10 Steps to a Successful Merger

By Brian Kidwell, EVP, D. Hilton Associates

The credit union industry has seen a dramatic expansion over the past 40 years. Where once credit unions were only available to select groups, access to credit unions is now available to all. Credit union product offerings span all a family's possible needs, and the technologies available have never been more advanced. The industry’s success is evidenced by the fact that total deposits have grown from $114 billion in 1985 to more than $1.9 trillion today. 

However, over that same 40-year period, the number of credit unions declined from 15,058 to 4,702. The industry continues to see consolidation averaging 3.5% annually, meaning there should be around 3,600 credit unions by 2030. More shocking is that just 438 credit unions (those over $1B in assets) make up 75% of the $1.9 trillion in deposits. Growth rates by asset size continue to suggest that scale is a critical component of the financial services industry. And this is not just a credit union phenomenon, the banking industry consolidates at an identical pace. 

In an environment faced with continued regulatory demands, costly technology offerings, and a shortage of industry talent, credit union mergers will continue to be a strategy for success. While a merger of two organizations could seem simple, the reality is that mergers are difficult to execute and come with a host of challenges. D. Hilton’s more than 30 years of experience in credit union mergers has taught us that no two credit unions are alike. As such, we have established a 10-step process that provides a foundation for executing a successful merger. 

Step 1 – Cultural Alignment. It does not matter how much money you may save through a merger if the organizations’ cultures do not align. Culture is not something that can be forced and takes years to craft. Determining the alignment of both organizations’ cultures and values is critical before going further.  

Step 2 – Board Decision to Explore Deeper.  The next objective is to get any absolutes on the table early. Rarely are these absolutes negotiated to a final offering, but instead are more of an “agreement in principle” before money and time are spent on formal due diligence. Examples of absolutes include Board governance and structure, executive leadership, and surviving charter. Kicking the can down the road on these topics is likely to waste a lot of time and end up in failure. 

Step 3 – Letter of Intent. The letter of intent serves as a formal agreement between both parties and includes any absolutes discussed, an agreement of confidentiality, handling of expenses, and a stated exclusivity period. Because this letter of intent does not mean the merger will happen, it is common to keep the Board decision confidential at this period. 

Step 4 – Due Diligence. Both parties will conduct various due diligence across a wide spectrum of areas. Examples of areas included in due diligence are human resources, products, contracts, accounting, technology, etc. The goal is to determine what the merger will cost (one-time and ongoing), what the combined organization will look like, and what the membership gains through the merger. 

Step 5 – Negotiation/Agreement to Merger. At this point, both parties must be clear on what each is promising. Examples of commitments that may be discussed include employee, volunteer, and operations commitments. Once completed, these agreements will be formalized in a modified letter of intent titled “Agreement to Merge.” Both Boards will make a motion to move forward with the merger (application process) and execute the agreement.

Step 6 – Merger Communications. A communications plan needs to be initiated that involves notifying the employees, members, and community. Particular attention should be placed on clearly communicating the employee and member value identified through this process. If this is truly good for the employees and members, then the only reason it would not be welcomed is if you do a poor job communicating the value. 

Step 7 – Merger Application. A formal merger application will need to be developed for regulators. Included in this application are official merger forms, a merger plan, financials, member vote materials, etc. The application is submitted by the continuing credit union and requests permission from regulators to proceed with a membership vote. 

Step 8 – Special Meeting and Member Vote Process. No merger is complete without a majority affirmative vote by the membership (the majority of those who vote must vote yes). The merging credit union must provide members the opportunity to vote on the merger, typically by holding a special meeting of the membership and conducting a mail ballot process. There are specific rules and timelines that must be adhered to in the voting process. You must also have an independent third party receive, tabulate, and certify the results.

Step 9 – Final Regulatory Approval. Upon a successful vote, submission of the final vote results is provided to regulators along with a request to merge. Regulators will approve the request and provide a final closing date for the merger, at which time the charter of the merging credit union will become inactive. This represents the completion of the merger on paper but not in actuality.

Step 10 – Integration. With final approval, both credit unions can begin the integration process. That can take anywhere from six months to two years, depending on the complexity of the operations, technology, and staffing. 

Mergers require significant time and resources, but the right fit can provide the combined organization with greater opportunities for growth. For more information about D. Hilton’s Merger Services, please visit our website at www.dhilton.com or contact Brian Kidwell at 800.367.0433, ext. 125 / brian@dhilton.com.