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Merger Guidance Offered in New NCUA Brochure

Mon, Jun 2, 2014

Alexandria, Virginia

The National Credit Union Administration's Office of Small Credit Union Initiatives (OSCUI) released a new brochure to be used as a resource for credit unions considering a merger. Titled "Truth in Mergers: A Guide for Merging Credit Unions," it provides a framework for credit union managers to begin discussions about the future of their institution.   

"Every strategic plan should include contingencies, including when a merger is worth considering," said OSCUI Director William Myers. "The critical first step is recognizing the early signs that a credit union's long-term viability may be at risk. A credit union still in sound financial condition has more options when it comes to merger partners and is in a better position to negotiate a contract than a credit union in a deteriorated financial condition."  

Between 2003 and 2012 there were 2,462 mergers--an average of one every 1.5 days--according to the NCUA. NCUA also found that many credit unions wait until they are in a precarious financial position before exploring a merger as an option.  

Many of these credit unions exhibit the following negative characteristics:

  • Declining membership: 47% of merging credit unions had negative member growth for three consecutive years prior to failure.  
  • Prompt Corrective Action (PCA): 26% of merging credit unions were in PCA sometime during the three to four years prior to failure. Existing OSCUI research shows that only 33 % of small credit unions recover from PCA within four years.  
  • Negative earnings: 54% of merging credit unions had negative return on average assets for three consecutive years prior to failure.  
  • Declining net worth: 53% of merging credit unions had declining net worth ratios for three consecutive years prior to failure.  
  • Weak CAMEL ratings: 47%of merging credit unions had a composite CAMEL rating of 4, or three consecutive years with a composite rating of 3, prior to failure. None were rated a CAMEL 5.

The brochure draws lessons from a review of more than 430 mergers that took place over an 18-month period. It is designed to help credit unions that might be considering a merger recognize when it might be in its best interest.  

Once a credit union is in financial trouble, a merger becomes more difficult because there will be fewer potential partners, giving the troubled credit union less leverage in any negotiations. If a merger deadline is imposed by the NCUA, options can become increasingly limited.  

The brochure identifies scenarios that can be harbingers that a credit union's viability is at risk. If a credit union recognizes any of these scenarios, it may want to explore merger options, the NCUA advises.

Characteristics include:

  • The credit union's membership is shrinking because it cannot provide desired services, or services on competitive terms, and the credit union's financial condition will not permit improvement.  
  • The credit union is not serving a unique niche via services, convenience or price, among others.  
  • The credit union's financial condition is deteriorating, as evidenced by: a CAMEL 4 or lower, or long-term CAMEL 3, consistently negative earnings, consistently declining net worth, PCA, administrative action or repeat Document of Resolution items.  
  • The credit union does not have a realistic plan to address any of the problems listed above.  
  • Key credit union officials or employees are nearing the end of their careers and no viable options for replacement exist.

It also contains information on how to find a partner, negotiate a merger contract that serves members as well as employees and finalize the transaction.


Source: CUNA News Now