Are Credit Unions Merging the Movement Out of Existence?

 

By Robert McGarvey

 

For CU2.0

 

The headline in American Banker screams: “Credit unions are bulking up via M&A — and banks are nervous.”

The story continued: “Since March…there have been three deals in which the credit union being acquired had more than $300 million in assets. And a New York investment banker said he is working on a fourth deal — with even more possibly on the way.

“Those deals threaten to create bigger, and more formidable, credit unions to compete against banks.”

The thesis, plainly, is that while mergers once were the exclusive province of generally small, dying credit unions, suddenly bigger ones are getting the urge to combine – and bankers should be trembling in their boots.

Word of caution: remember the source of this contention.  American Banker.  

Word of advice: file all this under fake news.

That’s a label I never thought I’d use but it just may fit in this instance.

According to American Banker, “nearly 670 credit union mergers took place between 2015 and 2017.”

That compares to 774 bank mergers in the same period, per American Banker.

The article – naturally – quotes a chorus of banking voices all of whom warn that the big bad credit unions are rushing to combine in order to better to gobble down the bankers’ cheese.  

The narrative is compelling. But fundamentally flawed.  

What is fact is that in the vast majority of cases, credit unions merge because one is grievously injured and there are pressures on a stronger credit union to do the right thing and take over the weakling.

Very occasionally, the weak institutions are large – think taxi medallions – but, generally, the weak are small, sub $100 million in assets and they find themselves unable to compete in technology and services and compliance with complex regulations increasingly try the talents and resources of tiny credit unions.

Meantime, numbers out of CUNA Mutual, by way of NCUA, in fact show that the number of mergers fell in 2017.  

And, yep, most mergers involve tiny credit unions. In February, said NCUA, there were 9 mergers and the average asset size was $13 million.

Personally I believe many more credit unions will close (typically by merging out of existence) in the next 10 years. Possibly  as many as 2000, roughly one-third of today’s 5700+. But most will be small. A few larger institutions will shutter due to grievously bad operational decisions (such as an over concentration in taxi medallion loans) but they will be the exception.

Also exceptional – extremely – will be mergers of two large, healthy credit unions.

On paper merging Navy and PenFed  might make a kind of sense – to better compete with USAA and the money center banks – but I believe my chances of winning PowerBall Friday night are significantly better than the odds of that merger occurring.

Five years ago in Credit Union Times, I wrote a story headlined: “Mergers Will Continue to Cull the CU Herd.”

Not much has changed since then, except many hundreds of credit unions have merged out of existence since 2013.  

The article picked a number – $100 million – as a kind of arbitrary benchmark for the size a credit union needed in order to survive the turbulence that lay ahead.  But it cited other experts touting bigger numbers, as much as $500 million in assets.

The reality is that there is no known minimum size. A lot depends upon the ingenuity of the top managers, the energy of the line staff, and the passion of the FOM. If enough members want their small credit union to live, it will. Simple as that.

When they don’t, it won’t.

But it certainly is sheer rubbish to insist that there is a wave of mergers of big, healthy credit unions and this is threatening the survival of community banks.

What’s threatening their survival is the same as what’s threatening many mid sized and larger credit unions: the growing strength of money center banks and, especially, the rise of non banks.

It’s idiocy for bankers to worry about credit union mergers.  Worry about Quicken Loans is my advice. Or any of many non bank car loans companies. Or any of many non bank p2p players.  

Really. Just plain idiocy to gnash teeth about credit union mergers threatening banks.

But it makes good fake news headlines, doesn’t it?