Could the Industry be Merged Out of Existence?
On Friday, NCUA’s Office of Small Credit Union Initiatives released a series of video modules dedicated to “merging from the merging credit union’s perspective.” It’s like the flight attendant reminding passengers that their cushion can be used as a flotation device as they are flying over the Atlantic Ocean.
These videos would have been more appropriately titled “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” If you think I’m exaggerating, watch the videos for yourself.
The recurring themes are (1) there is no shame in merging; (2) merging when your credit union is relatively strong gives you more leverage than merging when you are weak; (3) merging can preserve and increase membership value; and (4) contracts can be negotiated to protect employees and services. And did I mention that there is no shame in merging, especially for those of you whose board meetings are taking on the look of the activity committee of a Boca retirement village? Module 2 ends with this uplifting quote from the CEO of a $900 million credit union: “Most small credit unions are too proud to merge. They see merger as a failure rather than a benefit to members. So they will only merge at the inflection point of a CEO retirement or financial stress.”
What bothers me about the videos isn’t their content: NCUA’s ever so subtle nudge is a reflection of reality. There are approximately 275 mergers a year. Mature industries consolidate, particularly in the financial sector. Besides, the trend is by no means unique to the credit union industry. Just ask First Niagara. People want cheap, effective products and services and the only way of providing this grab bag is to hold down costs and increase economies of scale. And, let’s be honest, a credit union with a shrinking membership and no strategic plan for growing the base isn’t helping anyone by living off its excess capital.
What concerns me about the videos is that unlike the commercial banking sector, the credit union industry could literally merge itself out of existence. As of December, there were 481 credit unions with $500 million or more in assets and a little more than 200 of those have assets of $1 billion or more. From a purely economic standpoint, many credit unions with less than $500 million should consider merging. But, the credit union industry is unique. While it’s indisputable that the bigger credit unions can more cost effectively provide services and that many of our largest credit unions use their increased size to give people a better deal than they would get from banks, it’s doubtful that the industries not-for-profit cooperative model can survive politically as if the industry is comprised almost exclusively of billion dollar institutions. It’s ultimately the small guys – even the endangered home-based CUs – that keep the industry viable.
The industry is unique in that it needs a healthy mix of asset sizes. If a credit union has no chance to grow then, of course, merging makes sense and you should take a look at these videos. But, I’m afraid that there are too many credit unions that are willing to give up without a fight.
For instance, there is a great generation of community conscience, tech savvy millennials: why are they in such short supply on credit union boards? States like New York have made important changes to help credit unions grow by expanding their fields of membership: why have so few credit unions taken advantage of these changes? Credit unions exemplify the cooperative model: why are they so reluctant to form CUSOs to combine back office services? With so many aging boards, why are there credit unions without succession plans? With so many Americans looking to make the most of their money, why are there credit unions that refuse low income status even though it would help them grow and help their members?
NCUA’s right. There is no shame in merging, but there is shame in going down without a fight.