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Which Credit Unions are Acquired?

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Abstract

Recent years have witnessed a wave of consolidation amongst US credit unions. Through hazard function estimations, this paper identifies the determinants of acquisition for credit unions during the period 2001-06. The hazard of acquisition is inversely related to both asset size and profitability, and positively related to liquidity. Growth-constrained credit unions are less attractive acquisition targets. Institutions with low capitalization and those with small loans portfolios relative to total assets are susceptible to acquisition. The investigation presents unique empirical evidence of a link between technological capability and the hazard of acquisition. During the period 2001-06, when there was sustained growth in the use of internet technology, credit unions with no website were at the highest risk of acquisition.

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Notes

  1. As credit unions have become larger and more sophisticated, there has been a gradual shift away from using volunteers for day-to-day operational needs and towards salaried employees. “Increased complexity has reduced the proportion of volunteer labour which has tended to reduce credit union earnings” (Black and Dugger 1981, p.538).

  2. Technological change in financial services can be classified under four main headings: Customer Facing Technologies; Business Management Technologies; Core Processing Technologies; and Support and Integration Technologies. Customer Facing Technologies include Automated Teller Machines (ATM), Electronic Funds Transfer at the Point of Sale (EFTPOS), Telephone Banking, Call Centres, Internet Banking, E-Commerce and E-Card Business and Customer Relationship Management Systems (CRM). Business Management Technologies include Data Warehousing, Data Mining, Middleware, Credit and Risk systems. Core Processing Technologies include Cheque Processing, Statement Issuance, Interest and Charging Systems. Support and Integration Technologies include Human Resources Systems, Finance Systems and Technology Support Systems.

  3. Gorton et al. (2006) develop a hybrid theory that combines managerial motives and a regime shift. They argue that managers benefit personally from operating the firm, and therefore have an incentive to keep the firm independent. However, if a regime shift increases the importance of economies of scale, managers come under pressure to increase firm size, either for defensive or for strategic positioning reasons. “Our models show that in industries with economies of scale, firm size becomes the driving force for merger dynamics. Often this leads to profitable acquisitions. However, if a firm becomes very large and its managers’ private benefits are high, it may engage in unprofitable defensive acquisition.” (Gorton et al. 2006, p4).

  4. Some non-bank studies also report evidence in support of the hubris and agency conflict hypotheses (Berkovitch and Narayanan, 1998; Rossi and Volpin 2004). Cross-country merger studies suggest that differences in accounting standard and shareholder protection are significant drivers of shareholder activities (Rossi and Volpin 2004; Buch and De Long 2004; Pozzolo and Focarelli 2007).

  5. McKillop et al (2006) examine mergers of Irish credit unions while Goth et al (2006) provide a commentary on the motives for mergers in UK credit unions.

  6. A community charter covers persons who live, work, worship, or attend school in a well-defined local community, neighborhood, or rural district. An associational charter covers members and employees of a recognized association. This includes individuals or groups whose members participate in activities developing common loyalties and mutual interests. An occupational charter covers employees of the same entity, or related entities, or a trade, industry, or profession.

  7. Smythe (2001) examines mergers in US manufacturing industries between 1895-1904 using a Schumpeterian framework. The turn-of-the-century merger movement was “ ... the consequence of an aggressive, unremitting technological competition that concurrently swept across a wide swathe of American industries in the wake of the technological innovations clustered at the end of the nineteenth century. Because the implementation of these innovations required significant capital investments, and because the outcome of the competitive process was highly uncertain, firms’ incentives to cooperate with their rivals were increased at the same time that sustaining such cooperation at arms length was made impossible. The only way of realizing the benefits of cooperation, therefore, was by internalizing it through horizontal mergers. Once realized, the cooperation helped facilitate the capital investments necessary to implement the new technologies” (Smythe 2001, p254).

