What Is Old – and New – About Credit Union Mergers?

Consolidation in the credit union system is no longer simply a trend – it’s a truism. The numbers are so familiar as to risk cliché: From a peak of more than 23,000 in 1969, the number of credit unions dropped to around 5,600 in 2018 – a decrease of 76% – even as the number of members continued to grow alongside system assets. Most of this consolidation was the result of voluntarily mergers, but the vast majority of credit unions that were “merged away” were small, totaling less than 10% of the total credit union system assets. There were over 10,000 credit unions with less than $1 million in assets in 1979 and about 250 in 2018.

The result is fewer but larger institutions. There were only three credit unions with over $1 billion in assets in 1979; there are over 300 today. Larger institutions generally benefit from economies of scale and scope, and they are often better positioned to shoulder the increasing service, technology and compliance costs of doing business in a heterogeneous, deeply competitive and rapidly evolving consumer financial services sector. Indeed, while a desire to expand services is the top reason credit unions merge (selected for three-quarters of all NCUA-assessed credit union mergers), a range of interconnected reasons drive most merger decisions, including succession concerns, risk management and difficult growth prospects.

What Can Be Said That Hasn’t Been Said Already?

At the Filene Research Institute, we’ve been digging into some of the less well-known aspects of credit union consolidation. First, it’s important to recognize that consolidation is not the result of increased merger and acquisitions activity. In fact, the rate of credit union exits has remained remarkably stable for many decades, even if the main way that credit unions have exited has shifted, from voluntary liquidations to mergers.

What has changed is the rate of new credit union formation. Today, it’s difficult to capitalize a new credit union and to charter one, and these high barriers to entry have made new credit unions extraordinarily rare. The number of new credit unions formed in the U.S. per decade has plummeted from 9,992 during the 1960s to 5,272 during the 1970s, 909 during the 1980s, 113 during the 1990s, 73 during the 2000s, and 22, thus far, during the 2010s.

It is much more common for existing credit unions to shift or expand their fields of membership, even though efforts to jumpstart new organizations like Maine Harvest Federal Credit Union or Clean Energy Federal Credit Union show clearly that the cooperative model remains a compelling one in meeting the unique financial needs of underserved groups.

Is Consolidation Just a CU Phenomenon?

No, consolidation is a financial services phenomenon. Just as the credit union system has consolidated, so too has the banking system and consumer finance sector as a whole. (The explosion of startup fintech providers muddies the waters, but these companies operate with very different business models, capital infusions, competitive landscapes, expectations of profit and regulatory demands.) What we are witnessing is what economists call a secular transformation, one that is not driven by cyclical or seasonal shifts but instead represents long-term structural change, well outside the control of any individual or institution.

One newer wrinkle in this broad-based transformation is the increasing numbers of credit unions acquiring banks and bank branches. At Filene, we first discussed this trend in 2018, in our “Credit Unions’ Acquisitions of Banks and Thrifts” report by Georgetown Professor of Business David A. Walker. Walker found that credit union acquisitions of banks were not only on the rise, but that credit unions that acquired banks become stronger financially, with higher returns on assets and equity, and lower charge-offs. We’ve been keeping track of news reports on further credit union acquisitions of banks, and we see continued increases (even if still small as a proportion of total M&As). There were more than 20 such acquisitions in 2018 and 2019.

Who Benefits From CU Consolidation?

There’s no easy answer to this question. An April 2019 report from Filene by University of Alabama Professor William E. Jackson III called “Do Credit Union Mergers Create Value for Credit Union Members?” found that historically, credit union mergers tend to have large benefits for members, in terms of loan rates, deposit rates and noninterest expense ratio.

Importantly, these benefits accrue disproportionately to members of (generally smaller) target institutions. In fact, the members of a smaller credit union merging with a larger credit union will, on average, see loan benefits that are seven times greater than if that smaller credit union merged with a similarly sized institution. Likewise, the deposit benefits for a small credit union merging with a larger credit union were five times greater and the reductions in noninterest expense ratio were three times larger.

Larger credit unions and their members can certainly benefit from mergers through growth, the addition of desirable branch locations and the ability to meet the needs of a new member group or underserved population (just for example). But in terms of measurable financial benefits, the sheer difference in size tends to mean lopsided gains, as the members of small credit unions actually benefit more.

There are costs to mergers and acquisitions, too, although sometimes these are less easily quantified. For one thing, growth through intra-credit union mergers, which add assets to an individual institution but do not result in net asset gains for the credit union system, may distract from organic growth. Managerial attention may be pulled away from other parts of the business toward the merger. Indeed, Filene Economist Luis Dopico has shown that credit unions see lower organic asset growth during the years they engage in mergers in the report “Factors Contributing to Credit Union Asset Growth: 1979–2016.”

While difficult to measure, there may also be soft skills and location-based knowledge resulting from the close relationship a smaller credit union maintains with its community that a larger, acquiring institution fails to recognize and take advantage of. In October of this year, a group of leading credit union researchers attended a roundtable at the offices of Filene and were polled informally on key system trends. The majority (86%) of these experts reported that credit unions’ local presence and proximity to their members remained a significant advantage.

The Reasons May Be New, but the Concept Is Not

Not every credit union pairing makes sense. Differences in technology, FOMs, organizational cultures, leadership styles and strategic priorities can make for a poor match. One of the most important determinants of merger success is the cultural due diligence the parties undertake in advance of the merger.

While credit union regulators, policymakers and managers should strive for credit unions of all sizes to thrive, many credit unions will continue to consider mergers as a means to provide their members with better interest rates, broader product ranges, broader branch and ATM networks, and better service for the foreseeable future. That’s a strategy that goes back to credit unions’ beginnings.

Note: The authors thank Laura Gilliam of Filene for her extensive help drafting this article.

Taylor C. Nelms is Senior Director of Research for the Filene Research Institute. He can be reached at taylorn@filene.org.

Luis G. Dopico is an Economist for the Filene Research Institute. He can be reached at 336-848-4660.