Consolidation Is Picking Up Steam

Everyone talks about it: The credit union industry is consolidating on all fronts. If you stop and take a careful look around, you find consolidation is happening at breakneck speed – maybe faster than most of us realize. Corporate credit unions sometimes get lost in the shuffle, but the corporate network is poised to drop to 26 corporates by year-end. 2006 could go down as the most active year ever for corporate credit union mergers. There are currently four marriages in play: Mid-States/Empire, Southwest/Southeast, WesCorp/ VolCorp, and Corporate America/Louisiana Corporate. There is something striking about this list – the five largest corporates in the country are all involved in current merger deals, proving even the very large think they need to get larger to take advantage of economies of scale. The recent engagement of the $10 billion Southwest and $4 billion Southeast (see story, page 1) shows these two top tier corporates are thinking of the future; they want to be around when the corporate network dwindles to 12 to 15, which I think it will. The writing has been on the wall in the corporate network for some time. Corporates by nature are aggregators, that’s the model. They exist to aggregate CU funds to offer competitive investment offerings, loans and a host of correspondent services – they don’t do much else. Sure they all have various other offerings, but at the end of the day they are aggregators whose primary role is as liquidity providers. It’s overly simple, but the bigger the better. The smaller corporates can continue to survive by staying closely tied to the king of the aggregators, U.S. Central, but that ride only goes so far. Turning to natural person credit unions, in 1990 there were 14,547 CUs – 2005 ended with just 9,062. That’s a decline of over 5,000 CUs, more than 300 a year for the last 16 years. This trend is not slowing, in fact the new twist is mergers of similar sized, larger CUs. It’s now not uncommon to see two CUs with a couple hundred million dollars in assets each merge. Many believe mergers of equals will be the next wave. We have already seen two $500 million CUs merge. Maybe a billion dollar CU merger is next? Credit union leagues are following suit. It happened with Nevada and California, Maryland and D.C. and now North Dakota and South Dakota. There is not enough space in this column to run down all the vendor mergers in the credit union space, but let’s take the most recent – the CO-OP Network/Encore merger. This certainly isn’t a blockbuster deal, but it is indicative of another sector of the industry that is consolidating, the electronic funds transfer area, which by the way is a major source of income for credit unions. Here too industry players are realizing the benefits of joining forces. The CO-OP picked up 10 million transactions a month by adding Encore. This merger also shows the mindset of credit union CEOs is changing. Encore is owned by 124 member credit unions. It was founded because its members wanted a better mousetrap; these CU-owned organizations traditionally have tremendous pride of ownership. In the past it’s been difficult to merge credit union-owned organizations, especially credit union leagues. Politics get in the way and fights over who will be on the board break out, but there seems to be a growing acceptance among credit union CEOs about the need to consolidate for the good of the bottom line. Where is this all going? Are we headed down a road to one giant corporate and one giant credit union, served by one giant vendor? Absolutely not, but we’re clearly headed to an era of larger regional players. The corporate network will realize that a dozen or so large regional players can bring economies of scale that will provide their member credit unions with the edge to stay competitive. Natural person credit unions will continue to amalgamate to a size that can ensure viability in their regions. There is no magic asset or membership cut-off, as all credit unions are unique, but the statistics point to 100,000 members as the sweet spot. The growth in the credit union industry is occurring rapidly at credit unions with 100,000-plus members. Anyone who knows me understands that I am not anti-small credit union, but I am finding it harder and harder to see how they will survive. We all love the old stories of credit unions being started by a few people pooling their money in a shoebox and being run out of a small office, but those days are over. Aside from community development credit unions, new credit unions are just not being chartered. There is no punch line to this column. I certainly can’t predict whether a credit union industry made up of fewer, larger players will be better. What I do know is credit unions need to serve their membership with a broader array of products and services than ever before. There are too many financial services providers out there doing everything under the sun for credit unions to think plain vanilla offerings will be enough. -