Jennifer Lehn, chair of the CUNA Operation, Sales and ServiceCouncil, has firsthand experience in CU mergers.

Numerica Credit Union, in Spokane Valley, Wash., where Lehnserves as executive vice president, has completed seven mergersthroughout the past six years, and currently has one inprogress.

The mergers haven't had a large impact on Numerica because thecredit union is much larger than those that have been merged intoit.

“We are community chartered, and all of the credit unions we'vebeen merged with have been single fields of membership,” Lehn said.“Today it can be harder to grow and remain viable with a small,sponsored membership.”

Howard Pitkin, banking commissioner for the department ofbanking in Connecticut, said he is definitely seeing consolidationgoing on throughout his state, causing a shift among the number oflarge credit unions.

“Here in the northeast, in Connecticut, you have to understandthe economy isn't doing well,” he said. “You're probably watchingasset quality corrode, an adverse business cycle right now.”

There can be a plus side to consolidation, Pitkin said.

“There's a larger field of membership, and that membership isprobably served by better technology and more ATMs, and a branch ortwo. There is a better ability to pay and maintain managers, and abetter array of products and services.”

Not only are there benefits to merging, but there can also bedefinite downsides to going it alone.

“There's a tremendous expense with compliance,” Pitkin said.“There are some real issues to contend with if you're a small shop.Our experience is that the smaller credit unions are feeling thepressure from a lot of things right now.”

Pitkin said the transactions they approve are“pro-competitive.”

“The larger credit union has a larger lending portfolio,” hesaid. “We won't approve it unless there is improved safety andsoundness.”

For Minnesota's state-chartered CUs, the volume of mergers hasnot increased from prior levels, despite economic pressures onearnings and net worth, said Charles Schwartz, chief examiner forthe state's division of financial institutions.

“At present, many credit unions are having a difficult timeachieving positive earnings results,” Schwartz said. “Net-worthratios, although still adequate, have declined in the past twoyears at many institutions. Merger may be seen by management as ananswer to curtailing member service, in order to decrease operatingexpenses.”

In Texas, the need for collaboration and cooperation hasincreased in the current economic environment, said Mike Delker,vice president of credit union relations, Texas Credit UnionLeague.

Texas averages 15 mergers per year, and Delker said that by nomeans would he call mergers “a trend.”

“There are a number of reasons why a credit union would considera merger, but the primary reason is simple: to better meet theneeds of their membership,” he said. “In today's economic andregulatory environment one might expect to see a spike in mergers.However, that just isn't the case in Texas. I think this speaks tothe fact that the credit union movement overall remains a strongand healthy system.”

In North Dakota, most of the mergers in recent years haveinvolved small CUs merging into larger ones.

“That's probably a sign of the times,” said Timothy Karsky,commissioner for the North Dakota department of financialinstitutions.

At present, the state still has nine CUs with less than $5million in assets.

“So you can make it,” Karsky said of small CUs, “but I thinkthey struggle.”

William Mellin, CEO of the Credit Union Association of New York,said he is seeing the definitions of small versus large creditunions change due to mergers.

“If we take definitions in the technical sense, if we start withwhen I started with the movement, a large credit union was one with$50 million in assets,” he said. “Now we have credit unions with $4billion. My personal definition of large credit unions is now halfa billion and up. The way I see it is the larger credit unions arejust getting larger quickly.”

Mellin said he has seen an increased level of cooperation amongCUs throughout the merger trend.

“That's what separates us from other financial institutions,” hesaid.

In New York in recent years, the merger rate has actually gonedown, Mellin said.

“For years you could almost count on 30 credit union mergers peryear,” he said. “Last year we had 12. This year so far we've hadtwo. The whole merger scenario has almost stopped.”

Mellin attributes the slowdown to changes in the law that havemade merging a more difficult process.

“The problem today is that because the accounting laws havechanged, it isn't as easy to merge,” he said. “You have to gothrough a whole evaluation. You have use outside accountants. Youcan't do it yourself. I think over the next few years we will havefewer and fewer mergers.”

It's a sentiment shared by Dennis Dollar, principal partner forDollar Associates LLC in Birmingham, Ala.

“The definition of a small credit union will understandablyincrease as more and more mergers take place, thus increasing thesize of the combined credit unions,” Dollar said. “All mergers willnot, however, be the most often thought of pattern of a smallcredit union merging into a larger one,” he pointed out. “Therewill be a significant number of mergers by smaller credit unionstogether and also of larger credit unions coming together.”

