The economic climate for credit union mergers during 2009 was marked by a little of everything: Some saw panic by worried CEOs at small credit unions, more cross-country incursions by the healthy and a pullback or a wait-and-see attitude underscored by an improvement in interest margins.
Despite the financial pain created by the corporate crisis, the annualized merger rate stands at 259, which CUNA economists find "glaringly low" when compared to the actual 300 CU mergers of 2008 and what might have been projected this year given the recession.
Reasons vary for the slow merger rate, according to CUNA and industry consultants, but healthy capital ratios, a spurt in membership growth, troublesome accounting rules and a reluctance to add on losses were all factors.
"It now appears that 2009 will be the third consecutive year of below-trend consolidation, with the current rate well below both long-term trends and 2008 results," observed David Colby, chief economist at CUNA Mutual Group.
As for 2010, CUNA Mutual forecasts mergers and liquidations of troubled CUs "picking up from their current path and strategic mergers accelerating as healthy CUs become more confident in their capital levels."
There was little doubt that during the last few years, the NCUA's bidding process for troubled CUs has become "quite competitive and even aggressive," noted Dennis Dollar, the former NCUA chairman and head of a Birmingham, Ala., consulting firm.
"But recently," he went on, "the tough bottom lines of many credit unions do not leave them in a position to assume a lot of losses in a merger or assumption of assets" and some CUs have been looking to require guarantees from the NCUSIF before assuming bad debts.
So the NCUA's bid process "is not nearly as aggressive as it was a year or so ago," and while many CUs are doing due diligence on the process, they are also "pulling back unless there are some guarantees."
That lack of interest in adding troubled assets "will probably get worse before it gets better," Dollar forecast.
Filene Research Institute in Madison, Wis., maintained that while the chief concern in a merger is always cost, attitudes during 2009 "metastases into a panic at many credit unions."
"There is a demonstrable-and widening-cost advantage to being a large credit union, and so in the past 25 years, the noninterest expense advantage of large credit unions has risen from 88 basis points to more than 150 basis points," noted Ben Rogers, chief researcher.
"The math," he maintained, "says that members will usually-not always, but usually-get better rates and more services from a larger credit union."
So far, Filene said it has not seen "an explosion of mergers during the crisis, but it's possible there will be an uptick, even a surge, when credit union boards are done merely surviving and start thinking about growing again."
Michael Schenk, vice president and senior economist at CUNA, said the healthy capital ratios of many CUs coupled with robust member growth tends to downplay any "massive moves toward mergers" in 2010.
Many CUs continue to see their performance outstripping the banks, he said. "What is really eye popping is the membership growth, the fastest in five years," which Schnenk added says something about the consumers' flight to safety.
The last 12 months have seen memberships climb 1.9%, "clearly a sign that the public sees credit unions as a good deal," said Schenk.
One of Filene's research fellows, James Wilcox, Lowrey professor of financial institutions at the University of California at Berkeley, said lower rates and an easing of the margin squeeze have tended to be a positive for mergers, but "on the other hand, the hit on earnings has been huge."
In essence, the financial crisis "has been an equal opportunity calamity, hitting funding costs for both big and small credit unions-the giants and the minnows," he said.
The reason "we are not seeing a bigger wave of consolidations is because many of the acquirers are themselves troubled," said Wilcox.
Nonetheless, noted CUNA's Schenk, the signs still show the flood gates do not appear ready to open on credit unions, which suffered 14 failures in 2009 as compared to 133 bank failures.
–jrubenstein@cutimes.com

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CU Mergers Stand at 259, a Figure CUNA Says Was 'Glaringly Low'

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