San Francisco Fed Study Examines CU Mergers
Credit union mergers are producing greater cost efficiency and in cases where the acquiring CU is much larger than the target institution, members of the acquired CU benefit in lower loan rates and higher deposit rates, according to a new study issued this week by the Federal Reserve Bank of San Francisco.
“Credit Union Mergers: Efficiencies and Benefits” was written by an academic duo familiar to the Filene Research Institute and was issued by the economics research unit of the regional bank.
The report, which looked at 9,412 CU mergers from 1984 to 2009, concluded that acquiring CUs are now gaining slightly higher cost advantages than in the past when mergers tended to focus on the targeted CUs.
The San Francisco Fed study is one of the rare Fed reports covering specifically credit unions.
“This is a bit unusual for the Fed from what I’ve seen,” said Ben Rogers, Filene research director.
The Fed study maintained that traditional merger absorptions of struggling small CUs over the years “probably reflect” attitudes of “benevolence” by the larger CUs in supporting overall member retention, wrote the authors, James Wilcox, a University of California-Berkeley professor of economics and finance, and Luis G. Dupico, an economist at Macrometrix, a Berkeley economic consulting firm.
Wilcox has done research for Filene and over the years has written five separate papers on CU topics including mergers and structure.
Comparing stock-held banks and member-owned credit unions, the authors noted that bank consolidations are conducted to reduce expenses and raise net earnings but “by contrast a credit union might use merger-related cost savings to offer its members lower loan rates.”
The Fed report categorized CU mergers into three groups: absorptions, in which targets had less than 10% of the acquirer’s assets; acquisitions, in which targets had 10–50% of the acquirer’s assets, and mergers of equals, in which targets had more than half of the acquirer’s assets.
“At first glance,” said the report, “credit union mergers provide substantial benefits to the members of targets, while barely affecting the members of acquirers. From 1984 to 2009, target members merged into credit unions whose noninterest expenses were 0.79 percentage point lower in the first year after the mergers than at target credit unions. At the same time, interest income to credit unions, which is an expense paid by members, fell 0.51%.”
The study found that "in the first year after mergers, aggregate noninterest expenses fell by 0.02% in absorptions, 0.13% in acquisitions, and 0.20% in mergers of equals."