Thinking of Merging? Check This First

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The following article, part of CU Journal's July 13 Bonus Content, is an extended version of the way it appeared in print.

Once a credit union has decided to seek a merger partner, it can significantly increase the likelihood of a good match and a successful merger by anticipating the process of due diligence and the execution of the merger.

By getting information ready for review by a potential partner, the credit union:

  • Gives itself an opportunity to correct any errors and omissions in current practice and documentation.
  • Supplies assurance to a potential merger partner that reliable information is available and that operations at the merging credit union are under control.
  • Makes it easier and quicker for a potential partner to evaluate and execute the merger.
  • Catalogs the characteristics desired in a merger partner.
  • Provides a more satisfactory and seamless transition for its members.

Gather copies of all of the merging credit union documentation required for the due diligence process of a prospective merger partner. A complete, well-organized package makes a strong statement to a potential partner. Digital media has its advantages, but hard copy is preferred for this purpose. The table of contents should reflect the categories of information and should contain an entry for each document. Page numbers are not particularly useful but tabs corresponding to the table of contents are essential. The contents of the described package are in addition to current financial and portfolio information.Historical documents are required. They include, but are not limited to, the past two years of examination reports, audits of all sorts, security reviews, IRS reports, ALM analysis and 5300 reports. As much as three years of data describing delinquency, charge-offs and the allowance for loan losses is required, both in terms of dollars and as a percentage of total loans.
Leases and contracts are an important part of the due diligence process. A copy of each lease and contract should be included in the package, along with a standardized one-page summary of the agreement. A good summary includes the purpose of the contract/lease, the periodic costs and payment schedule, the term, option periods, maturity date, trigger notice dates, provisions for default and cures, and an analysis of the cost of early termination. An important part of the summary is an analysis of the limitations on assignment. Contracts silent about successors, assigns and early termination can be especially difficult to resolve.

The leases and contracts pertain to a wide variety of goods and services. They include but are not limited to maintenance agreements, "Alliance" or "Partnership" agreements, Credit Life/Credit Disability, Collateral Protection Insurance, Broker dealer arrangements, Real Estate Loan Investor Master Agreements, Telephone System Agreement, Item Processing Contracts, and Courtesy Pay.

Provide a full record of potential, threatened and pending litigation that could have a material impact upon the credit union. In gauging materiality, err on the side of full disclosure. Include copies of all opinion letters provided to outside auditors during the most recent audit.

List and explain contingent liabilities. These would include NCUA and/or state regulator Documents of Resolution, investigations/administrative actions, EEOC and state regulator investigations, OFCCP investigations, wage and hour investigations, worker compensation actions, any other state and federal administrative actions as well as repurchase obligations with third party real estate purchases and sellers.

Fully describe all retirement plans: self-funded or third party contracts, vendors, plan contracts and documents, latest summary plan descriptions, latest 5500 IRS tax filings, participant lists, funding status from most recent audit, penalties for plan or participant terminations, and any additional funding requirement obligations. Provide copies of contracts for all employees under contract.

Describe bond and insurance coverage for the credit union, e.g., package of protection, liability insurance, property insurance and bond with copies of all endorsements. List and explain all pending and potential bond claims.

List all real property owned by the merging credit union. For each property include the most recent fair market value appraisal of the property and improvements, copies of the purchase and sale agreement for each property, the last two property tax bills paid, and professional reports regarding hazardous or toxic materials.

Incorporate some documents not usually examined during due diligence. They will eventually be required but are seldom reviewed during due diligence for two reasons:

  • All available resources are engaged in gathering the documentation listed above, reviewing it and evaluating the financials and various portfolios.
  • Nothing in these documents is likely to change the merger decision.

These documents do, however, contain information that can have a significant impact upon the smooth execution of the merger.Include credit union policies in the package. Gathering and cataloging the policies provides the merging credit union an opportunity to confirm that Board review and ratification are current. It is also an opportunity to validate that current practices conform to the policies. The continuing credit union will eventually have to review the policies to determine how to resolve them with its own.
Forms are a useful addition to the package. They support a cross-reference to the list of vendors and contracts, and provide insight into credit union operations. The number and type of forms and checklists indicate the credit union's level of devotion to detail and control, which may be more or less than the potential merger partner.

Supply a full inventory of hardware, software, and peripherals. Include a detailed description of the communication network. These support another useful cross-reference to the list of vendors and contracts. Report the status of licenses and patches.

Provide a schematic of the logical relationships among application systems. In addition to providing another source for a cross-reference with the list of vendors and contracts, the schematic illustrates the level of complexity and promotes an understanding of the difficulty of abandoning a system.

Supply architectural schematics of buildings and properties and provide a schedule of monthly costs related to each property.

Include a current organizational chart. For each position, report full time/part time, exempt/non-exempt, years of service.

Describe some elements of current operations that demonstrate the credit union's values. Include items that are especially important and visible to members.

Each credit union has made hundreds of decisions about how it will conduct its business. These decisions provide a more accurate and nuanced understanding of the organizational culture than can be gleaned through conversations about Mission, Vision and Values. It is possible for two credit unions to have complete philosophical agreement and be incompatible in the real world.

These elements are hard to identify because they are so embedded in the fabric of the credit union. Here are some questions that can help bring them to the surface:

  • Are members encouraged to come into the branch(es) because it builds community, or encouraged to use self-service channels because it is more cost efficient?
  • How many members attend the annual meeting? What do they expect?
  • Are different levels of service provided, depending upon the member's value to the credit union? How is that value measured?
  • What services are provided to members in the lobby? Copies, faxes, notary, coin counting, traveler's checks, money orders, official checks? What are the fees?
  • Is free coffee, ice tea or soda provided in the lobby? What about the break room?

Disagreement on these issues may or may not be sufficient reason to abandon a potential merger. Even so, there is tremendous value in discussing them before a decision is made.All of this information must be gathered during the merger process. The sooner it is assembled, the more valuable it is. Preparation in advance of serious merger discussions strengthens the position of the merging credit union by building credibility with a potential partner. It provides the basis for a more informed choice of partner and facilitates both due diligence and the execution of the merger.
Carol O. Stryker is principal of Symbiotic Solutions, an operations management consulting firm. She was previously CIO/CFO of Texas Dow Employees CU, and can be reached at

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