Credit unions large and small have contemplated the member and bottom-line benefits of seeking a merger.
From 2002 to 2011, credit union mergers averaged 227 each year, according to Callahan & Associates. Some were seeking a strong partner to help address challenging financials, while others were looking for an equal partner to grow members and gain a competitive edge.
No matter what the motivation, CU mergers involve multifaceted accounting rules and significant regulatory requirements. Chief among them is conducting merger valuations that comply with Accounting Standards Codification (ASC) 805.
But don't think it's too tough to accomplish; there are expert resources available to help evaluate the viability of a potential merger, secure the necessary approvals and assist with the valuation needed for post-merger accounting entries. Mergers offer many advantages, but require careful planning and process management.
Preparing to Merge
A merger valuation can help make the case for combining, clarifying many of the related financial aspects and identifying key strengths and weaknesses. The continuing CU must justify the merger, determining the fair value of the acquired entity and measuring and recognizing the assets and liabilities being assumed.
The surviving CU must also account for goodwill and evaluate it for impairment for each reporting period; under current rules, goodwill can no longer be amortized.
Credit unions typically conduct two types of merger valuations: a macro view and a comprehensive analysis. A broad macro view done early in the process can help determine the path. Is there a strong business case to merge, and should the credit union proceed with the merger? It provides a high-level look at the target credit union's value and provides important background information.
The other type of valuation-a comprehensive analysis-is suitable after the merger has been approved. It drills down into the review process and loan-level details, fulfilling regulatory and accounting requirements. In both cases, auditors play a crucial role. Auditors cannot conduct the actual valuation, but they must be satisfied with the methods used. Engaging the auditor early is most beneficial.
Many credit unions choose to outsource merger valuations because of the complexities involved and expertise needed. Of course, there are associated costs, but CUs should weigh these against the expertise, time and resources required to conduct an internal valuation that is thorough and regulatorily sound.
Merger Costs & Considerations
Beyond the valuation component, credit unions contemplating a merger need to consider other costs and issues in determining the value. Among them are:
* Management contracts. Know the details and stipulations of existing management contracts to avoid surprises and potential expenses that may result from merging two organizations.
* Vendor contracts. Review existing vendor relationships and be aware of any restrictions or costs associated with contract changes or early cancellations. Identify overlaps and complementary services used by the two merging partners.
* Time and resource requirements. Don't underestimate how long the process takes-some mergers take 10-12 months from start to finish, while others are completed in just a matter of months. Many employees will need to contribute to the process, so adjust workloads and staffing accordingly. After you've made a merger decision, there usually isn't a large window of time to complete the required valuation-sometimes only two to three weeks to get everything recorded on the books. Complete as much work in advance as possible.
* Costs associated with legal requirements, data management and third-party outsourcing. Plan for various upfront and ongoing expenses related to the merger, including legal expenses, such as filing fees and merger notification fees, as well as time and costs tied to combining data processing solutions. Also, set aside budget dollars for retaining outside expertise in case it becomes necessary.
Help With The Heavy Lifting
Don't let this list of concerns overshadow the value that a combination might bring! Ask: If we didn't merge, what would we be doing instead to strengthen our organization and bring value to members?
There is a greater willingness within the industry to merge, not just to improve operating efficiencies and footprint expansion, but to gain a competitive advantage, as well. Some are looking to streamline their daily operations and improve costs for expenses such as compliance, while others see the opportunity as a better alternative to building new branches.
Regardless of the incentive, if the timing is right for your CU to consider a merger, you can start now with a little planning and an adjustment of expectations. Then, when the heavy lifting begins, you'll be ahead of the game.
Kevin Kirksey is Valuation and Risk Analytics Manager, and Benedict Voit is ALM Advisor with ALM First Financial Advisors. For info: (800) 752-4628 or www.almfirst.com.