Credit unions have mushroomed in popularity in recent decades as fees charged by commercial banks drove millions of Americans towards the not-for-profit financial services sector.

However, within the credit union community itself, a significant internal restructuring is changing the landscape — smaller credit unions are gradually disappearing as their larger counterparts amass the lion's share of the industry's growth in loans, assets and membership.

According to data compiled by NCUA and Peak Performance Consulting Group, the number of federally-insured credit unions has plunged from about 15,000 in December 1984 to roughly 6,500 currently. They project that figure will dip below 4,000 by the year 2020 — a nearly 75% drop in about 35 years. (The number of credit unions in the United States peaked at nearly 24,000 in 1969).

"Obviously, the historical trend has resulted in fewer, but significantly larger, credit unions," said Marvin Umholtz, a credit union consultant. "That trend is expected to continue, if not accelerate."

According to data from NCUA, the number of annual credit union merger approvals has actually remained relatively flat since the turn of the century — ranging from the low 200s to the low 300s yearly. As such, the pace of mergers is not accelerating — however, as few new credit unions see the light of day, this inexorable consolidation process continues to shrink the overall number of these institutions.

Meanwhile, assets held by credit unions have soared in excess of $1 trillion — meaning that these burgeoning funds are controlled by an ever-decreasing number of entities.

Size Matters

As Credit Union Journal has reported in its ongoing series, The Great Divide, size does matter.

As of mid-year 2014, large federally-insured credit unions (that is, those with at least $500 million in assets) accounted for only 7% of the total number of credit unions in the country, but held almost $760 billion, or 70%, of the industry's assets. Moreover, the five largest individual federally insured credit unions alone held nearly 12% of total assets.

Or, put another way, all credit unions holding at least $100 million in assets — which accounted for less than one-fourth (23.3%) of all federally insured credit unions — held more than 90% of the movement's total assets.

Moreover, not only are the larger credit unions dominating the CU landscape, they account for much of the businesses' overall growth and generate superior financials.

For example, as of June 2014, NCUA data found that the largest credit unions are attracting the biggest amount of new members, while the smallest credit unions are losing membership rolls. Credit unions with assets of at least $1 billion are growing their membership at an annual clip of 6%, while credit unions under $2 million in size are losing 2.5% of their customers every year.

"New credit union members will join the largest credit unions that can offer the greatest variety of financial products and services," explained Umholtz.

Ben Rogers, research director at Filene Research Institute, noted that larger CUs enjoy a more comfortable operating environment than their smaller counterparts.

Citing data from NCUA and Callahan & Associates, Rogers said that as of mid-year 2014, credit unions with assets of at least $1 billion had an annual operating expense of only 2.68%, while for the other end of the spectrum — tiny credit unions of $2 million in assets or less — that figure was 4.24%.

"The higher you go in terms of asset size, the lower the operating expense ratio," Rogers said.

Similarly, there is a direct correlation between credit union asset size and annual loan growth — credit unions of $1 billion in assets or more are witnessing 12.4% annual increases in loan portfolios, while the smallest credit unions are suffering 1.6% annual drops.

"Many of the smallest credit unions are just a handful of car loans going bad away from being insolvent," said Umholtz.

Hence, small credit unions face a plethora of reasons requiring their absorption into larger institutions in order to survive — including weak economies of scale, thin margins, a prolonged climate of low interest rates, the emergence of alternative banking methods (i.e. mobile transactions), and the public's demand for expanded, more diverse and efficient services.

Regulation and Compliance Blues

Meanwhile, outside factors also drive the flurry of mergers, most notably costly compliance and regulatory issues which eat away increasing amounts of resources at credit unions, placing a particularly pernicious burden on smaller institutions.

"The sheer volume of new regulations and tweaks to existing regulations — and the time, money and resources required to monitor and abide by them — is simply crushing for the smaller credit unions, which typically have modest staffing," said Mike Schenk, a senior economist at CUNA. "It's such a huge burden — along with the monetary and other penalties of failing to comply — that I think regulations are forcing many credit unions to merge with other larger institutions in order to cope with high operating expense pressures and the challenges of expanding product offerings. Mergers can help by producing economies of scale and scope — allowing institutions to deliver both a greater volume and a greater variety of increased services."

A Widespread Culture of Mergers

But these challenging conditions are familiar to companies across other sectors as well.

