Size matters. Larger credit unions are more successful driving membership growth, loan growth and operating efficiencies. In mid-year 2015, credit unions with more than $1 billion in assets grew membership, on average, four times as fast as those with between $100 million and $250 million in assets. The group of credit unions with less than $50 million in assets saw their membership decline. Credit unions with every asset size grew loans, but the smallest grew by 3%, those between $100 million and $250 million grew 8% and those with more than $1 billion in assets grew 13%.
The benefits of scale compound. Larger credit unions can market differently. They can hire differently. They can build and buy better technology. Their growth compounds.
But the picture is not an inevitable march to irrelevance for all but the largest credit unions. Every charter has served, and most continue to serve, important groups whose identities are caught up in the identities of the credit union. From churches, to manufacturers, to municipal employees, the fabric of the system is threaded with credit unions whose identities are valuable and whose members would miss them.
Here's an interesting route to keep those local identities and also achieve powers of scale.
The Network Credit Union
Imagine an aspen grove. Above the ground, each trunk seems like an individual tree. But underneath the ground, the roots comprise a dense network that connects each trunk. What seems to be two, or four, or fifteen trees is really just one organism. That kind of system is the basis for the network credit union, a way for multi-SEG credit unions under current regulations to build a single entity while keeping their identities intact.
It takes at least two credit unions merging together, along with approval from the NCUA to receive the network credit union designation. Within the network credit union merger process, a preliminary surviving credit union will be selected in order to minimize the market-to-market impact. The network credit union's field of membership becomes the composite of the fields of membership of each credit union that's part of the network credit union. The new network credit union name must include the term "Network Credit Union."
The Governance Twist
One of the first tangles in any merger discussion is usually how to deal with ongoing representation of the merging credit union. Representation is influence, and without seats at the table, some partners balk. These conversations are hard enough in a one-to-one merger, but imagine the challenge of five or 10 cumulative partners tussling over seats on the surviving board. The network model slices that knot with two cuts. First, the continuing credit union appoints an advisory committee composed of officials from the merged credit union to serve in an advisory role. Local input (though not legal governance) is preserved. Second, the continuing credit union reserves one seat on its nominating committee for a representative from each merged credit union. This is where the model lives and breathes. This means less representation immediately but allows for more scale over time.
The regulatory efficiencies are direct: Deposit insurance, safety and soundness requirements, reporting and governance all rest at the network credit union level, along with supervision, examination and statutory limitations. The board members of the network credit union are elected by the members of all the divisional credit unions. Each divisional credit union has its own advisory board of directors and maintains a CEO.
But Will it Work?
It's already working. Although the legal structures differ, Desjardins, the world's largest federated credit union, operates a similar model. Smaller, but still significant, is First West Credit Union in British Columbia, with $10 billion in assets and three separate brands operating in different markets across the southern band of the province. And in Ohio, MedPro and Ohio HealthCare have combined (while keeping their trade names) to form a $73M institution: Healthcare Credit Union System. The credit union seeks additional healthcare partners that want to preserve "Ohio's healthcare credit unions' legacies, traditions and identities."
Growth is still hard, but plugging into a network may help.
Ben Rogers is managing director, research for Filene Research Institute. He can be reached at 608-661-3745 or [email protected].
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