is the merger of Infinity Credit Union and Deere Employees Credit Union, where they retained their brands and local control while combining resources​​.
  6. Growing Competitive Pressures: Credit unions face growing competitive pressures, technological expectations, and shrinking margins, making growth and scaling through collaboration essential​​.

Legal Aspects

  1. NCUA’s Rules and Regulations (Part 708b): This part of the National Credit Union Administration’s (NCUA) regulations covers mergers of insured credit unions. It outlines the legal framework and procedural requirements for mergers​​.
  2. Member-to-Member Communications: The NCUA provides guidance on how credit unions should communicate with their members during the merger process, ensuring transparency and member involvement​​.
  3. Federal Register Notice for Final Rule: The NCUA’s 2018 final rule, available in the Federal Register, includes updates and modifications to the merger process and requirements​​.
  4. Merger Forms and Field of Membership Compatibility Tools: The NCUA offers fillable merger forms and tools to assist credit unions in determining the compatibility of their fields of membership. This also includes whether compensation disclosure is required during mergers​​.

For Employee Retention and Anxiety Reduction:

  1. Communication and Involvement: Executives must balance confidentiality with openness. It’s crucial to involve key managers early in the process to support their colleagues through the transition. Transparency helps to ease employee anxieties, even if it’s just to communicate what isn’t known yet. Human Resources (HR) should be involved from the start to help manage any information leaks and their consequences​​.
  2. Culture Integration: Cultural integration should be a priority. Conduct surveys at both credit unions to understand the most important cultural aspects and plan to merge these cultures. This is especially crucial when credit unions acquire banks, as they tend to have different values​​.
  3. Retention Strategies: Offering stay bonuses to key talent is effective in reducing voluntary turnover. These bonuses encourage critical employees to stay through the transition period, which is typically six months to a year. Monitoring ongoing employee engagement is also important, as mergers, especially into new markets, can cause stress and disengagement​​.

For Maintaining Customer Stability:

  1. Strategic Planning and Understanding: Ensure that the board of directors, executives, and members understand the merger’s purpose and objectives, how it fits into the strategic plan, and its potential impact on employees and customers. This step is critical for a successful merger​​.
  2. Compatibility Assessment: Assessing compatibility in strategic focus, financial characteristics, membership characteristics, values, and culture is crucial. This process often involves experienced M&A consultants to facilitate meetings and keep discussions on track​​.
  3. Due Diligence and Fair Value Analysis: Conducting organizational and loan due diligence, valuation of the balance sheet, and calculating pro forma financial projections are essential. These steps help in understanding the financial impact of the merger and ensuring that it benefits both entities and their members​​.
  4. Integration Planning: Develop a detailed integration plan that includes timelines, clear roles and responsibilities, communication strategies with existing and newly merged members, and processing and verification of merger transactions. Effective change management for employees of both entities is also crucial to ensure a smooth transition​​.

General Recommendations:

  • Proactive Communication: Regularly update all stakeholders, including employees and members, about the merger’s progress and how it will benefit them.
  • Supportive Leadership: Leaders should be empathetic and accessible, offering support and addressing concerns promptly.
  • Employee Involvement: Involve employees in the merger process, which can reduce anxiety by making them feel part of the decision-making.
  • Customer Focus: Keep customer service and experience as a priority throughout the merger process to ensure that customer needs are continually met.
  • Training and Development: Provide training to employees about new systems, processes, or cultures to ease the transition and maintain productivity.

In summary, credit union mergers are complex processes that require a balance of strategic planning, operational efficiency, member focus, and strict adherence to legal requirements. The successful integration of these aspects can lead to beneficial outcomes for both the merging entities and their members.