FOREST GROVE, Ore.-While credit unions under $20-million in assets continue to be primary merger targets, those very small shops-around $1 to $2 million-may not find many consolidation partners in the future.
That's the outlook of Merger Solutions Group here, which recently assessed credit union merger activity via a quarterly webinar. Merger Solutions Group President David Bartoo sees a growing trend for credit unions to shy away from tiny CUs.
"Not too far down the road the really small credit unions in trouble may not find a merger partner, because credit unions are seeing that it is too expensive to merge with them based on the return," Bartoo predicted. "Merging a small credit union is becoming expensive and a hassle. With new regulations and accounting requirements, it is becoming time- and cost-prohibitive for many credit unions to absorb the little credit unions that may be struggling, losing SEGs, or are just plain tired of fighting."
Small credit unions continue to lead consolidation statistics with year-to-date numbers showing on average 13 out of 16 (81%) merging CUs are under $20 million in assets. "This consolidation of small credit unions will continue to accelerate as so many factors weigh on this segment, such as rising unemployment and losses, increased regulatory costs, smaller margins, large banks expanding, and regulation reducing non-interest income," Bartoo said.
The average asset size of the merging credit union continues to rise, from $16 million in the first quarter of 2009 to $19 million in the third period. "And the trend for the number of mergers approved and merger volume is starting to show an upward trend," Bartoo noted. "However, year-to-date 2009 merger activity is at a consolidation rate under 3%, versus the last five years of just over 3.2%.
It's not just the large or medium-sized credit unions doing the acquiring, as the continuing credit unions' asset sizes are spread. For example, in the third quarter 14 continuing credit unions were under $50 million in assets and 15 were above $500 million.
There is also a trend for the continuing credit union to have a negative ROA, pointed out Bartoo, who said "17 of the 63 continuing CUs in the third quarter had a negative ROA at approval. This is the highest percentage for one quarter and increased the year-to-date total in this category to over 20% (41 total)."
No surprise, Bartoo said Merger Solutions Group quarterly modeling shows a dramatic increase in the number of credit unions at risk to being merged out. "This would indicate further acceleration of consolidation in 2010," he predicted. "Historically, our modeling places a 9% likelihood of merger for credit unions in the top two tiers of our analysis versus less than 1% for those in the bottom three tiers. With more than 1,300 credit unions in our highest risk tier, the results-if trends hold-will be more than 120 mergers in the next six to nine months out of this segment alone."