According to Dollar, the current economic situation has madesome CUs more willing to see merging as an option. “Today'smarketplace, earnings and regulatory environment is driving mergerconsideration by many credit unions who three years ago said theywould never consider it.” Jason Moon, public information officerfor the office of financial and insurance regulation for the stateof Michigan, is seeing more competition and less cooperation amongCUs.

“While industry representatives have more direct knowledge oncompetitive issues, fewer credit unions competing in the samemarkets clearly creates a more competitive environment,” he said.“Cooperation among credit unions has been an industry strength thatmay be eroded somewhat as consolidation continues.”

In Michigan, there were eight mergers in 2009. So far in 2010,three mergers have been completed.

Soundness and safety are considered in every merger, Moonsaid.

“Before approving any credit union merger, our agency conducts athorough review of many factors, including the new entity'smanagement, asset quality and earnings potential to ensure that itwill be operating in a safe and sound manner.”

Dollar noted that where there is accelerated merger activity,it's a sign of CUs becoming more cooperative in order to servemembers better.

“Credit unions are maturing to realize that they accomplish morethrough cooperation than by fighting with each other,” he said.“Shared branching, no fee ATM networks, loan participations,CUSOs-these are all a sign of enhanced credit union collaborationand cooperation.

“Yes, credit unions will compete with each other more as theyget larger through mergers, but credit unions have come to realizethat the real competitors that want to eat their lunch are notother credit unions. The real competitors are traditional,for-profit banks who want to remove the not-for-profit competitivedownward pressure on pricing that credit unions bring to themarketplace.”

Dollar said that nationwide, CUs have been merging at an averagerate of one per business day since 2000.

“This rate is going to accelerate over the next few years due todeclining margins, need for economy of scale, NCUSIF assessmentpressures, growing regulatory burden, aging of senior managementand the opportunity to serve members better through a growing andmore diversified credit union,” he said. “I would not be surprisedto see the industry at 5,000 credit unions by the year 2015,largely due to mergers.”

NAFCU President/CEO Fred Becker said he expects a number ofemergency mergers by CUs that are having trouble.

“An emergency merger is a different breed,” he said. “Andthere's the opportunity for credit unions to diversify across statelines as a result of that. My sense is that we are in for some verylarge liquidations or conservatorships.”

Becker said cooperation among CUs remains, but “it's not what itwas.”

“There's…still a willingness to help but more of a resistance.It's unfortunate but it is what it is,” he said.

Jay Johnson, executive vice president of Callahan &Associates, believes that the merger trend is being overstated.

“It's really a pretty consistent level of turnover that occurseach year,” he said. “The first quarter of this year was actuallylower than the first quarter of last year.”

And Johnson said there has been a shift in how CUs view mergersand what they can accomplish.

“We are seeing a dynamic in how people are looking at mergers,”he said. “Merger is not a strategy. It's a way to move ahead with astrategy. I also think credit unions are thinking more aboutcooperation as a way maybe they can address the challenges andopportunities they may have in the marketplace.”

David Adams, president/CEO of the Michigan Credit Union League,said the mergers are beneficial, leading CUs to become moreefficient.

“They're able to leverage the expertise they can bring with thatsize,” he said. “It's actually a good trend that has beenaccelerated by financial pressures.”

When a small CU merges into a larger CU, there is little impacton the management structure, Adams added.

“But when two small credit unions merge, it shakes upeverything,” he said. “You wind up restructuring everything. Butthey realize they have to be able to accept a high level of changewhen they integrate two cultures and two teams.”

Adams noted that consolidation is by no means the sole provinceof the CU industry.

“I can't think of a single industry not having consolidation,”he said. “It's driven by the economy, consumer level for high levelof service, speed, demand, value.”

Although mergers can be beneficial, Adams said, “I think it'spossible to go too far. I think the relatively gradual rates ofconsolidation we are seeing bode very well for the future of creditunions.”

Jeff Russell, executive vice president of The Members Group,said he expects the industry to continue seeing mergers for severalreasons.

“The focus on mergers seems like it is a result of continuingcosts of regulatory changes, as well as the need to drive down theoperating expenses of a credit union,” he said. “Also, with thelarge number of credit union CEOs who are scheduled to retire inthe next five years, that presents an additional impetus for creditunions to look at mergers.”

NCUA has not released new merger numbers since 2007. In 2007,there were 242 mergers, down from 285 in 2006 and 265 in 2005.

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