Exercising due diligence can reveal problems that may change the nature of the merger or even lead to its cancellation.

That is one of the findings from a new white paper from the CUNA Lending Council, “Lending Due Diligence in a Merger,” which is based on information gathered from credit union experts who have participated in multiple mergers.

The white paper explores the steps involved in performing lending due diligence including peeling back the onion of lending operations layer by layer to determine whether proposed merger partners are a good fit, according to the council. The research also examines data, segments the portfolio and determines the allowance for loan and lease losses.

“There will always be differences in the loan portfolio; what you need to understand is how big are the differences and where do they exist,” said Steve Miller, director of operations/senior analyst for Twenty-Twenty Analytics, a Chicago-based consulting firm that performs loan portfolio risk analytics and is a CUNA Strategic Service provider for loan portfolio analysis and regulatory compliance.

Credit union experts also shared information about how to handle the red flags that mark problem areas. According to the research, the due diligence process should identify these potential problems, measure the risk and then allow for proper reserves to allocate against possible losses.

Examining the collections process is also essential, the council noted.

“In some cases, the post-merger gains that will be achieved through scalability can help offset potential losses, allowing the merger to go forward despite higher-than-expected demands on reserves,” the white paper noted. “In other cases, due diligence can reveal problems that may change the nature of the merger or even lead to its cancellation.”

CUNA Council members are eligible to receive complimentary copies of the white paper. Non-Council members may purchase white papers for $50 per copy.