Executive Summary
- This report expands upon a 2008 Filene report entitled Credit Union Costs and Consolidations, wherein Jim Wilcox concluded that economies of scale will significantly influence credit unions’ financial and nonfinancial performance for the foreseeable future. Wilcox went on to say that while scale is not the only key to future credit union success, it will remain a very significant lever for most consumer finance institutions. Credit unions can gain economies of scale in a number of ways, including large-scale collaboration, mergers, and organic growth. Industry watchers (including Filene) spend a good deal of time exploring collaboration and organic growth, but very little attention is paid to long-term credit union merger trends. In this report, the research team of Jim Wilcox and Luis Dopico has filled the void by constructing and analyzing the most definitive database on credit union mergers from 1984 to the present. Distilling these long-term trends helps us understand what the future mergers land-scape may hold.
What is the research about?
The research team took a great deal of care (and time) to analyze this database backwards, forwards, and sideways, resulting in hundreds of data points. While you’ll no doubt find this data helpful at some point in the future, the following bullet points prioritize the key findings that can be of use to you today:
- The National Credit Union Administration (NCUA) has identified 12,485 credit union mergers during 1971–2008 (or 2.3% of credit unions per year), accounting for most of the reduction in the number of credit unions from its peak of 23,866 in 1969 to 8,147 in 2008. More than one-third of the credit unions in operation in 2008 had participated in at least one merger during 1979–2008.
- During 1984–2008, credit union mergers transferred members and assets from institutions that, on average, performed less well (the targets) to other institutions that, on average, performed far better (the acquirers). Better performance is defined as (a) lower noninterest expenses (4.36% vs. 3.12%), (b) lower loan rates (with interest income of 8.23% vs. 7.60%), (c) higher rates on savings products (interest expense of 3.66% vs. 3.98%), (d) lower provisions for loan losses (0.86% vs. 0.36%), (e) higher ROA (0.08% vs. 1.00%), and (f ) higher merger-adjusted asset growth (0.17% vs. 10.11%).
- The assets of targets totaled $37.3 billion (B) ($46.4B in 2008 dollars) during 1984–2008. Targets held a very small fraction of assets in federally insured credit unions (FICUs), 0.39% per year, and were much smaller than their acquirers, which held 10.27% per year.
- While the overwhelming majority of targets were tiny or very small during 1984–2008 (7,867 targets, or 89.8%, held under $10 million [M] in assets), 20.5% of targets’ assets were concen-trated in just 47 medium-sized targets (i.e., with $100M–$1B in assets). However, few targets (224, or 2.6%) had large acquir-ers (over $1B). Instead, smallish credit unions ($10M–$100M) acquired most targets (4,465, or 50.9%) and medium-sized credit unions ($100M–$1B) acquired the most of targets’ assets (55.7%).
- Across asset sizes, acquirers have higher noninterest expenses per assets than similarly sized nonmerging FICUs. Some acquirers, smaller ones in particular, seem to use mergers as a key tool to jump-start growth and lower their average cost of operations.
- While most targets were much smaller than their acquirers during 1984–2008 (6,405 targets, or 73%, were less than one-tenth as large), 21% of targets’ assets were concentrated in 437 mergers of equals, which we define as mergers where the target was at least half as large as the acquirer. While mergers of equals among credit unions larger than $100M are now becoming more common, they were relatively rare in the analysis period.
- Voluntary mergers (i.e., mergers that did not receive formal assistance from the NCUA) have been the main mechanism for credit union exits, totaling 8,209 targets, or 2.81% of FICUs annually, and 0.37% of FICU assets annually during 1984–2008.
What are the credit union implications?
This study illustrates the influence dramatic external events such as the savings and loan crisis, major changes to the credit union regulatory landscape, and the severe 1980 recession have had on the pace of credit union mergers. It is safe to assume these past events will be dwarfed by what credit unions are experiencing today or will be experiencing in the future. In short, managing the credit union merger process is a competency that will likely impact more credit unions and on a much larger scale.