The Anatomy of an Ideal Credit Union Merger Partner

Credit union mergers and acquisitions have been on the rise for several years. In fact, credit unions have been merging at the rate of 2.9 percent per year since the industry reached its peak in 1969 with nearly 24,000 credit unions.

While mergers are not new, what is new is an increase in strategic mergers—those driven by the need or desire for economies of scale, regulatory pressures, and consumer demand for more leading-edge services and banking products. A growing number of credit unions are considering mergers as a smart way to grow branch network, build membership, expand fields of membership, and leverage economies of scale.

Whereas in the past acquisitions and mergers were typically driven out of necessity when a credit union was floundering, today even large entities are combining forces strategically—driven to boost their combined assets into one even-stronger organization.

In a study on credit unions, the Filene Research Institute found the seeds of a trend—large credit union mergers—or what Filene termed “mergers of equals.” This is when two healthy credit unions of similar size combine assets and capabilities in order to improve their competitive position in the marketplace.

In fact, it’s no longer unusual to find two credit unions worth over $500 million dollar become a single billion-dollar entity—something the Credit Union Times calls “the billion dollar club.” The publication pointed out that acquisitions and mergers are a leading factor in credit union growth strategies today.

Initial Considerations for Identifying a Strategic Merger Partner

A credit union first needs to understand the bigger picture of the optimal markets in which the credit union should compete, and the best methods for gaining a presence in those markets. A credit union can grow organically over time by adding branches, technology and marketing. Alternatively, a credit union can expedite its entry into new geographies, associational or employee based markets through mergers.

This is the time to ask tough questions about future growth plans in terms of size and geography, preferred member demographic, and characteristics and culture of ideal merger partners. For example:

Which geographic areas would you like to grow into?
What new member demographics would you like to add?
Which new fields of membership do you want to pursue?
What new or upgraded services and products do you want to add?
What is the preferred financial standing of any potential merger partners?
What elements are necessary for cultural compatibility?

Target Credit Union Evaluation Criteria

Once the markets are selected, a credit union must evaluate the criteria for selecting merger partners. There are six broad areas to examine in determining a credit union’s desirability as a merger partner:

Fields of membership. When merging to accomplish this goal, look for a merger partner with a broad field of membership, even if they have a small overall membership. This broader base will open up the opportunities to reach communities you might not otherwise qualify for, including those with other occupational or associational characteristics.

Membership demographics. Many credit unions may wish to expand their membership demographics into new markets—especially if their current membership is aging or if the category is no longer as vibrant as it once was. For example, finding merger partners with new member demographics and experience in specific areas, such as millenials or high-income business sectors.

Branch network. Whether you have an on-site space from a sponsor facility or one or more branch offices in the community, merging with a credit union with one or more branches offers many advantages. Together, you will be better able to serve your current members, increase convenience to the combined membership, and also gain the opportunity to reach a wider demographic.

Product expertise. Merging with a credit union with a strong background in areas where you are weaker, such as small business lending, provides your organization with the opportunity to strengthen in these areas.

Leadership strengths. To compete in today’s more competitive banking landscape requires specific leadership skills. One way to enrich leadership is by merging with another credit union that possesses those skills—such as in business loans, technology, analytics, or new field of memberships.

Financial strength and performance. Increasingly, credit unions will face financial market pressures, for example, around compliance costs and economies of scale, which will force them to pursue growth. According to MiBiz: “Federal regulations are expected only to toughen in the years ahead, pushing compliance costs up and potentially forcing even healthy but smaller credit unions to look at partnering to generate economies of scale.” Ultimately, credit unions are looking for opportunities to gain efficiencies and often reinvest these gains back into member benefits. Some of the financial performance metrics that acquirers should consider include:

Current and historical trends of asset size
Net worth to asset ratio
Loan quality (loan delinquencies and write-offs)
Value of facilities
Return on assets (earnings)
Deposit and loan mix
Expenses (operating to asset ratio, operating expense to revenue, dates of expiring contracts, etc.)

A list of viable merger candidates can now be identified based on how well they match these criteria.

Discovering an Ideal Merger Partner with an Experienced Advisor

Merging with another entity opens the doors of opportunity for credit unions—allowing them to grow without adding costs. Partnering with an experienced merger expert can streamline the entire process, helping to ensure that the two merging credit unions find common ground, overcome joint challenges, and identify innovative solutions. It’s important to work with a team that has in-depth merger experience, an array of industry contacts, and a proven methodology for managing the merger process from start to finish.