Consolidation has been an ever-present trend in the credit union community for more than two decades. Indeed, hundreds of CUs have "disappeared" from the landscape—either through mergers (forced and otherwise) or liquidation – every year for at least the past 15 years.
And it usually is the smaller institutions, that is, those with less than $100 million in assets, that get lost in the deal or "vanish."
There were 235 completed mergers among federally-insured credit unions last calendar year, down from 257 in 2014 and 254 in 2013, according to the National Credit Union Administration.
The regulator noted that since 2010, there have been 1,458 mergers, or an average of 243 per year. According to NCUA, "most" of these mergers involved credit unions with less than $100 million in assets.
In addition, more than 60% of mergers between 2010 and 2015 were done to "improve or expand member services," according to John Fairbanks, public relations specialist at NCUA.
Losing Almost One a Day
Looking back over a longer time horizon, Mike Schenk, VP of economics & statistics at the Credit Union National Association, noted that over the past 15 years—on average—about 290 credit unions have "disappeared" annually.
Of that figure, an annual average of only about 13 succumbed to "involuntary liquidations" and six underwent "assisted mergers," that is, where regulatory intervention led to the institution merging, usually into a larger entity.
"The bottom line is that in any given year the vast majority of the decline in credit unions is related to voluntary mergers," Schenk said.
Fairbanks noted that NCUA "does a lot, through our supervision process and OSCUI's [NCUA's Office of Small Credit Union Initiatives] consulting programs, to help smaller credit unions remain viable whenever possible." The regulator only gets directly involved with a merger process when a CU is in a "troubled condition," he added.
As for so-called assisted mergers, which occur very rarely—about five per year on average—Fairbanks said they are done to "continue services to members at the least cost to the Share Insurance Fund."
A Shrinking Base
Still, given the sobering statistics, do small CUs have a fighting chance in an increasingly expensive and competitive marketplace? Or can they survive—even thrive—by offering products and services to a unique local community of members and by creative cost-cutting?
According to data from OSCUI, between 2005 and 2015, the number of credit unions with less than $100 million in assets dropped by 38.3% (credit unions with more than $100 million assets increased by 26.5% over that time frame). Also, over that time, the small credit unions lost membership by an average of 26.4%.
Schenk said that based on meetings and discussions with NCUA—through the auspices of CUNA's Small Credit Union Committee – the government agency "says the right things and seems genuinely committed to helping small credit unions survive and prosper."
Schenk singled out OSCUI and its former chief Bill Meyers for particular praise in helping to support smaller credit unions.
For example, changing the definition of a "small entity" to an institution with $100-million in assets from $50-million in 2015—a move that CUNA strongly supported—resulted in an additional 750 "smaller" credit unions enjoying relief from a number of regulatory burdens.
Dennis Dollar, a former NCUA chairman and now a credit union consultant in Alabama, notes that capital ratios at smaller credit unions are, on average, better than those at many larger institutions.
"The difference is that, because of ongoing growth and scale, the larger credit unions are performing better in every earnings and growth category because they have been willing to invest some of their excess capital in enhanced products, more branches, expanded technology and a broader array of member services," Dollar said.
Hoarders?
Meanwhile, Dollar said too many smaller credit unions are "hoarding" their capital in hopes that it will "protect them from the costly demands of marketplace changes when they [instead] need to be wisely investing that excess capital into strategic growth options such as technology, branching and products."
Dollar also noted that most mergers involving smaller credit unions "have been voluntary and driven by the belief that their members will be better served by what a larger credit union can offer than [what] they feel they can offer staying independent with their limited resources," he stated.
Regulatory Burdens
To be sure, increased regulatory burdens are having "some impact" on decisions to seek voluntary mergers by many smaller credit unions, Dollar said. "But most [smaller credit unions] have enough capital that they can invest in third-party compliance support if they want to do so. The increased regulatory burden expands the frustration factor for boards and management teams at smaller credit unions… Increased regulatory burden adds to the list of reasons many small credit unions elect to voluntarily merge, but it is seldom the sole reason."
John McKechnie, a senior partner at Total Spectrum in Washington and a former official at NCUA, also pointed the finger of blame at regulatory matters.
"Many small credit unions cite over-regulation as a major threat to their survival, but that comment is seldom directed at NCUA" he said. "[Rather,] it's [the Consumer Financial Protection Bureau] CFPB that seems to [be] the object of their concerns."
McKechnie further cautioned that in his nearly 30 years in and around the credit union industry, he has never heard "a great deal of optimism" from smaller credit unions, but now, the regulatory burden on them appears to be accelerating.
