<p>WEST PALM BEACH, Fla. – In just about every corporate credit union merger occurring in recent years, the term "economies of scale" has been uttered. The acquiring corporate says the more girth it has, the cheaper products and better rates it will be able to deliver. Some in the industry believe this push for economies of scale means mergers will continue and the number of corporates will dwindle to possibly single digits. But just how far can corporate CU consolidation go given the flip-side of economies of scale – diminishing returns. Diminishing returns occur when an entity's size becomes a hindrance rather than a help. As a corporate gets bigger, it's more difficult to maintain capital levels. Some leaders believe the very nature of what a corporate is is going to change, and asset size isn't going to be the measure of a strong corporate. Mike Mercer, president/CEO of the Georgia Credit Union Affiliates and who was in on the ground floor of the creation of the corporate network believes corporates are nearing a transition stage that will change how corporates serve CUs, and how corporates are structured. "In my view the business model that will emerge will not be so much built around size, but around nimble advisory type capabilities. The differentiator will be your people who can develop an investment policy and practice tailored around the risk parameters of each credit union," said Mercer. He said corporates' role will be far more about how to help CUs optimize their spread income rather than corporate reps calling on CUs trying to give them a few more basis points on the investment of the day. Mercer said tomorrow's corporate will have move interest sensitive balances off the balance sheet and maintain mostly capital accounts and settlement balances. "The measure of success will be the share of the credit union's wallet, as opposed to dollars on deposit at the corporate," said Mercer. Corporates' source of revenue will come mostly from fees for managing CU money and spread income and fees associated with settlement. "Corporates will be much less a manufacturer's rep, and more of an independent agent. Right now corporates' primary objective is to sell obligations off their own balance sheets. It's a sales culture as opposed to a consultative culture," said Mercer. He said if corporates truly play this advisory role they'll be pushing a lot of noncorporate investments. This type of network wouldn't just be for the big corporates. Joe Herbst, president/CEO of the $4.2 billion Empire Corporate FCU, Albany, N.Y., said economies of scale isn't just about assets. He said strong capital can allow smaller corporates can do what the bigger ones do. "You have to have enough capital to go out and invest in your infrastructure to do different things. Smaller corporates can raise capital through paid-in-capital and membership capital shares. It's not just about asset size," said Herbst. He gave the example of Central CU Fund, Auburn, Mass, which offers an incredible amount of varied services for a being one of the smallest corporates at about $300 million. "It can be done. Look back five or ten years and you saw corporates you would consider small that have grown and are doing more than some of the biggest corporates," said Herbst. Herbst agrees with Mercer that a corporate's HR assets are going to become more important in the future than just growing financial assets. Still consolidation has been occurring in recent years and interviews with credit union CEOs around the country show that they expect consolidation to continue and many hope it does. "I think fewer is better. It's an asset size thing. WesCorp has the critical mass to do some amazing things. I'm just not sure where the critical mass is, whether it's $2 billion, $4 billion, or what," said Dick Wellner, president/CEO of the $475 million Corporate America Family CU, Elgin, Ill. Wellner said there's clearly too many corporates today, but couldn't guess what the ideal number would be. Wellner's CU uses both Mid-States and Corporate One, each of which has a national FOM. It relies on Mid-States for more of the core services, such as clearing, overnight accounts and item processing. Corporate One is used mostly for investments. The use of multiple corporates is becoming quite common among mid-size and large CUs, and it reflects just how competitive the network has become. "I think there's a value of having a select number of corporates that you deal with to compare prices so you get the best investment. We just call them both and say we're interested in laddering our portfolio; what's your rate on this investment?" said Wellner. Competing to a fault But CEOs are questioning whether today's corporates, which have national FOMs, aren't just kidding themselves with all this competition when the only way to really grow may be consolidation. And it's not lost on credit union CEOs that it's expensive for corporates to compete nationally. State Employees CU, Raleigh, N.C., President/CEO Jim Blaine said corporates are "squandering resources as a movement" through all their national marketing campaigns. "The original concept (for the corporate network) is not how I think it's turned out. As I recall it was not to have 30 individual, competing institutions. Thirty are not needed. They all have national FOMs now. I'm not sure that a fragmented system will deliver in the long run," said Blaine. But as long as competition is here, Blaine said his $7.5 billion CU will take advantage of it. "We have joined six corporates and we are gaming the system. If they're going to compete against each other and think that's the way to go, then every Monday morning we're going to get bids on our money and see who has the best fit for us. If they truly are competing, they shouldn't expect loyalty. The highest bidder wins," he said. Blaine said corporates are tripping over themselves in offering identical products nationally. One example there is bill pay. A number of corporates are marketing their own bill pay service nationally, and it has led to some behind-the-scenes battles between corporates. Association of Corporate Credit Unions Executive Director Gigi Hyland challenged Blaine's view of such a competitive, non-cooperative corporate network. "Corporates have been strategically partnering with each other. If they can't offer a product, they will look around and see what they can leverage from other corporates," she said. She cited Corporate One's SimpliCD program as an example of how corporates are cooperating. Blaine said a corporate leadership group like the ACCU and U.S. Central should have more representation from natural person credit union CEOs, so corporates can get more insight into what CUs are looking for from the corporate network. Currently the ACCU has no credit union CEO representation. Hyland said natural person representation on ACCU just hasn't come up. As for U.S. Central, two of its nine directors are