Credit union mergers occur for varying reasons, including economic, operational, and environmental.
Over the past 16 years, there have been between 210 and 331 credit union mergers each year. That’s, on average, more than 50 mergers every quarter.
With numbers like this, most credit union executives have either been through a merger, been approached for a merger, or thought about a merger. If and when the time comes to evaluate a merger, it’s important to consider aspects beyond surface logistics and dig deeper to the heart of what the new credit union would look like.
There are two ways to look at the following list.
The first is for an institution that is thinking about merging into another one, the “merged credit union.” These are the questions a credit union will want to ask its potential partner to ensure member interest is protected. Use this list to create a framework of questions to ask.
The second way to look at this list is as a credit union that is trying to merge another credit union into its existing institution, the “acquiring credit union.” Thinking about these questions will help the acquiring institution communicate how much it values its potential merger partner and members. The answers to these questions should build a case to a potential partner credit union that merging is the best way to preserve the interests of its members. Acquiring institutions can use this list to create talking points on the credit union’s own merits and motivations.
1. What value does the acquiring credit union provide members?
Merged Credit Union: Are interest and dividend rates in line or better than existing rates? Are the rates offered at the acquiring institution going to be favorable to newly merged members? Does the acquiring credit union treat fees similarly to its potential merger partner? Are there technology offerings the acquiring credit union has that a merger partner does not (or vice versa)?
An adverse answer to any of these questions is not an automatic disqualifier; however, when merging, it is important to keep member services and relationships top-of-mind.
Acquiring Credit Union: Provide a side-by-side comparison of rates and technological offerings at both credit unions. Consider the member impact and discuss how the surviving credit union will better serve members. Consider pulling comparative Return of the Member scores (click here to learn more about ROM) to demonstrate how the credit union operates in the members’ best interests. Take this opportunity to discuss plans for new products and technology so the merged credit union has insight into the direction of the continuing credit union.
2. How does the acquiring credit union perform financially?
Merged Credit Union: Is the acquiring credit union running well and able to devote time and resources to a successful merger?
Make sure the acquiring institution is heathy. Consider traditional safety and soundness measures — such as asset quality, capital adequacy, and income and expense ratios — as well as productivity metrics.
To get a better sense of productivity, look at metrics such as the efficiency ratio, operating expense ratio, members per FTE (full-time equivalent), loan originations per FTE, revenue over compensation, accounts per FTE, and average member relationship. This will provide insight into the acquiring credit union’s operations and employee dynamics.
Acquiring Credit Union: The acquiring credit union will want to dive into the performance metrics of its potential merger partner to protect itself and its members. It is likewise important for the acquiring institution to be transparent about its own financial and productivity metrics.
Demonstrate well-managed operations by showing off metrics that establish a pattern of success or improvement. Model what a combined institution would look like financially, and show how the combined institution will be stronger than the sum of its parts.
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3. What is the business model at the acquiring credit union?
Merged Credit Union: What is the business model of the acquiring institution, and how will the merged credit union fit into that?
Look at loan composition. Does the acquiring credit union participate in loan categories or activities, such as indirect lending, that could present new opportunities for the members or the communities of the merged credit union?
What about the branch network? Would the acquiring credit union’s footprint serve merged credit union members well?
What’s the strategy behind the acquiring credit union’s earnings model? Some credit unions derive non-interest income from affiliations with credit union service organizations (CUSOs). Is the acquiring institution involved in a wholly owned CUSO or a collaborative multi-owned CUSO?
Most importantly, how does this merger fit into the acquiring credit union’s long-term growth plan?
Acquiring Credit Union: If the acquiring credit union doesn’t have a clearly defined business model and strategic direction, now’s the time to shore that up. Then, be honest and transparent with the merged credit union.
During the vetting process, consider whether the merger will address gaps in certain areas. Compare loan compositions, for example, to identify where the other credit union might have complementary strengths.
If a goal of the credit union is to build a diverse team, it would be helpful to bring on employees with different specialties.