The Why and How of Credit Union Mergers

Credit unions attract members with higher savings rates, lower loan interest rates, and personalized customer service. While these benefits have allowed credit unions to thrive, the number of these financial institutions has steadily decreased in the past 50 years. In the United States, the number of credit unions peaked at 23,000 in 1969. Since then, the number has dwindled to fewer than 5,000. This great decline is attributed mainly to credit union mergers. 

Why Are Credit Union Mergers Commonplace in the Financial Industry?

The financial landscape is rife with regulatory compliance burdens, decreasing profit margins, and stiff competition. In the past decade, credit union mergers have hit big numbers. There are several reasons for consolidation in the credit union industry. 

Weak Financial Condition

Poor financial status is the primary reason behind credit card mergers. Merging credit unions tend to exhibit the following characteristics: 

• Membership decline
• Negative earnings
• Being under Prompt Corrective Action
• Decreasing net worth
• Weak CAMEL rating

CAMEL refers to the rating system used by the NCUA to uniformly evaluate credit unions, to determine the degree of risk to the National Credit Union Share Insurance Fund, and to identify institutions that require supervisory attention.

Enhanced Value for Members

Mergers can lead to considerable value creation for credit union members due to increased services, improved rates, and lower banking fees. Small credit unions may even triple the financial benefits for their members when they merge with a larger institution versus with a smaller credit union. Members of smaller credit unions saw greater benefits in their loans, deposits, and non-interest expenses.

Digital Technology Access

Service digitalization is an attractive asset for prospective members. If a small credit union is unable to invest in creating digital services for its members, it may gain access to digital services after merging with a larger credit union. Digital services have become a crucial component for consumers in recent years as the demand for security and efficiency continually rises. 

Poor Succession Planning

Some credit unions are unable to acquire the right talent to fulfill leadership roles. Mergers allow credit unions to continue services for their members when the succession of a CEO has not been planned. Merging with a larger credit union may also help with executive burnout. In addition, a merger often provides job retention for credit union employees. 

Strategic Growth Planning

Larger credit unions tend to include mergers and acquisitions as part of their strategy for growth. When a credit union merges or acquires another credit union or bank, it gains access to more branch locations, members, and services.

Consolidation is a common theme throughout the financial landscape, including fintech and traditional banks. Although roughly 3% of institutions account for credit union mergers each year, financial experts believe that consolidation with a larger credit union is critical for small credit unions. 

Stiff Competition

Credit unions face fierce competition against traditional banking providers and digital neobanks. To thrive and survive, credit union mergers have become more common. While the total number of credit unions has decreased, the total value of assets has grown. In 2023, the net worth of credit unions increased by $8.7 billion, or 3.8 percent. Most of this growth is concentrated in credit union institutions that have more than $1 billion in assets. 

Forced Regulatory Merger

If a credit union is severely mismanaged or fails to meet performance metrics, the National Credit Union Administration may force a credit union merger to occur. Between 2012 and 2013, only nine percent of mergers involved NCUA. While forced credit union mergers are rare, they put pressure on current credit unions to find ways to drive their bottom line upward.

What Are the Challenges of Credit Union Mergers?

As more mergers occur, the tax-exempt status of credit unions can be challenged by lawmakers if credit union mergers aggressively scale upwards. Large mergers may even devalue services for members due to service and product disruption.

To ensure a successful merger, each credit union should do its due diligence and evaluate multiple prospects to discover the best fit. Merging credit unions should assess the following areas.

Mission Statements and Organizational Culture

If the mission and culture of merging credit unions differ drastically, current consumers may discontinue their memberships. Culture and mission alignment should not be overlooked.

Product and Service Menu

Assess whether the merging institutions have products and services that complement one another. If products are too similar and are offered at different rates, member value may be compromised if a specific product becomes more expensive.

Effects on Staffing and Locations

If branch locations are close together within the same geographic market, closures may occur after a merger. This will affect job retention. 

Financial Health

Each credit union should evaluate the current financial status of the other institution. Regulatory boards can deny a credit union merger if an institution is in financial distress.

Compatible Technology Systems

The information technology systems should be assessed for compatibility. Severe service disruption can occur if members have to learn a new digital platform.

Assessing these five areas will help credit unions find the best fit for potential mergers. 

What Are the Best Practices for Credit Union Mergers?

A credit union merger should include the following best practices. 

Research 

Merging credit unions should research all potential partners. Partners can be identified by using NCUA's Merger Partner Registry or through current professional networks. Once potential partners are identified, assess them for compatibility. 

Regulatory Waiver Evaluation

Continuing credit unions should have a plan for handling any increased assets that result from regulatory waivers that were pre-approved for the merging credit union. 

Strategic Growth Planning

Since credit union mergers are common, include mergers in future growth planning. Proactive measures should include: 

• Succession planning for board members and top executives
• Deal-breaker issues
• Growth objectives for future mergers
• Membership base potential

Negotiation 

Merger contract negotiations should ensure that the members, staff, and community will not experience service disruptions. Negotiate important issues such as contract terms, service menu, staff retention, and bonuses. Board member seats should also be considered.

Merger Provision Enforcement

The NCUA's Office of General Counsel suggests that the merging credit union identify third-party beneficiaries with the authority to enforce the merger contract. 

Integration Planning

This type of planning involves developing a plan to combine the operations of the merging credit unions. Integrative measures should include the following:

• Organizational restructuring
• Employee integration
• Operational consolidation
• Data migration
• Cloud migration

Integration planning should include personnel from the executive, administrative, operational, and IT departments of each merging credit union. Input from each department will help to develop a sound groundwork for efficient integration.

How Can Cloudficient Improve Credit Union Mergers? 

All financial institutions are required to take serious measures to protect the privacy of member financial data. During credit union mergers, data and cloud migration must not incur any privacy breach. At Cloudficient, we offer streamlined migration services to ensure that integration is compliant and breach-free. Products such as PSTComplete, EVComplete and ES1Complete help to reduce risk during integration. All of these are built on our tried-and-tested ReMAD platform which can help your migration to scale to meet the demands of large migration.

With unmatched next generation migration technology, Cloudficient revolutionizes how businesses transform their organization into the cloud. Since data migration cannot be slow during a credit union merger, we offer several solutions to make the merger seamless. 

If you would like to learn more about how to bring Cloudficiency to your credit union merger, visit our website, or contact us.