Some credit unions are taking the attitude of if you can’t beat ‘em, merge with ‘em.
The credit union industry has undergone consolidation for the last several years and that trend doesn’t seem likely to stop any time soon. This is diminishing the number of credit unions, especially smaller ones.
Tiny credit unions, frequently with less than $50 million of assets, may struggle to keep up with changes in technology and compliance and the ongoing battle for deposits.
“What’s driving consolidation is that there’s more lenders than Americans need, and Americans know it,” said Peter Duffy, managing director at Sandler O'Neill & Partners. “So [consumers] ruthlessly shop for the best deal, and it’s driving margins tighter, which makes [return on assets] that much more difficult. In essence, we’ve blown up the supply side of lending in America.”
There were almost 5,600 credit unions as of June, down 20 percent over the last four years, according to data from the Credit Union National Association. Through the first half of the year, 88 mergers have been completed, according to data from the National Credit Union Administration.
Smaller institutions in particular are feeling the pressure and their ranks are shrinking as a result. In the second quarter, the number of federally insured credit unions with at least $500 million of assets rose by nearly 4 percent, to roughly 540, from a year earlier, according to data from NCUA. But the number of federally insured institutions with less than $10 million assets declined more than 7 percent, to about 1,460.
There are a variety of reasons driving consolidation. For one, financial services have become more commoditized and technology requirements have increased. As interest rates rise, there is a growing battle for deposits, which could eat away at margins.
There is increased competition from nonbanks entering the space.
"New marketplace competitors are expanding into areas that credit unions have traditionally operated by providing deposit-like products, such as prepaid cards, and alternative lending products, such as crowd sourcing, peer-to-peer lending and small business financing,” reads the NCUA 2017 annual report.
Smaller credit unions may have more difficulty adjusting to these changes given their more limited resources. The smallest federally insured credit unions – those with less than $10 million of assets – had a return on average assets of 12 basis points in the second quarter, according to data from NCUA. Return on average assets for federally insured credit unions with at least $1 billion of assets was 1.03%.
“It’s a cold hard fact that small credit unions are going to struggle because of compliance, technology and other reasons,” said Marshall Boutwell, CEO and president of Peach State Federal Credit Union in Lawrenceville, Ga. “If your assets are $10 [to] $15 [to] 20 million, and you’re not growing robustly, unless you are a special niche player, the world has already passed you by. You should be looking for opportunities to fold in with other successful credit unions.”
The former Southeast Federal Credit Union, which had $65 million of assets, is an example of this. John Fair, the institution’s former CEO, said he realized that his credit union needed to upgrade its technology after a member visited the institution and requested to deposit a check using his mobile phone and have the funds be available that same day. This request, along with other impending technological upgrades, was not plausible for Southeast to pursue alone.
Fair decided Peach State was the best merger partner because of its growth, low loan delinquency rates and extensive branch network. Eventually Southeast FCU merged with the $474 million-asset Peach State in December. This expanded Peach State’s reach into northern Georgia and a new county in South Carolina. Peach State has more than 20 branches across those two states.
Larger credit unions are willing to merge with smaller ones in part because of a desire to grow. There are some limits to organic growth, and many in the industry believe scale is important so mergers can help expand the institution’s reach.
Other larger credit unions are open to these mergers for “altruistic reasons” to help support the cooperative movement, said Michael Bell, a partner at Howard & Howard. The incentive to merge with smaller institutions is analogous with marriage – it doesn’t solely come down to the financials, Bell said.
“These transactions are harder to do and they can’t be incentivized or done for strictly business reasons,” Bell said. “It’s not just about the money. It’s about items that are more sensitive. It’s about name, employment guarantees, branch closure [or] remaining open.”
Peach State’s name is an example of this. It was originally known as Gwinnett Teachers Federal Credit Union but changed its name after its 2012 merger with Peach State Federal Credit Union.
“We serve multiple counties and at the time, we were in five or six counties, [so] we were beginning to feel a little awkward about carrying the name Gwinette and going into other counties,” Boutwell said. “There’s two ways to say Georgia: Georgia or Peach State.”
But there are risks with a merger that the surviving institution has to think about. For one, there is a chance of losing members, who may have to re-register once the merger closes.
Another pitfall is possible employee attrition. Employees may be concerned about possible layoffs and may find other jobs during the transition. Bell recommends that credit unions are “early, honest and often” within their communication to help mitigate this.
With the expected continuation of consolidation, credit unions will gauge whether deals are worth the risk. Beyond the extension of a credit union’s marketplace, the diversification of risk and customer base is attractive.
During Boutwell’s roughly first 15 years as CEO, Peach State only engaged in organic growth, including expanding its technology offerings. But over the last several years, the credit union has merged with six institutions.
The credit union has its roots in the education sector. All of its founding members were employed by the Gwinnett Courtney School System. Several years ago, management visited different school districts and neighboring areas that didn’t have credit unions, leading Peach State to consider other avenues for growth.
“I sat down with my board and we did some Rip Van Winkle thinking,” Boutwell said. “Fall asleep for 15 to 20 years, and you come back, what would you like to see in Peach State? A very localized CU, a broader regional CU or a state-wide CU? And [the board] basically said that we can respond to the needs of other credit unions and field other credit union memberships as those needs presented themselves.”
