As Ranks of the Frail Grow, Large CUs Look to Mergers for Balance Sheet Cure
FOREST GROVE, Ore. -- Strategic industry consultants on both coasts report an increase in CU clients with assets of $100 million and more asking about their merger options.
David Bartoo's Oregon-based Merger Solutions Group and Dennis Dollar's Dollar Associates in Birmingham, Ala. both candidly reported their mid- to large-size credit union clients are more often considering voluntary mergers as a potential balance sheet solution.
Bartoo said while total industry stats may report gains, the number of struggling credit unions has increased, particularly those in large metro-politan areas with community charters or broad fields of membership.
"Keep in mind that less than 4% of all mergers involve a merging credit union with assets over $50 million," Bartoo said. "However, in looking at our trends and statistical analysis of merger risk for each credit union, we are seeing a rise in the likelihood of merger activity among larger credit unions, due to a trend of declining performance."
Merger Solutions Group's business is to help credit unions identify as many potential merger partners as possible and business is booming. Using balance sheet metrics, Bartoo can quickly produce a list of struggling, merger-likely credit unions in any metro area, asset class or field of membership category.
Bartoo considers six aspects that contribute to merger likelihood, including negative performance trends, a high concentration of credit unions competing for market share, a metro area with intense overall financial institution competition, CEOs at or near retirement, an area with more community charters than SEG-based, and significant outstanding debt in mortgages or direct lending programs.
It takes a good two years to identify declining performance trends, Bartoo said, so trending stats should be weighed more heavily than current metrics.
But, trending doesn't lie.
"Our modeling has noted a steady increase in the number of large credit unions with declining performance trends over the past three years," Bartoo said. "Until these trends start to move in a positive direction, we feel that the number of $100 million-plus merging credit unions will continue to rise."
Dollar said the corporate benefits market is saturated for SEG-based credit unions, and success with community charters and underserved neighborhoods is proving more difficult than expected.
"They're looking for growth options and finding few, other than simple organic growth," Dollar said, adding that organic growth is difficult to achieve one small, 10-employee business at a time.
"Then they start looking at a merger as a possibility. In my firm, we have worked with several mid- to large-size credit unions, to consult with them on a potential merger, and several have gone forward."
Bartoo said the competition crunch is regionalized, with California, Florida, Michigan and Texas logging in as tough territory for even the $100 million and larger set. More specifically, Lansing, Mich.; Houston; Dallas; Tampa/St. Petersburg, Fla. and southern California are ripe for merger activity.
"No modeling can predict every merger, as the most significant element in the merger process--emotion--can come into play at any time," Bartoo qualified.
However, the consultant made the bold prediction that for 2008, San Diego is the most likely city to see more mergers of institutions with more than $100 million in assets, he said. It's not just competition but performance issues, too.
"Other states like Ohio, New York and Pennsylvania show a significantly lower likelihood of having a merging credit union over $100 million in assets," Bartoo said.
Interstate mergers are another hot topic, both consultants agreed. Bartoo said credit unions of all sizes need to consider out-of-state credit unions, and he finds his clients sell themselves short of opportunities across state lines.
For one thing, out-of-state partners don't typically overlap branches or
fields of membership. Additionally, merger partners in separate regions create opportunities for merging partners to retain brand identities and some local legacy, he said.
There's a new attitude concerning mergers, both consultants noted, and it's trending away from the days of small or struggling credit unions desperately searching for partners.
"There's a side of us that would say, well, we hate to see a healthy credit union merging and eliminating a healthy credit union charter; but the other side, would we rather wait until it becomes unhealthy?" Dollar asked.
"You don't want to wait until someone is on their deathbed before giving them a transfusion," he said.
Additionally, Dollar said, the definition of necessary merger has changed, reflecting a more urgent responsibility toward the best return possible for members.
Back in the 1970s, when there were 25,000 credit unions, they represented about 30 million members and about 3% capital, he said. In contrast, today there are only 8,200 credit unions, but they represent almost 90 million members and nearly 12% capital.
"Which is the stronger industry? I'd submit that it's stronger today," he said.
An increased interest in mergers doesn't mean small credit unions are history, Dollar said, but a desire to grow and improve is necessary to survive.
"Every $2 billion credit union in America was once a $2 million credit union," Dollar said. "The potential for growth is there for everybody. Nobody can make the claim that they don't have the potential to grow."
Strategy is key, Dollar said, and for some, mergers make the most sense.
Bartoo sticks by his position that mergers must be equitable for both sets of partners, and credit unions should avoid sacrificing one to save the other whenever possible.
"Mergers aren't necessarily bad for the industry, in terms of overall strength, but ultimately, the benefit to the members must remain the deciding factor," he said.