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© 2015 Fox Rothschild
Credit Union Mergers Pros, Cons, Do’s and Don’ts
Presented By: Christopher J. Pippett, Esquire
National Association of Federal Credit Unions Webcast September 16, 2015
Credit Union Organizational Reporting/Supervision Chart
Internal Auditor
Supervisory Committee
Board Committees
Rank and File Employees
Department/Branch Managers
Senior Management
CEO/Manager
Board of Directors
Members
General Powers & Duties of Credit Union Directors and Officers
•DUTY OF CARE •DUTY OF LOYALTY •DUTY OF OBEDIENCE TO THE LAW All of these traditional legal duties apply to credit union directors and committee members.
General Powers & Duties (cont’d.)
• Duty of Care – A director must stay informed and must exercise independent judgment.
• Duty of Loyalty – “Best interests of the credit union”.
• Duty of Obedience to the Law – You have to follow the rules!
Duties Under NCUA Regulations
• Section 701.4 (b) of the regulations incorporated these duties into NCUA regulations as follows:
• Each Federal credit union director has the duty to: – (1) Carry out his or her duties as a director in good faith, in a
manner such director reasonably believes to be in the best interests of the membership of the Federal credit union, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
– (2) Administer the affairs of the Federal credit union fairly and
impartially and without discrimination in favor of or against any particular member;
Duties Under NCUA Regulations
– (3) At the time of election or appointment, or within a
reasonable time thereafter, not to exceed three months, have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the Federal credit union’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors; and
– (4) Direct management’s operations of the Federal credit union
in conformity with the requirements set forth in the Federal Credit Union Act, this chapter, other applicable law, and sound business practices.
Types of Credit Union Mergers
• Voluntary Merger • Emergency Merger • Merger of Equals • Acquisition • Credit Union – Credit Union • Credit Union – Bank
Polling Question 1
• Has your credit union considered merger as part of its strategic plan?
Merger Pros
• Greater resources for compliance, technology marketing, member services, personnel, etc.;
• Continued Service to members; • Expanded Service to members; • Continued employment for valued employees; • Best of both cultures.
Merger Cons
• Expense of terminating existing agreements • Loss of:
– Individual Identity; – Redundant Employees; – Board Seats; – Culture; – Services - if not compatible or available; – Capital (this should not happen);
Merger Do’s
• Have a merger plan/policy (this should be part of your credit union’s succession planning);
• Be proactive; • Be careful; • Conduct appropriate due diligence; • Keep your members first at all times!
Merger Don’ts
• Wait until you have no options! • Get hung up on non-essential items; • Rely upon the regulator in evaluating the
opportunity; • Fail to properly document your actions and
decisions.
Considerations/Merger Policy
• Why do we want to do it? – Will it increase our membership base? – Is their membership base compatible? – Will it increase our asset size? – Will it expand the services we can provide to
our existing members?
Considerations/Merger Policy
• Why do they want to do it? – Are they in financial trouble? – Are there management problems? – Are there personnel problems? – Is personnel compatible? – Is their membership growing, stable? – Will any existing members be
disenfranchised?
Polling Question 2
If your credit union had to merge tomorrow, do you know who the possible candidates are?
Considerations/Merger Policy
• Has a financial review been completed? – Have our independent auditors reviewed the books,
records and financial statements of the target? – Have they interviewed the target’s independent
auditors regarding the financial condition of the target?
– Have they interviewed the examiner, past exam reports and discussed any exceptions?
Considerations/Merger Policy
• Has a legal review been completed? – Thorough review of top fifteen contracts with
third parties measured by dollar volume and critical function.
– Interview with present retained counsel or other counsel handling credit union matters.
– Review any employment agreements with senior management or collective bargaining agreements which are in effect.
Considerations/Merger Policy
• Legal review (cont’d.) – Thorough review of HR files. – Random sampling of business loan files. – Technology Review.
• What do we want for a continuing field of membership?
• Will NCUA Approve it? • Is there another way to do it? (Asset Sale?)
Considerations/Merger Policy
• Merger budget merger – What will this cost? Can we absorb it? – Due Diligence – Accountants, Attorneys,
diversion of personnel time. – Termination of vendor agreements (they
almost always have penalties).
Considerations/Merger Policy
Merger budget (cont’d.) – Hidden losses – you have to anticipate some
level of this based upon delinquencies unforeseen claims etc.
– Integration of operations/personnel? • Are there redundancies in personnel,
locations or equipment? • How much will it cost to combine the
operations/personnel?
Polling Question 3
Does your credit union have an action plan to consider merger opportunities as they arise from time to time?
Merger/Acquisition Requirements
• Regulatory Requirements • NCUA Regulations impose substantial
requirements on Credit Unions that wish to liquidate or that wish to merge with or convert to a bank. These requirements include: – Substantial evaluation and due diligence – Limitations on compensation of executives – Notification of and disclosure to members – Voting procedures.
Merger/Acquisition Requirements
• When a credit union board or management receives an offer from a third party (whether a credit union, bank or other interested party) to acquire the assets of the credit union, the offer must be evaluated in keeping with the above principles.
Merger/Acquisition Requirements
• Evaluation of the offer may be done by: – the board as a whole, or – by a committee appointed by the board.
• In either case, the board or committee must seek independent legal and business advice and counsel in order to effectively fulfill its duties.
Merger/Acquisition Requirements
• Evaluation must be thorough regardless of whether it is a Bank or Credit Union. – Can’t rely on regulator’s review. – Must thoroughly review all material
agreements. – Financial analysis of operations. – Review of Loan Portfolios. – Interview with outside professionals.
Merger/Acquisition Requirements
• If after evaluating the offer, the board determines
that it is clearly not in the best interests of the members - there is no need to present it to the members.
• If, on the other hand, the board determines that the acquisition is or may be in the best interests of the members, the board must present it to the members for review and acceptance in accordance with the credit union’s bylaws.
Conversions
• A board must carefully consider a proposal to convert a credit union to a stock or non stock thrift. Issues to be considered include: – Why is it necessary ? – How will it impact the members? – What is the ultimate game plan? – Will any insiders benefit from the transaction?
Conversions (cont’d)
• If any member of the board or management will
benefit either directly or indirectly from the conversion transaction, (i.e., stock options, being retained as a paid board member after the conversion etc.) that member must not participate in the discussions or decision to take the conversion proposal to the membership. It is a direct conflict of interest (see above).
