Exercising due diligence can reveal problems that may change thenature of the merger or even lead to its cancellation.

That is one of the findings from a new white paper from the CUNALending Council, “Lending Due Diligence in a Merger,” which isbased on information gathered from credit union experts who haveparticipated in multiple mergers.

The white paper explores the steps involved in performinglendingdue diligence including peeling back the onion of lendingoperations layer by layer to determine whether proposed mergerpartners are a good fit, according to the council. The researchalso examines data, segments the portfolio and determines theallowance for loan and lease losses.

“There will always be differences in the loan portfolio; whatyou need to understand is how big are the differences and where dothey exist,” said Steve Miller, director of operations/senioranalyst for Twenty-Twenty Analytics, a Chicago-based consultingfirm that performs loan portfolio risk analytics and is a CUNAStrategic Service provider for loan portfolio analysis andregulatory compliance.

Credit union experts also shared information about how to handlethe red flags that mark problem areas. According to the research,the due diligence process should identify these potential problems,measure the risk and then allow for proper reserves to allocateagainst possible losses.

Examining the collections process is also essential, the councilnoted.

“In some cases, the post-merger gains that will be achievedthrough scalability can help offset potential losses, allowing themerger to go forward despite higher-than-expected demands onreserves,” the white paper noted. “In other cases, due diligencecan reveal problems that may change the nature of the merger oreven lead to its cancellation.”

CUNA Council membersare eligible to receive complimentary copies of the white paper.Non-Council members may purchase white papers for $50 per copy.