Too Small?
The banking and insurance industries brought up the concept of "too big to fail" in connection with controversial bailouts a few years back. For credit unions, a more appropriate question might be—are some institutions "too small to survive"? That is, is there an asset level below which a credit union simply cannot function and must find a merger partner or be liquidated?
Schenk of CUNA doesn't think so. He indicated, for instance, that the median asset size for credit unions is currently just $27 million—this means that half of all credit unions have assets larger than this figure, and the other half has less in assets. (For comparison purposes, the corresponding figure for banks is about $200 million.)
Thus, "small" is "normal" for credit unions—and many modest-sized institutions provide vital services for their communities and can survive without being forced to merge. Schenk cited, for example, the $1-million NRS Community Development FCU of Birmingham, Ala., which has fewer than 400 members. The tiny credit union generated net income of $20,527 in calendar 2015, up from $16,850 the prior year.
Pamela Owens, vice president of programs at the National Federation of Community Development Credit Unions (Federation) said that NRS Community is a "leader in Alabama in providing anti-payday loans. They are only one example of small credit unions making a huge impact."
Schenk concedes that there are some smaller institutions that will find it very difficult to survive, particularly amidst a climate a higher costs, rising regulatory burdens and lack of economies of scale. But that doesn't mean that the basic business model for smaller credit unions is necessarily flawed.
Indeed, Schenk emphasized that small CUs play an extremely important role in the industry and he hopes the NCUA (and examiners) understand this. "The more credit unions we have, particularly smaller ones, the better and healthier the whole movement will be," he said. "A great number and diversity of institutions means more voices and more unique products and services for members."
Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federal Credit Unions, also noted that there are many successful "small" credit unions and that they provide a vital service to their membership.
But she emphasizes that the viability and sustainability of smaller CUs depends more on their business models rather than upon a cold appraisal of their asset sizes. Still, Hunt concedes that, given the backdrop of tightening regulatory pressures and increased competition from banks and other lending institutions, smaller credit unions are facing great challenges in the marketplace.
Better Off?
Whether a small credit union would be better off merging into a larger entity depends on a multitude of factors, i.e., lacking a concrete succession plan or having an inability to grow members are two common issues. In addition, Hunt noted that NCUA has to intervene to arrange a merger for a small institution when the "safety and soundness of a credit union is a primary concern," she added.
Tansley Stearns, chief impact officer at Filene Research Institute, said there is "absolutely" a place for smaller credit unions to thrive, provide good service and remain relevant in the marketplace.
Stearns cited a Filene report called "Credit Unions: Financial Capability and Scale" which stated that "On average, larger credit unions are far more likely to meet our conditions for financial sustainability than smaller credit unions. However, credit union performance varies greatly within each credit union asset size range. Thus, asset size plays a key role in explaining long-term trends in credit unions' performance, but is not an insurmountable determinant for each individual credit union."
Owens of the Federation also hailed the important role of small credit unions. "Many small credit unions represent some of the oldest credit unions of our movement and have been rooted in communities for decades," she said. "These were some of the first institutions to lend to people of color and women. A large number of these credit unions are designated as minority depository institutions."
She adds that when one of these small credit unions is merged or liquidated it can have a "devastating impact" upon its membership. "Beyond a lack of services, there may also be a lack of understanding of the community [by other financial institutions]," she said. "Today many small credit unions provide
basic services (checking and saving) in addition to small-dollar loans, mortgages, business loans and credit-builder loans."
The Future
Cathie Mahon, president and CEO of Federation, said that small credit unions still can and do serve their communities well.
"Mergers that reduce or eliminate service to underserved consumers are a loss to the movement," she stated. Those that can expand or enhance service can actually be a benefit. This should be the number one consideration when determining appropriate merger partners."
Michael A. Wishnow, senior vice president-marketing & communications at Pennsylvania Credit Union Association (PCUA), believes that consolidation in the CU industry will continue unabated. "We believe the trend will continue toward fewer, yet stronger, credit unions—serving a greater number of member-consumers in the aggregate," he said, adding that banks have been undergoing a similar trajectory.
"That said, we also firmly believe that a not-for-profit, democratically-controlled business model is as relevant today as it was in the 1930s, when most U.S. credit unions got their start," Wishnow added. "Looking forward, we think it's safe to say that credit unions that are well-capitalized, and fully understand and serve the needs of their members, will be able to thrive in the marketplace for many years to come regardless of their size."
