CONSOLIDATION IN THE US CREDIT UNION SECTOR: DETERMINANTS OF FAILURE AND ACQUISITION John Goddard University of Wales, Bangor Donal McKillop Queen’s University of Belfast John Wilson University of St Andrews 1

Summary 2  We examine the determinants of disappearance through liquidation or acquisition for US credit unions,  Around 3% of the total population have disappeared annually over the past 10 years.  We estimate competing risks hazard functions for the probabilities of liquidation and acquisition.  Covariates of the hazard functions include controls for technological capability as well as other variables

Motivation 3  Technology improvements in data collection, storage and processing capabilities  costs of product development and service delivery have declined.  Deregulation  institutions can trade more freely  increasing range of products and services.  Increased competition has led to an increased emphasis on efficiency through scale and institutions have responded by growth through merger and acquisition.  US credit unions are no different {1969 – 23,866 CUs; 1999 – 10,628 CUs; ,372 CUs}

A Snapshot end

Merger – the Credit Union Story 5  Studies include - for the US (Fried et al; 1999) and Australia (Ralston; 2001 and Worthington; 2004)  Insights -  Institutions must be large to remain competitive.  Retirement of CEO and Sr. Management - smaller credit unions face serious challenges in replacing such key individuals – alternative may be to merge  Desire for wider distribution networks (extended common bond) and/or to provide more services

Failure – the Credit Union Story 6  Key study Wilcox (2005) for US suggests the following are important reasons for failure  macroeconomic conditions (high real interest rates and high unemployment rates)  Microeconomic factors (smaller, younger, less well capitalised, less profitable and less efficient credit unions are more likely to fail)  However, credit unions may be less risky than banks.

Mergers and Technology 7  Mergers take place when institutions respond to technological shocks that alter cost and demand conditions  Technological innovation requiring significant capital investment gives institutions an incentive to cooperate which may be a forerunner to merger {Smythe, 2001}  Mergers may serve as an important vehicle for the diffusion of new technology {Mansfield, 1969; Damanpour, 1992}  Table profiles technology adoption by US credit unions

Product Provision and Delivery Channels 8

Estimation method  hazard function  contribution to partial likelihood  log-partial likelihood function 9 Hazard function modelled asdescription

Preliminary Data – ‘the disappeared’ 2001 to

Preliminary Data – Non-Time-Varying Covariates 11

Preliminary Data – Mean Values of Time- Varying Covariates: All Credit Unions 12

Preliminary Data – Mean Values of Time-Varying Covariates: Credit Unions That Disappeared During the Subsequent Six- Month Period 13

Hazard Function Estimation Results (part one) 14

Hazard Function Estimation Results (part two) 15

A Final Comment 16  A variety of factors have been identified as influencing the hazard of disappearance - many are common to studies in other sectors  Unique to credit unions were factors such as charter type and common bond categorisation  More importantly and perhaps with resonance for other sectors was the link between hazard of disappearance and technological capability  Using website sophistication as a technology proxy it was noted that the risk of disappearance reduced as the level of website capability increased  Next step – explore in depth the role of technology in dictating credit union behaviour