Experience is the best teacher and it's also the foundation upon which best practices are built and validated.

In the realm of credit union mergers, many executives know about the importance of finding a merger partner with a similar organizational culture, mission statement and field of membership.

And while those fundamental elements are critical, credit union professionals shared some other best practices they learned through their own experience that may help others.

Robert D. Ramirez, president/CEO of the $1.5 billion Vantage West Credit Union in Tucson, Ariz., has been involved in a couple of mergers that perhaps many CEOs would have never considered.

In 1999, Ramirez got a call from the NCUA about whether he would assess merging with the $125 million Saguaro Credit Union in Tucson, which was conserved in December 1998 by state and federal regulators for not operating in a safe and sound manner.

“Their loan portfolio was solid but it was their investment portfolio that caused them some serious problems and they had been basically insolvent,” he recalled. “They were a little aggressive in terms of what they invested in and it just went south on them. They had a negative equity of about $3 million.”

At the time, Vantage West was managing about $250 million in assets and the credit union's capital would take a big hit.

mergers best practices credit union But Ramirez learned that by going into a proposed merger with eyes wide open, he was able to spot a potential opportunity for future growth.

“I told my board that I saw opportunities in merging this credit union that was half our size,” he said. “The credit union's main SEG was the University of Arizona and I think there were about 31,000 members. So this was a great opportunity to increase our membership into the educational area. As it turned out, it really jump started Vantage West into a growth trajectory.”

But Vantage West experienced some merger pains over the short term. Soon after the merger was completed, the credit union's capital dropped by 200 basis points, and there were issues with the IT and systems integration, as well as other challenges.

“It was a challenging and difficult merger, but I would do it again,” he said.

His best practice of keeping his eyes wide open for opportunities with troubled credit unions allowed him to do the same in 2014, when a consolidation with Tombstone Credit Union was proposed to Vantage West.

Tombstone faced financial struggles, making it a good merger candidate, but Ramirez also decided to go through with the merger because the credit union was located in Cochise County, an area where Vantage West was looking to expand.

“If you're able to expand in an area through a merger, that is more cost effective than establishing a presence in that particular region,” he said.

The Tombstone merger gave Vantage West a new potential member pool of about 130,000 people.

Mergers best practices Because the credit union industry will continue to consolidate and mergers of equals may become more prevalent in the years to come, it's important for credit unions to develop a merger preparedness plan, according to Vincent Hui, senior director at Cornerstone Advisors Inc. in Scottsdale, Ariz. He specializes in strategic planning and operational improvements, as well as mergers and acquisitions for small and midsize financial institutions.

A merger preparedness plan is somewhat similar to a business continuity plan, he explained, which will give the credit union a roadmap for how to execute a merger when an opportunity surfaces.

The plan can help the credit union executive team think through all of the key elements of a merger, including what trade-offs are acceptable and not acceptable; who will be responsible for overseeing negotiations, due diligence, staffing, operations, conversion, and products and services; and what partners to bring on board to assist with the merger process, he said.

“One of the worst practices is when the board and management can't agree on what the merger trade-offs are and what happens is that we can end up negotiating against ourselves,” Hui explained. “And that, unfortunately, happens a lot of times. So that's why it's important to get your internal house in order first before you go out into the marketplace.”

Before diving into the laborious work of due diligence, Hui said he found another best practice is for credit unions to ask the tough, deal-breaking questions first, such as: What will be the makeup of the new board? Who is going to be on the management team? Who is going to be the surviving charter? What will the name of the credit union be? And, where will the credit union be headquartered?

Once those key questions and others are addressed, the due diligence process can begin.

However, Hui recommended prioritizing items that need to be reviewed throughout the due diligence process.

“The key to diligence is that you really need to focus on the questions that you need answered,” he said. “I've seen diligence that takes months. People are looking at tons of stuff, and in our view, when you do that it distracts the team and creates anxiety. Does that mean we are not going to be rigorous in our discovery process? No. You look at the important things first and set the stage so that once the deal is announced, you're going to do more discovery, which is ultimately part of the integration planning as well.”

Because the heart of the due diligence process is the financial audit, Ramirez said it's important to allot more time and resources for a thorough review and analysis by the executive team.

“We review loan portfolios, loan files, underwriting standards, collection practices. charge-off loans, delinquent loans, expenses, department budgets, investment programs, investment portfolios, audits, and internal control audits or opinion audits, as well as NCUA exams and state exams for state chartered credit unions,” he explained. “We'll also review at least three years of financials, which can identify trends, but if we spot any abnormalities we'll go back another two years.”

In addition to reviewing board minutes, Vantage West also interviews staff and board members to see if there are any issues they are concerned about or any issues Vantage West can identify from the interviews.

One of the final tasks of any merger is the IT and systems conversion process. Though it is considered a big deal when the conversion process is completed, Hui noted the conversion is simply a means to an end.

“We see a lot of savings not just in the core conversion, but also in debit processing, telecom and other data networks,” he said. “We often see, unfortunately, people leave money on the table either because they haven't focused on it or they did not push as hard because they were accustomed to negotiating from a much smaller size. This is one element of the conversion where you can translate scale into something tangible that allows you to move to the next or better tier of pricing, or puts you in a position to negotiate better pricing.”

Instant Insights /

Credit Unions, Consultants Reveal Merger Best Practices

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