  8. In attempting to devise a typology of technology-based investment, Callahan and Associates (2007) distinguish between critical applications; steady state technologies; monitoring technologies; and up-and-coming technologies. Critical applications are technologies with a high adoption rate and high planned investment, including bill pay services, internet home banking, e-statements, and automated fraud tools. Steady state technologies are those with high adoption but low planned investment, including website calculators, outsourced firewall management, and voice-over internet protocol. Monitoring technologies are those with low adoption and low planned investment, including CRM software, video conferencing, and online mortgage approval. Up-and-coming technologies are those with low adoption and high planned investment, including business back-up systems; and new member account funding via the internet.

  9. Merger and acquisition proposals require prior approval from the NCUA, dependent upon compliance with state and federal legislation, and an assessment of whether the proposal is in the interests of the members of the credit unions concerned. The proposal must also be presented at a membership meeting, and there are various thresholds for the proportions of members voting in favour.

  10. The 1998 Credit Union Membership Access Act lowered the regulatory hurdles for the conversion of credit unions into banks. The benefits associated with conversion include increased access to capital, and the relaxation of restrictions on investment and lending activities. However, credit unions that convert lose their tax-exempt status, and must comply with the 1977 Community Reinvestment Act (Wilcox 2006, 2007). Around 30 conversions took place between 2001 and 2006.

  11. Credit unions cannot raise capital as easily as other financial institutions, because they cannot issue equity. However, the tax-exempt status of any capital the credit union raises internally through retained earnings may be interpreted as a form of subsidy to shareholders. This has been justified as beneficial for tackling financial exclusion, on the grounds that credit unions serve low-income clients. However, a 2001 Federal Reserve survey of consumer finance found that credit unions do not actually serve a higher proportion of such clients than other financial institutions. Recently, US Congress has asked the NCUA to collect data to identify the types of services provided to members, the income distribution of members, and levels of executive compensation and benefits to board members (US Government Accountability Office 2005; National Credit Union, 2006b).

  12. The laws governing state chartered credit unions’ common bond limits and powers tend to be more liberal than the corresponding federal laws. State chartered credit unions may therefore assume more risk or adopt more aggressive portfolio management techniques. However, state chartered credit unions are unable to branch across state lines, and are therefore subject to a significant constraint on their growth.

  13. There is equivalence between a hazard function model in which the baseline hazard is parameterized, and a multiperiod logit model (Shumway 2001). In the present case, the non-parametric Cox proportional hazards specification is used for the baseline hazard, and the two approaches produce similar but not identical estimation results.

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Acknowledgements

The authors would like to thank Bob Adams, Allen Berger, Bob DeYoung, Doug Evanoff, Phil Molyneux, Neil Murphy, Evren Ors, Linda Powell, Frank Schmid and Larry Wall for useful comments, insights and suggestions. We would like to thank an anonymous referee for a number of comments which helped us strengthen the paper. We would like to thank the participants at the Mergers & Acquisitions of Financial Institutions Conference at the FDIC, Arlington in November 2007 and the Workshop on Cooperative Banking at the Helsinki School of Economics in December 2007. The usual disclaimer applies. John Goddard gratefully acknowledges Ente Luigi Einaudi for Monetary, Banking and Financial Studies, Rome, for hospitality and financial support during a visiting appointment as a Targeted Research Fellow in Autumn 2007. John Goddard gratefully acknowledges the support of the Marie Curie Transfer of Knowledge Fellowship of the European Union’s Sixth Framework Program at the Department of Economics at the University of Crete (contract number MTKD-CT-014288), during March–July, 2008.

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  1. Bangor Business School, Bangor University, Bangor, Gwynedd, LL57 2DG, UK

    John Goddard

  2. School of Management and Economics, Queen’s University Belfast, BT7 1NN, Belfast, UK

    Donal McKillop

  3. School of Management, University of St Andrews, The Gateway, North Haugh, St Andrews, Fife, KY16 9SS, UK

    John O. S. Wilson

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Goddard, J., McKillop, D. & Wilson, J.O.S. Which Credit Unions are Acquired?. J Financ Serv Res 36, 231–252 (2009). https://doi.org/10.1007/s10693-009-0055-x

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