Considerations before Credit Unions Merge

Lloyds Banking Group’s £4m grant scheme offers the availability of seed funding towards the cost of mergers between Credit Unions. This will certainly find favour with the PRA who have not been unsubtle in their suggestions that struggling Credit Unions should merge with stronger counterparties. With transfers of engagement likely to be on the increase in the sector here are some of the key points to consider before acquiring another Credit Union:

  • Recoverability of assets – One of the most obvious considerations is the recoverability of the assets being acquired, and in particular, the loans. High bad debts is a common reason for a Credit Union struggling financially. Care therefore needs to be taken in terms of identifying the recoverability of the loans that you are acquiring. In addition, it should be considered whether the fixed assets in the balance sheet are worth anything to your Credit Union. Assets such as software or computers may have been capitalised that you do not intend to use.
  • Hidden costs – The existence of liabilities that are not currently shown in the Balance Sheet should be considered. For example, there could be legal cases against the Credit Union, including PPI claims or action by the regulator which have not been provided for in the Balance Sheet. This shows the importance of carrying out due diligence in order to identify any such hidden costs.
  • Staff – On acquisition of another Credit Union any paid staff would normally transfer over to your Credit Union under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). It is therefore important to check the legal position and ensure that the costs of these staff members are reflected in your financial plans. The reaction of staff of both organisations to the merger will need to managed.
  • Members – The reaction of members of both organisations to any merger needs to be considered.
  • Funders – Consideration needs to be given as to whether funders would be willing to continue to support the merged organisation. Alternative funding may be available to the merged Credit Union such as the Lloyds grant scheme.
  • Resources – The merger process can be very time consuming for staff, management and the Board as you try to integrate two organisations with different ways of operating (and often two different computer systems). You therefore need to ensure that your Credit Union has the resources available to manage this process while continuing to provide the high level of service to your existing members.
  • Business Planning – A new business plan should be developed when proposing a merger as the Credit Union is likely to undergo major changes. Many people expect economies of scale when there is a merger but this is not often the case.  In some cases the management structure for the new entity can actually increase costs.
  • Accounting – Accounting for the combination is not always straight forward and in most cases is not as simple as adding both balance sheets together. Capital ratios may be affected by the merger. It is therefore worth exploring the impact of the combination with your accountant.
  • Legal Costs– The process of acquiring another Credit Union can result additional legal and professional fees.

We can provide assistance through the process. For further information please see our Due Diligence page.

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