3 minutes
Five considerations that should not be overlooked.
This is a sidebar from the article "No Surprises" in the March issue of CUES' Credit Union Management magazine.
Stephen G. Morrissette, adjunct associate professor of strategic management with the University of Chicago’s Booth School of Business and lead faculty for CUES’ Strategic Growth Institute, identifies direct costs that may be overlooked or underestimated in merger planning:
Fringe benefits. The magnitude of changes in employee benefit costs may vary widely, depending on which plans the continuing credit union offers to all staff. In selecting which benefits to adopt going forward, the credit union may choose to provide the health care plan with more generous benefits, for example, or a vacation and sick leave policy that offers more paid time off.
Member loss. The rate of members closing their accounts because of a merger can be hard to predict but represents a potentially significant loss of income. It could be 3 percent, 5 percent or even 10 percent of the membership of the merging credit union—or higher if there’s a big overlap in membership. “If members have substantial deposit accounts with both credit unions, they might need to leave because of deposit insurance limits,” Morrissette notes.
Deposit rate, loan rate and fee changes. Smaller credit unions typically charge higher loan rates than larger institutions, so when the loans to members of a smaller merging credit union renew, they will do so at a lower rate. The same dynamic is true in reverse for deposits: Members of a smaller merging credit union may see their deposit rates increase, which represents added expense for the continuing credit union. “Lower loan rates and higher deposit rates are well-documented benefits of mergers to members, but they hurt the profitability of the credit union, so the continuing credit union might need to factor in lower revenue and higher interest expenses,” he says. Applying new fee schedules will also affect income. If one credit union charges $28 overdraft fees and the other charges $25, that fee income will either decrease or increase following the merger. “No two credit unions charge exactly the same fees, so you have to watch for those differences,” Morrissette advises.
Productivity and morale. Changes in employee output during and immediately following a merger are not unexpected but can be difficult to quantify.
Financial reporting differences. When any two businesses merge, under accounting rules such as Rule 141R, financial statements and ratio calculations may change. “At the end of the day, those reporting issues could affect the finances you report to regulators,” Morrissette says.
Karen Bankston is a long-time contributor to Credit Union Management. She is the proprietor of Precision Prose, Eugene, Ore.
