A spate of mergers among larger U.S. credit unions suggests that the operating environment remains challenging — and that could be bad news for the smallest institutions.
Recent industry consolidation has primarily occurred among credit unions with assets of $50 million or less, according to the National Credit Union Administration's annual report for 2017. Seventy-two percent of all credit unions have $100 million in assets or less, the NCUA found.
But the regulator pointed to an increasing number of larger credit unions using M&A to grow and increase market share.
A recent case in point: Two large Michigan credit unions announced plans to merge in April: Novi-based Vibe CU, which has more than half a billion dollars in assets, and Waterford-based Oakland County CU, which had $351.2 million at the end of 2017, S&P Global Market Intelligence data shows.
This was the third credit union merger announced in a month in which the merged institution had more than $300 million in assets, and Sandler O'Neill & Partners is now working on another, according to Managing Director Peter Duffy.
"The operating environment is not getting easier, and boards have begun understanding that scale matters if the member is going to be served competitively," Duffy wrote in an email.
Huntington Beach, Calif.-based NuVision FCU and Anchorage, Alaska-based Denali FCU also recently announced plans to merge. NuVision FCU had $1.56 billion in assets at the end of 2017, while Denali FCU $657.2 million.
Between 2011 and 2016, the NCUA approved only 11 mergers involving credit unions of at least $300 million in assets. One of the largest in this bunch received regulatory approval but was later called off: Lake Michigan CU, with $5.46 billion in assets, and $2.61 billion United FCU announced plans to merge in October 2015 but backed out of the deal in early 2016.
If larger institutions are feeling pressure, smaller companies may be hurting even more.
Sean Cahill, president and CEO of $85 million Southwest 66 CU, said in an interview that credit unions below $100 million often live on the edge of sustainability. It can be difficult to recover from just one bad year, he said.
And that situation is exacerbated because small institutions feel regulatory burden to a disproportionate degree, he said. New Truth-in-Lending Act and the Real Estate Settlement Procedures Act loan disclosure requirements, for example, forced the credit union to revamp all of its mortgage-related documents and processes. The resulting $30,000 cost might not be burdensome for a larger organization, but it was a direct hit to the Odessa, Texas-based credit union's bottom line.
Though President Donald Trump and his administration have pushed to reduce regulations, there has not yet been much direct impact, Cahill said. But he pointed to the NCUA's plans for extended examination cycles as an example of something that could lower the burden in coming years. In 2017, the NCUA's field staff reported 579,330 examination hours — about 100,000 less than in 2016.
Southwest 66 has had some merger discussions with smaller credit unions but has not looked at joining a larger institution. Cahill said the company likes its independence and feels it can compete in the market at its size. Instead, the credit union will open its third branch — and its first outside of Odessa — in Midland, Texas, this summer. He said Southwest 66 is also considering a charter expansion as it looks for ways to grow.
Being small means fewer resources, but some in the industry say it can also come with some benefits. Ronaldo Hardy, president and CEO of $97 million Southwest Louisiana CU said smaller institutions can be nimble, make rapid changes and bring new products to market more quickly.
"Small is a mindset — not an asset size," Hardy said.