By Ray Birch
KENT, Wash.—Mergers among credit unions will continue, but the real trend will be in consolidation of larger CUs, according to one merger expert.
Glenn Christensen of CEO Advisory Services told CUToday.info that the asset size of CU mergers is escalating not simply because many smaller credit unions are disappearing, but
because more credit unions are just seeing a strategic advantage in combining to address increasing competition from inside and outside the financial services sector.
“While the number of credit unions continues to dwindle, the size of CU mergers continues to grow. I do think the number of financially driven mergers will be lower—mergers of necessity—and we will see much more strategic mergers,” said Christensen.
He said merger data over the last few years supports that assertion.
“In 2014, there were nine mergers where the merged credit union’s assets were over $100 million,” noted Christensen. “Last year saw nearly twice as many (17) mergers over $100 million. In 2017, the tenth-largest credit union that merged out was $120 million in assets—over $25 million higher than 2014. Although the majority of mergers will continue among smaller credit unions, we continue to see growth in the mean and median asset size for all credit union mergers.”
Median Size
In 2017 the median merger asset size was up over $4 million to $10.4 million, compared to 2014, he said.
“The world has changed—regulatory pressures, financial pressures and changes in consumer behavior and expectations toward financial institutions has changed,” said Christensen. “There are technology challenges and the need for analytics and people to run the analytics.”
Christensen said that more healthy credit unions are looking to the future and asking how to best position themselves for the next five to 10 years, and if it is better to go down the road alone or partner with another credit union.
“These conversations are occurring more frequently among medium and large credit unions, and I think it has been evolving over the last few years,” explained Christensen. “It’s in some way it’s an acceptance of what good CU governance is. If you are truly looking out for the best interests of the membership and the employees, you have to determine if you are better off reinvesting the credit union’s capital and going it alone or forming a partnership to accelerate your competitive position.”
As CUToday.info reported, sources have also stated that some big credit unions are scooping up smaller, healthy CUs by offering attractive incentives to leaders of the shop that is merging out. NCUA has also proposed merger rules that would allow for greater transparency during mergers, including disclosing benefits going to executives at the CU being merged out.
Christensen reminded that more consumers shopping online for financial services has placed a greater emphasis on credit unions achieving scale.
“In the past credit unions were somewhat isolated within their own markets and did not feel the intense competitive pressure that exists today,” he said. “Credit unions are competing now nationally and even internationally. Certainly the personal relationship is still very important today, but it’s just part of the overall delivery of services. That has to be complemented, however, with a deep understanding of analytics and other technical components for credit unions to remain relevant.”
Christensen turned to the plight of small credit unions.
“We still have so many small credit unions in the country and it is very difficult for many of them to be able to offer even the most basic of services,” he said. “They will continue fight the battle, but it is getting increasingly more difficult. If you are under $10 million in assets, there probably is a good chance you might not have home or mobile banking or even a solid investment in a website. You have to at least have these things to compete today.”
Services An Issue
It can be a real battle for the small credit union even to make the decision to add a debit card, noted Christensen.
“A lot of these small CUs just don’t have the capacity to offer some of these necessary services,” said Christensen. “And if they choose to add a service, such as debit cards, the have to make the decision and take the risk of drawing down capital to pay for them. The average cost per member to introduce a debit card, for example, is not insignificant. Many are just deciding it may be wiser to partner with a larger credit union.”
Christensen is also concerned for smaller credit unions’ ability to maintain their existing share of the auto lending market as the reliance on indirect lending increases and dealers look to bigger lenders.
The shrinking number of credit unions is just the natural evolution of any industry said Christensen, who added that credit unions don’t always see it that way.
“Look at any other industry and when mergers happen the champagne corks are flying,” he said. “Yet, the credit union industry has been more skeptical of mergers. But what are we doing and who are we looking out for? Are we trying to retain as many credit unions as possible? To me, we’ve always been wanting to gain market share. And we can gain market share more effectively by joining forces and providing better rates and services to members as a result.”