Schenk indicated that the consolidation among credit unions simply reflects the multi-decade restructuring of the entire financial services industry. Indeed, banks have also been merging at a rapid pace for years due to cost and competitive pressures, resulting in a dramatically lower number of U.S. banks (down from a peak of about 18,000 in 1985 to just below 7,000 currently).

As in the realm of commercial banking, many credit union mergers involve a troubled smaller firm merging into a stronger larger firm. This arrangement provides the formerly small operation with expanded products and services, while the larger credit union gains new membership.

Dennis Dollar, an Alabama-based credit union consultant and former chairman of NCUA, cautioned, however, that some smaller credit unions are prospering and do not necessarily need to merge.

"I've seen some very innovative small credit unions, and many of them will eventually grow into larger credit unions," he said.

Indeed, many smaller credit unions remain quite viable enterprises.

For example, PatrickRedo, CEO of ALLUS Credit Union, a $36 million institution based in Salinas, Cal., told Credit Union Journal that one of the key's to his firm's success has been their checking products from which they derive significant fee income and interchange income.

The boss of another flourishing small credit union, Kenneth Poyton, who runs the $44 million Postal Government Employees (PGE) Credit Union of Providence, Rhode Island, said the key to staying afloat and prospering is simply "service, service and more service."

"It is vital for smaller-asset credit unions to provide superlative service for its membership," Poyton told Credit Union Journal. "We reach out to our members to gauge their needs, not by email, but by phone calls. Even if we are small, we offer the same financial products and services as the billion-dollar credit unions."

Dollar adds that "every billion-dollar credit union was once a $10 million credit union. They met their members' needs effectively and the response was that more members and member business came their way… Many smaller-to-moderate size credit unions are innovatively investing in products, services and technology in order to drive managed growth. Those credit unions will be fine. But a smaller asset credit union that is sitting on its capital and not moving toward growth is… on a collision course with merger."

Schenk also noted that some smaller credit unions, in fact, are bucking the trend and flourishing. "Small-asset credit unions tend to be engaged with their customer base and the most successful focus heavily on lending," he said. "They have differentiated themselves and found niche where they can prosper."

As an example of such an institution, Mark Lynch, a credit union consultant and real solutions field coach, cited Northside Community Credit Union, a tiny $7.8-million entity based in Broadview, Ill., just outside Chicago, as an example of a flourishing smaller-asset credit union. "Typically, the secret [to a prosperous smaller-asset credit union] lies in an active board, a dynamic CEO, a great vision and focused strategy," Lynch told Credit Union Journal. "They also tend to work very well on creating partnerships; [for example,] they partner with community organizations, churches, schools, etc."

North Side Community FCU was founded more than forty years ago to help residents access mortgage loans after they had been "redlined" — a practice whereby banks denied financial services to certain residents often based on race. According to its website, NorthSide has a "unique niche of serving people who are not using mainstream financial institutions or who may be experiencing financial challenges."

Similarly, Miriam De Dios, CEO of Coopera, a credit union consulting firm that focuses on the Hispanic market, cited Village Credit Union, a Des Moines, Iowa-based credit union with $10.8 million in assets. "When they changed their charter to a community charter they started focusing on a Hispanic growth strategy and that is largely what is driving their growth today," De Dios stated. "They also serve a large immigrant population."

Indeed, some credit union mergers feature a combination of equals — two similarly modest-sized credit unions merging in order to leverage their operations.

As an example of a 'combination of equals' Dollar cited the $1.7-billion United Federal Credit Union of St. Joseph's, Michigan which was formed through the merger of First Resource Credit Union and United Federal Credit Union of Buchanan in 2006. "The merger has had time to mature into a growing, successful credit union," Dollar noted.

The Bright Side of Mergers

However, mergers are an inevitable — and often beneficial — fact of life in business.

Consolidation reflects not a troubled industry but rather one that is maturing and strengthening, said Dollar. "There is nothing inherently wrong with this as every vital industry in America is likewise consolidating — banks, insurance companies, grocery stores, car rental companies, discount stores," he explained. "Credit unions, averaging one merger per business day since 2000, are not exempt from the business reality that is growing consumer demand and the need to have economies of scale. We are a stronger industry today with about 6,500 credit unions and average capital levels above 10% than we were 25 years ago with 15,000 credit unions and a much lower capital level."

Thus, if financial stability and enhanced member service are the measures of a healthy industry, Dollar cites, credit unions "are much healthier today with 6,500 stronger, more competitive institutions."

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