What Does It Mean?
In the midst of economic uncertainty, the credit union industry seems to be trending back to pre-pandemic levels of merger activity. In 2020, acquisitions and mergers declined for the first time in ten years – primarily due to temporary and permanent pandemic-driven closures. However, the number of merger approvals has rallied sharply this year and is predicted to continue along that trajectory. The National Credit Union Administration’s Merger Activity and Insurance Report for the first quarter of 2022 announced approval for 41 credit union mergers (outpacing 2021, when 33 mergers were approved in the same time frame). According to Forbes, as of June 21, 2022, there were 5,041 credit unions in the U.S. This number has decreased exponentially since 2013 when there were between 6,700 and 7,000 credit unions doing business. However, during that same period, the total assets of credit unions increased each year. All this brings up the question of why credit union mergers are ramping up, and what that means for your credit union.
WHAT IS A CU MERGER?
When one credit union absorbs another and the surviving entity retains the name and brand – or the new consolidation is renamed and rebranded as one different credit union – a mutually beneficial merge of businesses is created. Depending on the particular arrangement, the merging entity’s assets and liabilities are entirely transferred to the “surviving” credit union, or it undergoes a restructuring and retains some of its branches. The result is a larger financial institution with upgraded resources and services.
WHY DO CREDIT UNIONS MERGE?
There are several reasons why a credit union would seek to consolidate. The most typical ones are:
- growth and branch expansion
- improved member benefits
- access to better technology
- financial and/or membership erosion concerns
- lack of succession planning by former leadership
Growth and expansion: It has been traditionally common to see small credit unions absorb even smaller institutions in pursuit of a growth phase. Now, it appears that more similarly sized credit unions (small and large) are seeking mergers with each other. Quoting an article from early 2022 in CUToday, merger expert Glenn Christensen states that “…the industry is growing at 9% to 10% per year on an annualized basis, …so, for a credit union to be able to at least sustain itself from the industry average for growth they’re going to need to grow at about 10%, and that equates to about an annualized ROA of 1%.”
Better benefits for members: In most cases, merging members will benefit from a wider branch network, a more extensive product selection, competitive rates, higher dividends, and better technological efficiency. Add those benefits to the personalized service that credit unions are known for, and the attraction is clear.
Access to higher technologies: As those in our industry already know, credit unions boast a more member-focused experience as opposed to what big banks can offer. With FinTech advancements in digital banking becoming increasingly more accessible, credit unions can compete on a higher level. Nowadays, cryptocurrency transactions are widely accepted, adding value to the member experience. Account features such as ultra-user-friendly apps for electronic devices, mobile deposits, and 24-hour access are now considered standard offerings. Small credit unions have a much harder time vying for members without meeting these expectations.
Financial and membership decline: With the push toward eliminating NSF fees among credit unions, smaller institutions stand to suffer from the resulting income erosion. To many, a merger will be seen as the only solution to this problem. Oftentimes, a foreclosure precedes an acquisition.
Bad planning and mismanagement: There are times when the Board and Executive Leadership age out or otherwise departs with a failure to plan for succession. Perhaps there was a plan in place that for one reason or another was not successful. Occasionally a deal falls through, and sometimes financial misconduct by key personnel is why a credit union can no longer stand on its own.
THE LANDSCAPE IS CHANGING
New rules have resulted from a need for financial ethics transparency, among other things. These new rules increase the transparency of mergers for members and block proposed mergers that don’t seem to provide enough worthwhile benefits.
In 2018, NCUA updated its Merger Rule Provisions for federally insured credit unions with a new process to allow for more time between when the meeting notice is sent to members and the date of the merger vote. The new merger process requires the board officer and CEO of both credit unions to certify that there are no non-disclosed merger-related financial arrangements and allows members of the merging FICU to submit comments on the merger proposal for posting on the NCUA website.
WHO WILL BENEFIT?
Provided the merger has cultural and organizational compatibility, it should ideally create value for everyone involved. But first and foremost, a merger should serve to benefit the members. Credit unions were established on a not-for-profit cooperative model to give people a member-centric option for saving, borrowing, and managing money, as opposed to a bank with the primary benefit going to shareholders. Founded on a principle of “members as owners,” it stands to reason that a merger should only be considered when it strongly benefits existing members. For example, the integration of two workforces will not impact just the employee experience. It may be disconcerting to members when they find themselves suddenly interacting with unfamiliar staff. What steps will be taken to assure members are comfortable with the changes?
ALTERNATE MERGERS
Some smaller credit unions are taking a new avenue in seeking partnerships with FinTech companies and banks. In a NAFCU-sponsored podcast, LendKey’s David Mark says, “A FinTech partnership allows credit unions to expand into new markets, reach new members, and provide new products/services to the existing member base with greater efficiency and at a lower cost. These partnerships can be leveraged for success while staying compliant if the right processes are in place.”
Likewise, bank acquisitions by credit unions have been more frequent. In spite of facing an inevitable culture shock, the advantages sought are enhancements in commercial lending services, advanced digital capabilities, and more diverse expertise. However, there have been some CRA (Community Reinvestment Act) regulatory implications regarding the impact on lower-income communities, and tax exemption status challenges.
WHAT DOES THIS MEAN FOR THE FUTURE OF CREDIT UNIONS?
Data is showing that the credit union industry is growing at 9–10 percent a year. This signifies a “restructuring” of the credit union system as a whole. Smaller credit unions will have trouble maintaining growth as FinTech becomes more sophisticated and members demand the latest high-tech services. Some will find that the only option for maintaining member growth is to merge.
The “merger of equals” pattern indicates that mid-to-large-sized credit unions will continue to form “super credit unions,” which will ultimately change how consumers view the friendly neighborhood credit union. In combining the cooperative value proposition with the big-box concept of technology and services, we can only hope for the best of both worlds.
