The “Disappeared”

Since the beginning of 2008, the year the financial crisis began, 1,175 credit unions have merged or otherwise closed for business according to NCUA’s 5300 Call Report data.  These credit unions, whose last reported total assets sum to $31B, range from $2.3B to numerous smaller credit unions with total assets measured in the thousands of dollars.  In this post we’ll take a deeper look at these merger / closures.

The rate at which credit unions have merged or closed has been quite volatile as can be seen in the chart below (blue line). Mergers / closures appear to follow a seasonal pattern with a pronounced uptick in the number of mergers / closures occurring in the fourth quarter of each year. There was also a notable slowdown in the number of mergers / closures starting in 2010 and lasting through the first half of 2011. 

Interestingly, NCUA noted in its “NCUSIF and TCCUSF Quarterly Statistics - September 30, 2012” report (page 8, slide 16) that the number of credit union failures in 2010 matched the previous high of 28 in 2009.  The slowdown of 2010 and early 2011 can thus be attributed to a reduction in the number of voluntary mergers.  

Note: Timeline in above chart marks the quarter when a CU ceased reporting its NCUA 5300 Call Report data.  Total assets shown above represent the last reported, i.e., prior quarter’s, total assets.

The assets involved in these mergers / closures (red columns in previous chart) have also been unevenly distributed across this time period.  A surge of consolidation activity occurred in the fourth quarter of 2008 and first quarter of 2011 when total assets of merged / closed credit unions exceeded $3B.  The fourth quarter of 2008 was marked by four $200M+ credit union mergers / closures and the $2.3B First Tech – Addison Avenue merger occurred in the first quarter of 2011. In contrast, total last reported assets of merged / closed credit unions fell below $1B in 4 of the 18 quarters since the start of 2008.

While there have been a few mergers / closures of relatively large credit unions since 2008, the overwhelming majority of mergers / closures involve relatively small credit unions.  Nine out of 10 credit unions that disappeared had last reported total assets of $50M or less.  Only about 2% of these mergers / closures involved credit unions with last reported total assets in excess of $250M.

Source: NCUA 5300; base equals total number of credit union mergers / closures since 2008.

Credit unions with last reported assets greater than $250M comprised approximately 47% of total assets of all credit unions that disappeared since 2008.  In contrast, credit unions with assets of less than $10M comprised over 70% of the total number of credit unions that merged / closed, but only a little more than 7% of the last reported total assets of these credit unions.

Source:  NCUA 5300; base equals total last reported assets of credit unions that merged / closed since 2008.

A lack of long-term profitability is another common characteristic of credit unions that have merged / closed. As the following chart shows, 2 of every 3 of these credit unions had a negative average ROA over the last 3 full years prior to their merger / closure.

Source: NCUA 5300; base equals total number of credit union mergers / closures since 2008.

Most of the credit unions (66%) that have disappeared were well capitalized based on their last reported net worth ratios, i.e., their net worth ratios were 7% or higher.  Almost one half had net worth ratios of 10% or higher.  

Source: NCUA 5300; base equals total number of credit union mergers / closures since 2008.

In summary, the pace of credit union mergers / closures has been quite volatile and typically peaked in the fourth quarter of each year.  Also, credit unions that merged / closed since 2008 were generally:

• Smaller in size (91%  with total assets <$50M)
• Earnings challenged (68% with negative 3-year ROAs )
• Well capitalized (66% with NW ratios ≥ 7%)

Will these trends hold going forward?  Will the economic and regulatory dynamic in financial services impact consolidation?  Will the pace of merger activity accelerate in 2013?  Will mergers of larger credit unions pick up?  When pondering these questions, it’s important to remember a disclaimer that is commonly used on investment prospectuses:

“Past performance is no guarantee of future results”.