Guest Opinion: Strength in Numbers
Since January 2008, there has been a credit union merger every 1.5 days and beginning in 2013, this rate has increased to one every 1.3 days.
While on the surface these numbers might indicate a strengthening of the industry, the fact is most of these mergers are generally the result of failed or failing credit unions of less than $25 million in total assets and the completed mergers did little to significantly increase or strengthen the industry as a whole.
Since the fiscal crisis and subsequent bank failures beginning with the recession of 2007, credit unions have done an extremely good job of building a stronger membership base and increasing deposits as more people have moved away from other financial institutions. However, if credit unions are going to continue being competitive, they will have to face the challenge of other financial institutions trying to take their market share back. The immediate growth that comes from the merger of two already strong credit unions is one way to make this happen.
To put all of this into perspective, over this five year period, the total dollar volume of merged credit unions was slightly more than $26.2 billion with an average institution size of $23.0 million. During 2011 alone, FDIC-insured mergers totaled $65.6 billion with an average institution size of $235.8 million. Today, the average FDIC-insured institution has slightly more than $2.0 billion in total assets as compared to the average credit union with $135.6 million.
Most recently, credit union mergers have been driven by an increase in regulatory requirements. These mergers are not occurring because it puts the new institution at a competitive advantage, but because the smaller institutions were unable to find another way to survive. If credit unions are going to continue being a long term alternative for consumers, many managers and boards are going to have to look beyond their current models and seek out merger partners that provide them with a new strategic advantage.
Today, credit unions exist because they have a fundamental competitive advantage over other financial institutions. By definition, they exist to serve their members whereas banks exist to serve their shareholders. Unlike banks however, credit unions also face some of the biggest obstacles in continuing to build new market share because they lack the ability to generate new net worth, have limitations on the footprint they operate within and are restricted by regulations from within the industry.
From an industry perspective, higher performing credit unions generally find it difficult to find complementary merger partners or institutions of similar size and character. These credit unions understand that size matters and if they are going to be competitive in the 21st century, they will need to grow.
Another problem currently facing credit unions relates to rapidly evolving technologies and the challenges the regulatory environment places on new technologies. To gain additional market share from other financial institutions, they will need to find new ways to grow across county and state lines or expand their reach by redefining their membership requirements. New applications help make this growth possible; however, navigating the myriad of regulations related to expansion requires a strong management team, board and constant diligence.
Finally, the biggest growth restriction for credit unions has been the ability to generate net worth. Since net worth is generally a result of membership and undistributed earnings, maintaining a well-capitalized credit union has been difficult as balance sheets have grown under a surge of deposits. This growth in deposits has resulted in the percentage of capital relative to total assets to decrease.
Unfortunately, there is no single formula to match the right credit unions for a merger, but if the right candidates can be identified, each of the obstacles outlined above can be addressed. For these candidates, complementary loan portfolios can reduce risk while fair-value accounting can help to boost net worth and expanded memberships can lead to a bigger market share. As an industry, credit unions are good for consumers because they focus on customer satisfaction and the membership experience, but converting these qualities into market share has always been an industry challenge.
Steve Miller is president of TwentyTwenty Analytics.
877-778-3314 or steve.miller@TwentyTwentyAnalytics.com