The number of credit unions in the United States declined 27% between 2003 and 2012, from 9,369 to 6,812. Credit unions completed an additional 243 mergers in 2013. Attrition has disproportionately affected smaller institutions, particularly those with less than $50 million in assets. These credit unions have been, and likely will continue to be, especially vulnerable to trends affecting financial institutions in general, such as competitive pressures, ever-increasing regulatory compliance costs, and the persistently low interest rate environment.
A merger is a corporate transaction governed by state or federal law, depending on the institutions involved, generally in which a continuing credit union assumes all of the assets and liabilities of a merging credit union. The merging credit union ceases to exist after it is merged with and into the continuing credit union. Merger structures vary depending on the unique circumstances of each deal, and consideration must be paid to applicable law and the regulations, policy statements and other pronouncements of the applicable chartering authority. Such mergers typically involve two (or more) credit unions, but not always. There has been a modest uptick in merger transactions between credit unions and banks, with five such transactions agreed to in the past two years.
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Relatively healthy credit unions are in a better position to merge than weaker ones that may be experiencing declining financial performance or membership or subject to adverse regulatory action. Yet, the statistics indicate that merging credit unions often wait to merge until their position has seriously deteriorated. According to the NCUA, more than 50% of merging credit unions had negative return on average assets and declining net worth ratios for three consecutive years prior to the merger.
By waiting until the institution has to merge, a credit union may lose leverage to negotiate key deal terms and secure positive outcomes for stakeholders. Typical negotiation points for merging credit unions include maintaining the brand of the merged institution, such as through existing branches, financial consideration for members, treatment of employees, leadership of the continuing credit union, and other social issues. Troubled credit unions are less likely to be able to negotiate favorable terms for these important issues. For example, mergers involving a credit union under a Prompt Corrective Action order are approximately 20% less likely to be significantly negotiated than those in which none of the parties are subject to PCA, according to the NCUA.
Entering the merger process from a position of strength also allows a merging credit union to conduct thorough due diligence, which can reveal issues that might go unnoticed in a more hurried merger of necessity, and generally to move through the process at a more comfortable pace. It also allows a merging credit union to be more selective in choosing a merger partner, as the options for a distressed credit union are likely to be limited.
Recent NCUA guidance underscores the importance of considering a merger as part of the credit union's broader strategic planning process. The NCUA suggests that this should include regular reflection by the board of directors on the institution's mission, membership, product mix, prospects, and succession plan. Engaging in this kind of thinking will help cultivate a sense of which other credit unions might fit as a merger partner, how a merger would affect the institution's membership, and which concerns the board and management would focus on in a negotiation. Ideally, the ultimate decision to merge is the result of a robust and deliberative process, considered against possible alternative strategies.
James H. Hahn and Robert M. Tammero Jr. are attorneys with Partridge Snow & Hahn. They can be reached at [email protected], [email protected] or (401) 861-8200.
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