Slowing Merger Projection for 2007 Coming True, Most Mergers End in State Charter
WASHINGTON -- Credit union mergers seem to be slowing from the last few years' pace of around 300, and though NCUA approves them for deposit insurance purposes, most are heading toward a state charter, along with their assets.
According to Merger Solutions Group, there were only 54 mergers completed in the first quarter of 2007 versus 77 in 2006 and 70 in 2005. Asset volume was also down to $330 million in the first quarter from $770 million in first quarter 2006 and $920 million in first quarter 2005.
Merger Solutions Group President David Bartoo explained that the numbers are actually stronger than just one quarter's worth given the long lead times for mergers and looking at the rates of approval by NCUA and the number actually completed in the last six months, and comparing that with one and two years ago, "mergers are not closing at as fast or more frequent pace than in 2006."
But credit union mergers are not a dying art form as it is more of a "function of credit union performance," according to Bartoo. He stated that credit unions were demonstrating more solid sustainability in 2006 than in 2005. "This should lead to fewer mergers in the short term," he said. His organization had predicted 60 mergers approved by NCUA in the first quarter when in actuality there were 55.
Additionally, Bartoo said, "Our modeling indicated in the last half of 2006 and into 2007 that there were fewer 'at risk' credit unions than a year earlier. This led us to assume that mergers would be fewer than average in the first half of 2007."
NAFCU Chief Economist Tun Wai agreed that there is a general slow down in mergers, though he cautioned looking at approved mergers because they could take some time to close and, in some cases, they are never completed. Some of the increase in mergers over the last few years he said could have been in part due to the elimination of overlap protection under former NCUA Chairman Dennis Dollar's administration, which made it easier to merge fields of membership. Others, he said, could have decided to merge "while they still have a viable model" rather than being forced to merge as members shop around for a complete financial services package.
"In the past, larger institutions would go out and pursue smaller institutions," Wai observed. "Because of the squeeze in terms of return because of the inverted yield curve and slowdown in membership growth, now we're seeing the smaller institutions pursue the larger ones...These are not unhealthy institutions we're talking about." A lot of the merger decision is made to expand services for the membership these days.
Wolters Kluwer Financial Services Credit Union Segment Manager Sue Pogatschnik offered a different perspective. "I think some of it is cyclical," she said of merger trends in general. "We feel merger and acquisition activity will continue for some time." She added that it may be too early to say for sure if there is a definite slowing and there could be an up tick in the second half of the year.
One of the obvious driving forces behind credit union merger activity is the expansion of products and services. "My kids," Pogatschnik related, "don't have land lines, they have cell phones." Likewise, they do their banking online. "They don't step foot in the credit union," she said. Some credit unions, particularly smaller ones, may not be able to keep up with the needs of Gen X and Y, Pogatschnik pointed out. "The less than $10 million credit unions will struggle to remain viable entities." State Charters Getting the Assets
Of the $330 million in merging credit unions, Merger Solutions Group found $110 million went from federal to state chartered institutions while only $32 million moved from the state to federal. Bartoo said there did not appear to be a tendency of smaller or larger institutions to go one way or the other. Basically, he concluded, credit unions go with the "best available partnership" and the charter that works best for the continuing institution.
"Credit unions with state charters and large fields of membership have much more flexibility in being a continuing credit union," Bartoo added. He pointed out that in the last eight quarters, NCUA has approved federal credit union to federally insured, state chartered credit union mergers much more frequently than the other way around: 102 to 64. Merger volume is nearly double for federal to state charter mergers at $1.757 billion to $946 million for state to federal.
Wai commented, "I've heard anecdotally that some of it is the regulatory scheme because they have more open fields of membership." On the other hand, he said, he has also heard state charters merging into continuing federal charters say the federal charter is more liberal.
Pogatschnik also noted regulatory burden as a factor in merger activity from the Bank Secrecy Act to Regulation E and they continue to evolve. "The state charter may be more flexible for credit unions, meaning it may be less restrictive in products and caps," she said. Pogatschnik offered up CURIA as an example: if the business lending cap is increased to 20%, the trend could move back toward the federal charter.
Wai would not speculate on the effect NCUA's proposed regulation to disclose executive compensation in mergers might have on the trend, but stated that transparency is generally a good thing.
But, aside from expanding services and regulatory issues, Pogatschnik said other issues pushing credit unions to merge include the loss of sponsor support every time a company is merged or military base is closed down; financial health as membership growth remains slow; and changing demographics while baby boomers surge toward retirement or there is a lack of succession planning. "We really do see it as a multitude of factors," Pogatschnik said, and it will press on.