Merger Trend: Which Way Did They Go?
Jennifer Lehn, chair of the CUNA Operation, Sales and Service Council, has firsthand experience in CU mergers.
Numerica Credit Union, in Spokane Valley, Wash., where Lehn serves as executive vice president, has completed seven mergers throughout the past six years, and currently has one in progress.
The mergers haven't had a large impact on Numerica because the credit union is much larger than those that have been merged into it.
"We are community chartered, and all of the credit unions we've been merged with have been single fields of membership," Lehn said. "Today it can be harder to grow and remain viable with a small, sponsored membership."
Howard Pitkin, banking commissioner for the department of banking in Connecticut, said he is definitely seeing consolidation going on throughout his state, causing a shift among the number of large credit unions.
"Here in the northeast, in Connecticut, you have to understand the economy isn't doing well," he said. "You're probably watching asset quality corrode, an adverse business cycle right now."
There can be a plus side to consolidation, Pitkin said.
"There's a larger field of membership, and that membership is probably served by better technology and more ATMs, and a branch or two. There is a better ability to pay and maintain managers, and a better array of products and services."
Not only are there benefits to merging, but there can also be definite downsides to going it alone.
"There's a tremendous expense with compliance," Pitkin said. "There are some real issues to contend with if you're a small shop. Our experience is that the smaller credit unions are feeling the pressure from a lot of things right now."
Pitkin said the transactions they approve are "pro-competitive."
"The larger credit union has a larger lending portfolio," he said. "We won't approve it unless there is improved safety and soundness."
For Minnesota's state-chartered CUs, the volume of mergers has not increased from prior levels, despite economic pressures on earnings and net worth, said Charles Schwartz, chief examiner for the state's division of financial institutions.
"At present, many credit unions are having a difficult time achieving positive earnings results," Schwartz said. "Net-worth ratios, although still adequate, have declined in the past two years at many institutions. Merger may be seen by management as an answer to curtailing member service, in order to decrease operating expenses."
In Texas, the need for collaboration and cooperation has increased in the current economic environment, said Mike Delker, vice president of credit union relations, Texas Credit Union League.
Texas averages 15 mergers per year, and Delker said that by no means would he call mergers "a trend."
"There are a number of reasons why a credit union would consider a merger, but the primary reason is simple: to better meet the needs of their membership," he said. "In today's economic and regulatory environment one might expect to see a spike in mergers. However, that just isn't the case in Texas. I think this speaks to the fact that the credit union movement overall remains a strong and healthy system."
In North Dakota, most of the mergers in recent years have involved small CUs merging into larger ones.
"That's probably a sign of the times," said Timothy Karsky, commissioner for the North Dakota department of financial institutions.
At present, the state still has nine CUs with less than $5 million in assets.
"So you can make it," Karsky said of small CUs, "but I think they struggle."
William Mellin, CEO of the Credit Union Association of New York, said he is seeing the definitions of small versus large credit unions change due to mergers.
"If we take definitions in the technical sense, if we start with when I started with the movement, a large credit union was one with $50 million in assets," he said. "Now we have credit unions with $4 billion. My personal definition of large credit unions is now half a billion and up. The way I see it is the larger credit unions are just getting larger quickly."
Mellin said he has seen an increased level of cooperation among CUs throughout the merger trend.
"That's what separates us from other financial institutions," he said.
In New York in recent years, the merger rate has actually gone down, Mellin said.
"For years you could almost count on 30 credit union mergers per year," he said. "Last year we had 12. This year so far we've had two. The whole merger scenario has almost stopped."
Mellin attributes the slowdown to changes in the law that have made merging a more difficult process.
"The problem today is that because the accounting laws have changed, it isn't as easy to merge," he said. "You have to go through a whole evaluation. You have use outside accountants. You can't do it yourself. I think over the next few years we will have fewer and fewer mergers."
It's a sentiment shared by Dennis Dollar, principal partner for Dollar Associates LLC in Birmingham, Ala.
"The definition of a small credit union will understandably increase as more and more mergers take place, thus increasing the size of the combined credit unions," Dollar said. "All mergers will not, however, be the most often thought of pattern of a small credit union merging into a larger one," he pointed out. "There will be a significant number of mergers by smaller credit unions together and also of larger credit unions coming together."
