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.

A second challenge, and perhaps one that is not discussed enough, is communication. Clear and concise communication between the credit unions is essential. It may sound basic, but it can be a pitfall. Ongoing and regular communication throughout the due diligence period, agreement drafting process, application and submission process, the member vote process, and the approval and integration processes, is critical to ensure success. Ensuring that communication about the merger itself is timed and managed appropriately—not just to members, but to employees of both credit unions. Transparency makes the process easier, however with business transactions, timing is essential. Being open and detailed about deal-points and dealbreakers helps alleviate challenges, as each credit union works through what they value in consummation of the merger. As you see in the trades, Merger Related Financial Arrangements (MRFA) get a lot of attention, and it is only going to increase.

Another challenge credit unions encounter during the merger process is the consolidation of technology systems, data, and costs associated therewith. Credit unions rely heavily on many vendor software technologies, applications, and databases to manage their operations, from the core to member relationship management tools and everything in between. Integrating these systems seamlessly can be a complex, resource-intensive, and time-consuming process, requiring extensive planning and testing. Issues such as data migration errors, vendor scheduling, or compatibility issues can disrupt operations, leading to frustration for both employees and members. Generally, vendor technology contracts include major financial components. Thorough due diligence, which includes contract termination clause review, should reveal further potential financial impacts. From this, it leads to attempted negotiations to decrease those costs and fees.

Technology remains a reason mergers continue to occur, therefore the challenges that come from technology must be considered a challenge. This is particularly true as many mergers run side-by- side between Legal Day 1 and Operational Day 1 (Integration Day1). We have seen more than a few issues occur (despite everyone’s best efforts), which allows us to help credit unions better plan ahead.

Despite the three challenges outlined above (and there are many more), credit union mergers may present opportunities for scale and growth, improved operational efficiencies, new geographic markets (or market diversity), and enhanced technology offerings. Successful mergers require careful planning and due diligence, effective communication, and a strong commitment to addressing potential risks. Credit unions must work through a regulatory-intensive process and prepare for long-term success in an increasingly competitive financial landscape. By partnering with a firm that has decades of credit union merger experience, it can mitigate risks and ensure a smoother merger process.

Jennifer Williams is an attorney currently serving as Of Counsel at SW&M. Prior to joining SW&M, Jennifer held various positions at prominent broker dealers in New York, NY, establishing a solid foundation in financial services law. In 2011, she transitioned to the credit union industry and held roles in executive leadership at three different credit unions varying in size from $200 million to $4 billion in assets. Jennifer is dedicated to elevating the credit union movement and actively engages with civic organizations, making a positive impact beyond her professional responsibilities. She holds bachelor’s degrees in criminal justice, history, and political science, obtained her Juris Doctor (JD) from Indiana University School of Law and has licenses to practice law in Colorado and New York.