The consolidation trend continues as more and more credit unions, small and large, healthy and troubled, consider merger as a legitimate strategic response to increasing competition for market share.
There was a time when the idea of one credit union openly encroaching upon the field of membership of another credit union was considered if not unthinkable, unacceptable and contrary to the spirit of credit unionism. Those were the days when credit unions, collectively, were referred to as a "movement" and when government, state or federal, would step in whenever it appeared that one credit union's expansion plan would adversely affect the financial welfare of another credit union. In those days, a traditional, single bond federal charter worried only about providing good service and a sufficient array of products to keep their members from turning to banks. That was worry enough. The concerns over those issues, coupled with effective lobbying, eventually resulted in the ability of credit unions to compete more effectively with local banks by offering their members many of the same products and services offered by banks, but at better rates and in a more personalized atmosphere. In those days, credit unions had little to fear from each other.
Today, particularly small or single bond federal credit unions have a great deal to fear from each other. NCUA's former protectionist policies have largely evaporated. In lieu of extending protection to credit unions complaining of encroachment, NCUA today advises affected credit unions to respond by competing more effectively. But the more cumbersome federal expansion rules (partly the result of the political pressures created by the lawsuits and lobbying campaigns brought by bank trade associations against NCUA) made that difficult. As a result, over the last several years, a number of large federal charters determined that their growth strategies would be better served by converting to more flexible state charters. This "trend" further fueled the competitive pressures on smaller credit unions, especially in states like Florida, because state credit union laws permitted large credit unions with memberships based on geographic boundaries to compete head to head with all of the credit unions located within those areas. And what was once viewed as "predatory encroachment" became ordinary competition. The intensified pressure on smaller and midsized credit unions necessarily began to impact growth, profit and capital, and as those effects increased, the concept of merging, as a means of perpetuating credit union service to members, became a more commonly considered-and more frequently elected-strategic alternative.
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Consolidation will continue for some time. Approximately 4,000 charters have disappeared since the early `90s. During that period, industry assets have more than doubled, and credit union membership is on the rise. Industry pundits predict that the trend, both in the reduction of charters and in the growth of assets, will not settle for another few years. Clearly, this continued asset growth is not merely the result of weakened credit unions merging as a means of bailing out. It suggests the contrary. Increasingly, financially healthy credit unions are talking to each other, discussing the wisdom of combining resources to grow. Merging, rather than the last resort of a failing institution, has become a prosperous industry's means of pruning itself in order to gain a stronger competitive edge. As a result, merger agreements are becoming more sophisticated and complex, many providing for employment opportunities for the CEOs and staff of the merging credit union, premium bonus payments to departing staff, board representation in the surviving entity, and liquidating or "bonus" dividends for members. The ability-post-merger-to continue using their own brand names has further allayed the concerns of some credit unions that once resisted merger because they feared the loss of their name and the connection with their memberships. An example of this is the 2004 merger of PGA Credit Union into IBM Southeast Employees FCU ("IBM"). Prior to the merger, PGA Credit Union, a state charter, although not failing, did not have the capital to effectively market (or administer) its products and services to the more than 25,000 professional golfers and their families throughout the United States. But the PGA brand name described the important association between the credit union and its membership. As a result, the merging partners agreed that PGA Credit Union, even as a branch of IBM, would be able to maintain its brand name.
In the past, credit unions have viewed merging in a negative and apprehensive light, something that occurred only when a credit union had failed. But today's consolidation trend suggests quite the opposite. Although failing credit unions will continue to be forced to liquidate or merge, an increasing number of healthy credit unions are discussing mergers with other healthy credit unions not because they foresee financial failure, but because they see merging as a legitimate strategic alternative, an opportunity to take advantage of the economies of scale resulting from combined memberships and resources, in order to more effectively compete for market share, by providing better service and a wider array of products to a broader base of members.
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