Report
227
Number
Feb 10 2011

Impact of Mergers on Credit Union Costs: 1984–2009

Conventional wisdom about mergers is that they reduce operational costs. And why wouldn’t they? After all, they assume advances like reductions in staff, consolidation of systems and vendors, more talented overall leadership, streamlined product structures, improved supplier pricing, and so on. Bigger is better, or at least marginally less expensive, right? But the answer, at least for credit unions, is merely “sometimes.” 

Luis Dopico
Luis Dopico
Economist
Jim Wilcox
Jim Wilcox
Filene Advisor
Report Number 227

Executive Summary

Mergers are like marriages. Two parties enter into each with the expectation, sometimes poorly defined, that life will be better as a result. The partners, ideally, strive to make the union work. Some sacrifices are made, some gains expected. And, almost always, neither party gets exactly what was planned. According to Sidney Poitiers character in To Sir, with Love, “Marriage is no way of life for the weak, the selfish, or the insecure.” Neither are mergers.

Conventional wisdom about mergers is that they reduce operational costs. And why wouldnt they? After all, they assume advances like reductions in staff, consolidation of systems and vendors, more talented overall leadership, streamlined product structures, improved supplier pricing, and so on. Bigger is better, or at least marginally less expensive, right? But the answer, at least for credit unions, is merely “sometimes.”

What Is the Research About?

James Wilcox, PhD, and Luis Dopico, PhD, parse in- depth credit union merger data from 1984 to 2009 to find what actual operating gains, expressed as noninterest expense per assets (NIEXP) over five years, came out of mergers. The gains have been real and substantial for the smaller partners and hard- won for the larger partners.

  • In the average credit union merger, members of the smaller merger partner (i.e., the target) experience large reductions in NIEXP (–0.79%) and in loan rates (interest income falls by 0.51%) and increases in rates paid on deposits (interest expense rises by 0.08%). In contrast, these impacts are very small (0.00%, –0.04%, and –0.01%, respectively) for members of the larger merger partner (i.e., the acquirer).
  • Since acquirers on average are over 20 times larger than their targets, impacts for the combined memberships of acquirers plus targets are small but measurable (–0.03%, –0.06%, and 0.00%).
  • The size and direction of impacts on combined memberships can vary widely. In about half of mergers, the impact on combined NIEXP is relatively small (under 0.20%). While large decreases in combined NIEXP are common (34% of mergers), large increases are also common (21% of mergers); they cannot be considered mere outliers.
  • Impacts are larger for the smaller partner. NIEXP reductions range from –1.38% for targets with less than 10% of the assets in their acquirers (i.e., absorptions) to 0.00% for acquirers in absorptions.
  • Combined impacts are largest in mergers of equals (where NIEXP falls by –0.20%). However, mergers of equals are relatively rare, accounting for only 6% of targets (and 22% of assets in targets).
  • Mergers of equals among larger credit unions have not delivered substantial cost reductions. NIEXP fell by –0.29% in mergers of equals among credit unions with less than $100 million (M) in assets but rose by 0.15% among their counterparts with more than $100M.
  • While targets continue to experience far larger impacts than acquirers, the distribution of impacts has been shifting somewhat in favor of acquirers.
  • While mergers of equals experience the largest short- term combined reductions in NIEXP, those reductions have, thus far, not been durable, turning to cost increases of +0.01% in the fifth year.

What Are the Credit Union Implications?

This report serves as a dual warning to leaders of larger credit unions: First, cost reductions do not spring magically from the merger pro-cess, and second, members may not reap noticeable advantages, even in the long term. On the other hand, these findings show to smaller credit unions that, absent a compelling independent value proposition, larger credit unions usually provide better economic value to members. This may not be surprising, but it is pressing.

The researchers did not seek specifically to isolate causes for NIEXP improvements. But some possibilities emerge from the research:

  • Larger merging partners have to work particularly hard to find NIEXP improvements. This may be because credit unions are unusually loath to lay off staff (the largest NIEXP item), opting instead for reductions by attrition or no reductions at all.
  • Credit unions may lack a good sense of what constitutes reasonable NIEXP improvement, making it harder to plan for post- merger improvements. This report serves as a good baseline for credit unions that seek to match their own merger and its expected benefits against historical averages.
  • Mergers of equals among credit unions larger than $100M do not on average improve NIEXP or net income. As managers increasingly consider strategic mergers, they should realize that they will have to work doubly hard to improve their financial returns.

Cooperative structure does not give credit unions license to ignore high costs. If anything, it should force leaders to make hard cost- cutting decisions with an eye toward more affordable service, better overall rates, and improved member value. Significant operational efficiencies may be hard to come by, but they are still the right goal.