By most accounts, 2010 should have been a barn burner in the number of credit union mergers, based on rising assessments, the corporate crisis and a bad economy hitting a large part of the country.
The fact is the actual number of mergers-about 150 as of Nov. 1 and slated to hit 175 to 200 by year end, is well below the 238 mark hit last year.
Still, at least one consultant, former NCUA Chair Dennis Dollar, envisions an explosion of mergers in 2011 since "it looks like mergers are becoming a way of life in credit union land and I'll have you know 80% of our consultation calls today are merger related."
Indeed, Dollar, who heads up his own Birmingham, Ala. firm, contends that when one combines voluntary mergers now being seriously discussed along with forced supervisory mergers, "I would not be surprised to see 750 mergers in 2011, almost triple the average number over the past few years."
While outsiders claim the decrease in the number of credit unions "is a sign of a dying industry," Dollar said he recalls a time when there were 24,000 credit unions, only 34 million members and a capital ratio in the 2% range, and when the share insurance fund was having to be recapitalized because of the large number of failing CUs.
Today "there are about 7,700 credit unions with over 90 million members and, even after two years of unanticipated NCUSIF assessments, a capital ratio in the 10% range. I would submit that the credit union industry is a stronger industry today with 7,700 units than it was with 24,000 units," said Dollar.
One troubling merger statistic as uncovered by Merger Solutions Group of Forest Grove, Ore., is the sharp drop off in the asset volume of mergers, down by 24% from a year ago, noted J. David Bartoo, head of the firm. The decline in average size ratio "is down year over year, and this is the first time that has occurred in a decade."
At the same time, distressed and liquidated merger activity has taken off, he said, noting that less than 1% of all mergers were considered "distressed" five years ago. But in 2010, the distressed figure stands at 33.5% of mergers.
"In 2005, over 370 mergers were considered 'healthy,' but year to date in 2010 that number has dwindled to under 130," said Bartoo, whose firm draws its statistics from NCUA Call Report compilations.
While mergers look to be on a certain upswing in 2011, there were CU groups everywhere pushing for collaboration to forestall consolidation. That is particularly the case among small CUs, which through CUSOs and other vehicles, have worked on joint back-office cooperation and sharing operations as a way to cut costs and improve margins.
The two most prominent examples of "survival strategy" have been the CURoots CUSO program being put together by the California-Nevada Credit Union Leagues for formal launch in January and a similar co-op effort underway in Houston led by Beacon FCU of La Porte, Texas.
"There is a growing desire in the industry to form true cooperative CUSOs that can share the escalating costs of back-office tasks," noted Tom Glatt Jr., head of Glatt Consulting LLC of Wilmington, N.C. "What I have seen are not efforts to create yet another CUSO profit-center solution but a not-for-profit cooperative with the dual mandate of providing efficient back-office management support and maintaining a break-even cost structure."
In other words, this is an approach to back-office cooperation "as a means of reducing operating expenses and/or eliminating the need to merge as a survival strategy."
One reason touted for the number drop off in CU mergers during 2010 is an eased stance by regulators who are bending over backward in keeping struggling CUs afloat.
"Watching a board tackle its problems, I think examiners are a lot more lenient and flexible in allowing a credit union to continue even with 4% net worth if they have a legitimate, workable business plan," observed another consultant, Robin D. Hoag, director of the Financial Institutions Group for Doeren Mayhew of Troy, Mich.
Regulators "are less aggressive in some cases when they see a strong executive team at work," suggested Hoag.
Nonetheless, the new NCUA budget for 2011 with added personnel still shows the need for added supervision. "There remain troubled credit unions working through their problems," noted John Worthington, senior vice president of Security Service FCU of San Antonio, a prominent player in merging small CUs.
And after a merger of equals, just how much savings accrues? Benson Porter, the new president/CEO of the soon to be combined $4.7 billion First Tech CU, joining First Tech of Beaverton, Ore. and Addison Avenue FCU of Palo Alto, claims he is already witnessing a positive impact even though that deal does not become effective until Jan. 1.
But Ben Rogers, research director at the Filene Research Institute in Madison has his doubts.
"We just got a draft report of our latest merger study and the results are interesting," said Rogers. "Using data from 1984 to 2009, they show that merger partners, especially the larger partners, struggle to push down noninterest expense after a merger, and that's mostly because the majority of mergers have been absorptions of tiny credit unions by larger credit unions."
But even among the relatively rare mergers of equals, said Rogers. "we're not seeing impressive economies of scale materialize."
Overall, concluded Rogers, amid "all the talk of crisis and havoc, the recession was more like a harsh winter for most credit unions" when it comes to mergers.
"A harsh winter forces you to go into hibernation, live off the accumulated fat of your capital and wait until spring for the merger season to come back around," observed Rogers. "So a handful of credit unions had to seek out shelter together to survive, and that's the rationale behind many mergers of the past three years. Today, even though the harshest part of the winter seems past, all the other credit unions are still a little sluggish. They're just now thinking about coming out of their dens."