Merger Opportunities and Warning Signs

Optimizing Credit Union Financial Health & Avoiding Merger Pitfalls

The word “merger” can incite a variety of feelings, emotions, and opinions from credit union leaders. Ideally, credit union board and executive team members have steadily been working to build an organization which is financially healthy and contributes positive benefits to its members, community, and employees.

All too often, however, successful credit unions disregard potential mergers, which can result in significant loss of opportunities down the road. In fact, according to the NCUA’s recently released video Credit Union Mergers: Trends and Warning Signs, 47% of merging credit unions had a loss of membership for three years prior to merger, and 54% of merging credit unions operated at a loss for three years before merging.

Herein lies the question: When should you, as a credit union leader, consider a merger that will optimize the value of your financial institution?

Optimizing Your Financial Health to Leverage Positive Merger Outcomes

Credit union mergers can be classified into two categories — voluntary and involuntary. The NCUA reports that, since 2012, more than 90% of mergers have been voluntary.

For credit unions considering a merger, doing so in times of financial strength allows for optimal negotiation, which often provides them with the ability to choose from a variety of potential merger partners.

When your institution is financially healthy, you will likely find several suitors from which to choose, allowing you to find a company that best fits your values, culture, and mission.

Conversely, if you wait until your financials are in distress, you will limit the pool of merging partners who will be willing to consider taking on the challenge of your credit union, disabling many points of negotiation you could have had if your credit union was financially healthy.

Potential Merger Pitfalls

In consideration of a potential merger with your organization, credit unions considering acquiring your financial institution will look firmly upon a number of characteristics.

Poor negotiation leverage is often attributable to the following factors:

  • Weak financial health
  • Poor management succession planning
  • Field of membership disruption
  • Poor record-keeping

To avoid these pitfalls, it is imperative that your board and leadership team implement a plan to address these categories as soon as possible. Seeking the services of a professional advisory team can help you leverage your negotiation power and showcase optimal strengths even before you’re facing a merger negotiation.

Click Here to Download White Paper “How Mergers Help Small CUs”

Warning Signs

To avoid losing leverage in merger negotiations, you must be aware of warning signs that could lead to distress in the future. The following are common signals that should warrant attention from credit union leaders:

  • Shrinking membership
  • Lack of service to a unique niche (including services, price, and convenience)
  • Consistently negative earnings
  • Long-term CAMEL 4 ratings or recent CAMEL 3 ratings
  • Overall consistently declining net worth
  • Prompt Corrective Action (PCA)

Don’t Delay

The sooner you address problems and seek resolution, the more likely your organization is to successfully benefit from a merger.

To gain more industry insight regarding financial ratios your leadership should be tracking see the article: 9 Ratios For Considering Whether Your Credit Union Should Merge.