The 230 credit union mergers in 2010 might seem like a lot of mergers. But it actually represents the second lowest level in the past 30 years—down from 260 mergers in 2009 and 300 in 2008.
The recent recession, new accounting rules, and an ever-increasing compliance burden have slowed merger activity, according to Mike Schenk, CUNA’s vice president of economics and statistics.
But not everyone is backing off mergers. Some credit unions are proceeding with their merger plans in an attempt to accelerate growth, diversify existing fields of membership, or explore completely new fields of membership.
Behind the slowdown
Multiple factors are contributing to the slowdown in credit union merger activity:
- Lower earnings and reserves mean there are less funds available to pay for merger costs.
- The recession increased the potential cost of overlooking risks and liabilities during the due diligence process, causing some credit unions to retreat from potential mergers.
- Declines in capital ratios made some credit unions less willing to consider the potential negative impact of a merger on their capital levels.
- New rules moved merger accounting from the “pooling of interest” method to the “acquisition” method. The acquisition method values assets and liabilities at their “fair value” at the time of the acquisition. This increases the odds that the continuing credit union could experience a “hit” to net worth.
- A wait-and-see approach. Some credit unions could be holding off on mergers in hopes that NCUA will eventually offer higher levels of assistance for mergers with financially distressed credit unions.
Strong credit unions sometimes look for mergers to boost membership growth, pursue market penetration or diversification, and support fixed operating costs, points out Ron Nice, owner of merger and planning consulting firm Nice Enterprises Inc., Kremmling, Colo. This could range from acquiring a smaller credit union to finding a cultural match in a “merger of equals,” where two strong credit unions combine organizations to leverage the strengths
Struggling credit unions are drawn to the bargaining table by economic challenges that put pressure on earnings and reserves, the burden of regulatory compliance, the difficulty of finding high-quality CEOs, or an “unsustainable” business model where the cost of providing products and serving members exceeds the profitability of those products and services.
“If you look at credit unions that are in trouble, you will find that most are overbranched and overstaffed, and are carrying a cost load that isn’t consistent with their asset size,” Nice says. That model is likely to drain credit unions, he adds, particularly those with less than roughly $750 million in assets, with the size varying by local costs and conditions.
Nice says many struggling credit unions have fallen into the trap of trying to be “all things to all members” as their primary financial institution (PFI), rather than focusing on targeted loan and deposit products and using automation to lower operating costs.
In contrast, credit unions with sustainable business models engage in mergers that complement existing operations, whether the merger partner is located across the street or across the country.
“A great merger is a marriage of complementary strengths and like-minded cultures that can do something greater together than remaining two separate organizations,” Nice says.