Good, Bad, or Indifferent

A post-merger financial analysis of United Federal Credit Union.


In today’s market there is no shortage of motivations – diminishing membership, a fragile economy, retiring management, and general financial distress, just to name a few – that might compel a credit union to look for a merger partner. For whatever reason the institution is simply no longer sustainable, and the structure of the National Credit Union Share Insurance Fund (NCUSIF) oftentimes makes it easier for two credit unions to merge rather than for a healthier credit union to conserve a weaker one and slowly wind down its assets.

Mergers can be opportunistic. For example, two institutions decide they would be greater as one. Mergers can be solely for legal purposes. For example, several credit union groups, including Affinity Group and Self-Help Federal Credit Union, operate structurally as a single entity for compliance and reporting processes, yet the individual institutions within these models maintain separate credit union branding.

A credit union undergoes a merger to improve its standing and, more importantly, its members’ standing. Without improved member value, there is little that is sustainable or beneficial about a merger. Given this sentiment, is it possible to objectively measure the success of a merger?

United has grown through both organic means and through merging or acquiring other institutions. In 2006, the merger of the nearly equal United Federal Credit Union and First Resource Federal Credit resulted in a larger United Federal Credit Union. In 2010, United acquired a struggling Clearstar Financial Credit Union. Is it possible to quantify the increased value of United Federal Credit Union’s membership after two mergers in six years? Are the benefits of belonging to the surviving institution substantially better?

The chart below looks at United after both of the growth events and highlights 15* of the 18 key metrics that comprise Callahan & Associates’ Return of the Member index. For each of the events, the values of the 15 metrics reflect whether the relative value increased or decreased. An increase in most of these metrics reflects better value for the member; however, increases in yield on loans and fee income per member is a NEGATIVE shift from the member perspective. United Federal and First Resource Federal completed the 2006 merger in the fourth quarter. United completed the 2009 acquisition of Clearstar in the third quarter. To account for seasonality and integration, each of the metrics below is based on June data.

  • Dividends/income has decreased sharply since the first merger; however, the current record-low interest rate environment plays a major role here. The value – 15.2% – is only slightly less than the peer average of 17.8%.
  • The average share balance decreased after the first merger and increased after the second merger, indicating an overall shift in the portfolio. One institution might have had a concentration of low-balance core deposits, which would drive down the average balance. The second might have had more high-balance accounts, such as share certificates or IRAs.
  • The average number of share accounts per member decreased after the first merger, increased suddenly just prior to the second acquisition, and have since fallen again. Note, today’s average is in line with peer credit unions.
  • The current lending environment is responsible for the drop in the loans + servicing portfolio-to-shares ratio. United’s value is still higher than its peers as of June 30, 2011.
  • Notably, the yield on average loans fell after each of the mergers. Although this is partially a product of the rate environment, it also indicates members might be getting better rates in the surviving institution.
  • United is a strong lender, and originations on a per-member basis have increased each year, except in 2007.
  • United’s members use the credit union’s products and services. A slight, post-merger decline in share draft penetration is expected as the surviving institution removes old or inactive accounts. A large decline, which is not the case here, is a sign that members of the acquired credit union are leaving.
  • Changes in United’s overall loan portfolio have caused loan penetration figures, including auto and credit card, to fluctuate. These rates should increase over time as the credit union approaches members with the availability of new or improved products.
  • Year-to-date fee income is a key area of member value, and it was lower after each of the growth events.

*The three missing metrics – three-year average share growth, three-year average loan growth, and three-year average member growth – do not demonstrate improved member value because any merger automatically increases these metrics.

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