According to Dollar, the current economic situation has made some CUs more willing to see merging as an option. "Today's marketplace, earnings and regulatory environment is driving merger consideration by many credit unions who three years ago said they would never consider it." Jason Moon, public information officer for the office of financial and insurance regulation for the state of Michigan, is seeing more competition and less cooperation among CUs.
"While industry representatives have more direct knowledge on competitive issues, fewer credit unions competing in the same markets clearly creates a more competitive environment," he said. "Cooperation among credit unions has been an industry strength that may be eroded somewhat as consolidation continues."
In Michigan, there were eight mergers in 2009. So far in 2010, three mergers have been completed.
Soundness and safety are considered in every merger, Moon said.
"Before approving any credit union merger, our agency conducts a thorough review of many factors, including the new entity's management, asset quality and earnings potential to ensure that it will be operating in a safe and sound manner."
Dollar noted that where there is accelerated merger activity, it's a sign of CUs becoming more cooperative in order to serve members better.
"Credit unions are maturing to realize that they accomplish more through cooperation than by fighting with each other," he said. "Shared branching, no fee ATM networks, loan participations, CUSOs-these are all a sign of enhanced credit union collaboration and cooperation.
"Yes, credit unions will compete with each other more as they get larger through mergers, but credit unions have come to realize that the real competitors that want to eat their lunch are not other credit unions. The real competitors are traditional, for-profit banks who want to remove the not-for-profit competitive downward pressure on pricing that credit unions bring to the marketplace."
Dollar said that nationwide, CUs have been merging at an average rate of one per business day since 2000.
"This rate is going to accelerate over the next few years due to declining margins, need for economy of scale, NCUSIF assessment pressures, growing regulatory burden, aging of senior management and the opportunity to serve members better through a growing and more diversified credit union," he said. "I would not be surprised to see the industry at 5,000 credit unions by the year 2015, largely due to mergers."
NAFCU President/CEO Fred Becker said he expects a number of emergency mergers by CUs that are having trouble.
"An emergency merger is a different breed," he said. "And there's the opportunity for credit unions to diversify across state lines as a result of that. My sense is that we are in for some very large liquidations or conservatorships."
Becker said cooperation among CUs remains, but "it's not what it was."
"There's...still a willingness to help but more of a resistance. It's unfortunate but it is what it is," he said.
Jay Johnson, executive vice president of Callahan & Associates, believes that the merger trend is being overstated.
"It's really a pretty consistent level of turnover that occurs each year," he said. "The first quarter of this year was actually lower than the first quarter of last year."
And Johnson said there has been a shift in how CUs view mergers and what they can accomplish.
"We are seeing a dynamic in how people are looking at mergers," he said. "Merger is not a strategy. It's a way to move ahead with a strategy. I also think credit unions are thinking more about cooperation as a way maybe they can address the challenges and opportunities they may have in the marketplace."
David Adams, president/CEO of the Michigan Credit Union League, said the mergers are beneficial, leading CUs to become more efficient.
"They're able to leverage the expertise they can bring with that size," he said. "It's actually a good trend that has been accelerated by financial pressures."
When a small CU merges into a larger CU, there is little impact on the management structure, Adams added.
"But when two small credit unions merge, it shakes up everything," he said. "You wind up restructuring everything. But they realize they have to be able to accept a high level of change when they integrate two cultures and two teams."
Adams noted that consolidation is by no means the sole province of the CU industry.
"I can't think of a single industry not having consolidation," he said. "It's driven by the economy, consumer level for high level of service, speed, demand, value."
Although mergers can be beneficial, Adams said, "I think it's possible to go too far. I think the relatively gradual rates of consolidation we are seeing bode very well for the future of credit unions."
Jeff Russell, executive vice president of The Members Group, said he expects the industry to continue seeing mergers for several reasons.
"The focus on mergers seems like it is a result of continuing costs of regulatory changes, as well as the need to drive down the operating expenses of a credit union," he said. "Also, with the large number of credit union CEOs who are scheduled to retire in the next five years, that presents an additional impetus for credit unions to look at mergers."
NCUA has not released new merger numbers since 2007. In 2007, there were 242 mergers, down from 285 in 2006 and 265 in 2005.