Merger and acquisition business strategy.

In 2018, the long-term trend of credit union consolidation continued; still, cooperatives saw strong financial growth as membership expanded to record levels.

The credit union industry underwent 194 mergers over the calendar year, bringing the institution count at year-end to 5,492. Ten years ago, 7,697 institutions operated throughout the U.S. and despite 2,205 less credit unions in 2018, membership has soared 31%. In the midst of financial crisis and the aftermath of the Great Recession, American consumers turned to member-owned financial cooperatives in record numbers for their not-for-profit, member-focused business model.

Consolidations play a role in how credit unions have continued to provide financial services to a continually growing membership base. Average member relationship, the total retail value of the average member’s relationship with their credit union, reached $18,775 in 2018. This measure has continually increased at year-end over the last couple of decades and is up $5,076 since 2008. This is indicative that beyond the trend of a growing membership base, members have also chosen to expand their relationships with their credit unions.

Share draft penetration, which measures the percentage of members with a share draft account and is a common indicator of whether the credit union is the member’s primary financial institution, reached 57.6% (up 11.7 percentage points since 2008).

Credit card (17.5%) and auto (21.2%) penetration also increased in the past decade, up 3.3 and 4.1 percentage points, respectively. Members are continually choosing to diversify their relationship with the credit union. This, coupled with an increasing average member relationship, depicts a growing sense of loyalty among credit union members over the past decade.

The credit union balance sheet has grown alongside member metrics. Total assets at cooperatives are up 78.8% in the last decade, to $1.5 trillion. Over that time period, loans are up 83.7% and shares are up 78.6% to $1.1 trillion and $1.2 trillion, respectively. This represents record levels on both sides of the balance sheet.

The not-for-profit credit union model offers value to consumers, who, in turn, are increasingly making cooperatives their financial institution of choice. Though there are increasingly fewer credit unions to choose from, efficiencies, scale and product offerings, among other factors, have allowed credit unions to effectively serve the financial needs of their members.

Mergers by the Numbers

Of the 194 credit union mergers in 2018, six were considered a purchase and acquisition (P&A). There are fundamental differences between a merger and a P&A. A P&A, often at the behest of the NCUA, is when the acquiring credit union attains some of the assets and liabilities of a troubled credit union that typically is then liquidated.

A P&A is largely exercised to both protect the member and pass on valuable assets that failing credit union has attained. A merger, meanwhile, is a strategic alignment of business between two credit unions. This looks to use cumulative efforts and resources to better serve the surviving credit union and members alike.

Traditionally, merged credit unions are small and lack the resources and scale to efficiently provide financial services to their members. This continued in 2018, with 185 of the 194 mergers during the year being credit unions with less than $100 million in assets. The average size of acquiring credit unions is more diverse. There were 173 last year – some credit unions completed more than one merger – 56 of them were less than $100 million in assets themselves, while only 29 were billion-dollar credit unions. The majority of the credit unions were in the mid-range, between $100 million and $1 billion.

In 2018, Pennsylvania had the most mergers of any state at 18, followed by New York (13), Ohio (12), Texas (10) and Michigan (10). The large majority of mergers in Pennsylvania, however, were small credit unions, as the state saw only $103.4 million merged. New York, on the other hand, saw $1.1 billion merged, primarily due to P&As as a result of taxi medallion issues.

Merger Strategy in Action

A movement built on a community model, credit unions all began as small collectives and each had its own blend of reasons for merging into another. Factors such as seeking scale to expand product offering and services, business model alignment and efficiencies, vanishing SEGs, or simply being unable to find leadership in the wake of a CEO retirement are all possible drivers of when a credit union would seek out a merger.

The bottom line is the same: Mergers, if undertaken for the right reasons, should provide a credit union with necessary resources to properly serve its membership base, meeting growing demands for products and services necessary to thrive in markets with traditional and disruptive competitors. The members of the surviving credit union are served by ownership in an organization with hopefully better prospects for sustainable operating efficiencies, and access to capital and other resources that are essential to sound financial performance.

While mergers should, at their foremost, be beneficial to the member and institution alike, this is not the case in all mergers that occur in the industry today. Credit unions must take into account how a merger will promote strategic alignment and how it can be beneficial to its growing membership base.

These Ratios Are Capital

The capital ratio is an important metric to monitor leading up to a merger. Calculated as capital as a percentage of assets, the capital ratio, to an extent, is generally directly correlated to financial performance. Capital is the leading proponent to credit union growth, and a merger can lead to capital injection at the acquiring credit union, which has proven to be an easy way to bolster growth.

The year-end 2017 capital ratio of credit unions that merged in 2018 was 8.33%, three percentage points below the industry average at that time. A ratio of 8.33% is still considered well-capitalized, so in general, merged credit unions did have the potential to grow.

This indicates that, on average, merging credit unions are not just being squeezed out but are rather deliberately looking to a merger to meet specific strategic goals. Merged credit unions will often also offer a dividend payment to their members in advance of the merger as a token of their common wealth.

While mergers have seen the population of credit unions shrink, when strategically executed, the level of service from the institutions and engagement from their members will often rise.

Aman Johal

Aman Johal is an Industry Analyst for Callahan & Associates. He can be reached at 800-446-7453 or