To Merge or Not to Merge…

Over the past two years, there has been roughly one credit union merger a day. According to conversations with a number of credit union CEOs, there are five reasons to consider a merger


...That seems to be the question these days. Unable to generate sufficient asset or member growth through organic means and confronted with a challenging environment for the foreseeable future, credit unions are increasingly exploring merger opportunities.

In 2005, there were 302 credit union mergers. While merger activity was down slightly from the previous year (331), the credit union industry is experiencing approximately one merger per day! What is driving this trend towards consolidation?

Five Reasons to Merge

The impetus to merge depends upon the unique situation of each credit union. However, through conversations with credit unions executives who have merged in the past two years or are considering a merger today, Callahan & Associates identified five common reasons to merge:

1. Increase Member Value

A credit union’s raison d’etre is to provide value to its members. Unlike a private sector merger which must create shareholder value, a credit union merger must first and foremost bring value to the members. According to one executive from a credit union with less than $50 million in assets, its merger with a significantly larger credit union brought tremendous value to its members. Members now have access to a larger product suite, better rates, more branches, and greater online capabilities. “As a small standalone credit union, I simply could not provide such a breadth of services to my members,” the CEO said.

2. Growth

In a period of stagnant member and asset growth, growth by inorganic means (i.e. mergers) is compelling. One executive from a large credit union, however, notes that the primary motivation for merging with a small credit union was not for the instant increase of assets and members. “We did not merge with a $30 million credit union for its assets,” he said. “The headaches associated with all the ‘people’ issues and the IT conversion simply aren’t worth it.” In fact, many large credit unions could generate the equivalent assets in one quarter with a successful HELOC marketing campaign. Rather, it is about the growth potential presented by the smaller credit union’s under-penetrated field of membership. According to the CEO, “cross-selling our products to existing members and creating new members was how we could maximize the benefits from the merger.”

3. Diversification

Mergers can represent a viable diversification strategy. Credit unions with a single Select Employee Group (SEG), for example, are dependent upon the financial health of the corporate sponsor. Should macro-economic events adversely impact the corporate sponsor (e.g. auto or airline industry) or the sponsor experience layoffs (e.g. high technology), credit union performance may suffer. Mergers, therefore, offer credit unions an opportunity to mitigate this risk by diversifying their exposure to an individual SEG. Geographic diversification is another viable reason to merge. A merger with a credit union in another geography can help reduce the exposure to any single area or region.

4. Necessity

For many credit unions, particularly small ones, a merger may be the only means for survival. In today’s highly competitive market, credit unions need a compelling value proposition to maintain an active member base and grow. For small credit unions with limited resources and service offerings, providing sufficient member value can be a challenge. While a number of small credit unions are successfully reinventing themselves to adapt to the ever-changing market, for many others the challenge is becoming acute. As a result of sustained financial under-performance, many credit unions are forced to merge to survive.

Over the past five years, the credit union industry has consolidated by 1,658—from 10,538 credit unions in December, 2000 to 8,880 as of December 2005. Consolidation, however, is occurring almost exclusively among the smallest credit unions. As shown below, over 2,000 credit unions with assets less than $20 million either merged or liquidated in the past five years. In stark contrast, the rest of the industry actually experienced net growth! Scale economies are important to remain competitive in the financial services industry. Unless a small credit union has a defensive niche, it may ultimately be forced to evaluate alternatives, one of which is to merge.

5. Other

While the majority of credit union mergers occur for the reasons outlined above, other reasons have been cited such as succession planning and greater employment opportunities post-merger. Generally, these reasons are not the sole rationale for the merger; however, they do provide support for the other reasons to merge.

Although one can expect the current trend towards consolidation to continue into the foreseeable future, it should be noted that mergers in and of themselves are not a panacea. The decision to merge needs to support the strategy and growth objectives of each credit union. Further, each prospective merger partner needs to be assessed on its own merits. To learn more about how to evaluate potential merger partners, join our webinar, Evaluating Merger Opportunities, sponsored by the Callahan Center for Credit Union Leadership.



Feb. 27, 2006


  • We have gone thru 3 mergers in the past 5 years. This validates what we have done.
  • Much better than your norm; more numbers and detail. VERY GOOD!
  • Another reason for credit union mergers, which your article omitted, concerns Member Business Loan lending limits -- specifically he 12.25% limitation. This was one of the better articles I've recently read on this topic.