Experts Say Fewer Partners and Tight FOMs Will Hinder CU Mergers
The credit union merger scene appears to be in a funk as 2010 gets under way.
For one thing, according to consultants, the availability of merger partners is drying up based on a variety of factors, not the least is the poor economy and strict field of membership rules.
However the NCUA will have to become more flexible on involuntary consolidations to protect the insurance fund, they predict.
"One trend I see is that credit unions are beginning to refuse to take in troubled merger partners without some assistance or guarantees from the NCUSIF, and on that, NCUA at times is wisely providing this support," said Dennis Dollar, former NCUA chairman.
It is better, maintains Dollar, for the insurance fund "to put up $10 million in guarantees than to swallow $100 million if they are forced to liquidate the troubled credit union, and this trend will likely increase unless field of membership issues can be negotiated more effectively for voluntary mergers."
One common assumption David Bartoo, a Portland, Ore. consultant and president of Merger Solutions Group, said is that continuing credit unions are large and high performers. In reality "55% of the continuing credit unions in 2009 were under $100 million in assets and 60% of those were under $50 million," he said.
There is little doubt, said Bartoo that the merger environment is now gripped by the "shrinking partner" phenomenon.
"When we look at some simple, yet key metrics, we see performance numbers falling during 2008-2009, with more than 35% of the continuing credit unions in the fourth quarter showing a negative ROA." Another aspect of the shrinking partner pool, said Bartoo, is the large combination of healthy and at-risk CUs. When this occurs, a strong potential partner may be unavailable to merge with a smaller partner, he argued.
Moreover, because of the increased level of incentives used to persuade good credit unions to take on large problem CUs, some "will simply wait for a credit union to go under and try to get guarantees or get another credit union to absorb a failed credit union," he said.
If the merger is voluntary, said Dollar, principal of Dollar Associates, the tight FOM rules "often get in the way, and if the merger is of an emergency nature, there are few potential merger partners who can make the numbers work to take the losses without some NCUSIF guarantees." The number of large CUs that can "make the numbers work is very limited."
Another trend Dollar noted is that state charters are finding more flexibility in their field of membership interpretations, and as a result, the surviving CU in many voluntary mergers is a state-chartered one.
"To avoid this trend continuing more dramatically, NCUA will need to become more flexible in allowing credit unions with unlike fields of membership to voluntarily merge prior to an emergency situation," Dollar concluded. "In other words, they shouldn't wait until a credit union gets on its death bed to allow a transfusion."
Another factor in the merger slowdown has been new FASB accounting rules on fair-market value implemented at year-end. Those complicated rules, in addition to Federal Trade Commission compliance for large CUs, require the surviving CU to revalue loans and other assets when placed on the books rather than on the date of the merger.
"I guess you could fairly say we've been the guinea pig this year on those accounting rules," said Brian McVeigh, senior vice president of the $839 million NuUnion CU in Lansing, Mich., which is on track to complete one of the nation's largest mergers in 2009-2010 by combining with the $639 million Detroit Edison CU of Plymouth.
The surviving CU, the fourth largest in the state, will become known as Lake Trust CU. Management has already made known it expects the $1.4 billion CU will eventually become a statewide and regional power by expanding into neighboring Ohio and Indiana.
The members of NuUnion were slated to vote on the merger plan at a meeting on Feb. 17 with management expecting approval.
As for the FASB accounting rules, "They have been time consuming and costly and we appear to be charting new ground for other credit union mergers," said McVeigh.
The two CUs had to hire additional CPA help to compute valuations and "the testament to that is just look at the report which is five inches thick," said Stephan L. Winninger, the designated president/CEO of Lake Trust and the current head of NuUnion.