from natural person CUs. The $1 billion GTE FCU, Tampa, Fla., President/CEO Bucky Sebastian says he doesn't know what the magic number is, but he just can't believe that there's a need for 33 corporates. "I don't think there should be one, but 33 or 32 is probably many more than we need. Maybe we'd be better off if we had six, eight or 10," said Sebastian. Why fewer corporates? "Corporates with less than $1 billion in assets are probably not large enough and do not have the wherewithal to provide the level of service of a bigger corporate. I don't know how small corporates survive and thrive when they're in the wholesale business and have less than $200 million in assets," said Sebastian. Sebastian said ego is probably the main reason consolidation won't go as far as it needs to. "People don't like to talk about it, but you get into egos, league politics. I don't know how you get out of that," said Sebastian. He said people on the boards of corporates don't want to give up the prestige of their board seat, and credit union CEOs and league leaders want their state to have its own corporate for a variety of reasons. Jim Bright, President/CEO of Scott CU, Collinsville, Ill., said corporate consolidation is clearly going to continue, but there are dangers of it going too far. "Theoretically I guess you could divide the country into five regions and say there's a corporate for every region. But after so much consolidation you get a corporate system that doesn't report to anybody. No single group of credit unions can influence them because their members are so diversified, or it's so large, you have to start catering to whoever is on the board," said Bright. Bright said a credit union is a credit union is a credit union only goes so far. Credit unions in Oklahoma, for example, have different needs than CUs in Illinois, so regional corporates would have to be very responsive to all their states for it to work, he said. He doesn't know if a very large regional corporate could pull that off. Bright's CU is a member of Mid-States which was the surviving corporate in the biggest merger in CU history when it merged with INDICORP. Bright said things change for everyone after a merger. "Before the Mid-States and INDICORP merger I knew most of the members of Mid-States. I don't know a lot of credit unions in Indiana and we have different needs. I did support the merger and it was a good deal, but credit unions have to figure out if the economies of scale is worth giving up a measure of familiarity and influence with the organization. Any one credit union now has less influence on the corporate." He said if the number of corporates drops dramatically from the current level, the economies of scale advantage could quickly turn into diminishing returns. "In order for two corporates to merge there has to be a very significant benefit for the member owner credit unions. I think as these corporates consolidate, it's going to be harder and harder to justify that another merger is necessary. There is a point after which economies of scale do you no good," said Bright. Dave Preter, president/CEO of Mid-States believes with national FOMs and technology capabilities allowing corporates to serve CUs virtually anywhere, corporates are duplicating efforts in many areas. He thinks consolidation is necessary, but doesn't know if mergers are the way to go. "I would like to see the system come together itself and come up with a better way. I don't believe it's going to happen. It would have been a great thing if we said `the system is growing, regulations are changing, let's look at the system from the inside out'," said Preter. Preter said the competition among corporates is giving CUs a lot of good options today, but there are downsides. "Competition is not bad. It has made prices decrease and yields better for credit unions. We have to be very careful though that competition won't cause some credit unions to be unserved in some markets. As a corporate comes into a new market, they're not going to be interested in serving 100% of another corporate's members. They're going to want the most profitable credit unions," said Preter. He also said if you look at the line item for marketing in corporates' budgets, you're going to see a lot bigger number than in years past. Preter said corporates in some states may not have the CU assets to support their own corporate, and would probably benefit from a corporate merger. But in other states, small corporates are very valuable to their members, yet competition from larger corporates can take its toll on them. "It's like Home Depot and a Tru-Value. You use your local hardware store and think it's great, but if Home Depot moves in down the street and you start going down to that Home Depot, guess what Tru-Value hardware stores are going away," said Preter. Preter said even though he's the leader of one of the nation's largest corporates, if a merger where Mid-States was not the surviving corporate made sense for the industry, he'd be all for it. A good example of a state with not a lot of CU assets, but that has a beloved corporate is Louisiana. The $151 million Louisiana Corporate has a lot of members that also belong to the $6 billion Southwest Corporate FCU because Southwest served the state before Louisiana had its own corporate. While many Louisiana CUs belong to both corporates, they say they wouldn't know what to do if Louisiana Corporate went away. Edna Hickman, president/CEO of $7.5 million District 08 FCU, Alexandria, La., said she just likes the personal touch of Louisiana Corporate. She said the CU belongs to both Louisiana Corporate and Southwest Corporate, but has transferred the majority of its business to Louisiana. "There are lots of differences. Southwest requires a full 1% member capital account. Louisiana does not. Southwest pays less dividends on their accounts than Louisiana and because we are a smaller credit union when our account rep from Southwest is in town they never call. This is not true of Louisiana Corporate," said Hickman. Audrey Cerise, president/CEO of the $160 million ASI FCU, Harahan, La., said Southwest provides good service, but the local presence of Louisiana Corporate can't be beat. "I'm not going to tell you we don't get a good response from Southwest, because we do. I get a personal `I know you' response from Dave (Savoie, CEO of Louisiana Corporate)," said Cerise. Is this warm and fuzzy personal touch so important for corporate services? Cerise says it is because the corporate gets a feel for a CU's management style and can use that to provide better service. The ACCU is commissioning a study to look at what role corporates will have to play to best serve CUs in the future. The study's primary goal is not to look at the ideal number of corporates needed, but that will be one aspect that is covered, in addition to what products and services corporates of the future will need to provide. [email protected]</p>