"It was the best of times, it was the worst of times." That's a prophetic famous line from A Tale of Two Cities that accurately describes what's happening in the credit union industry. Credit unions are different in so many ways. There are still single-sponsor CUs out there, some are community charters, others are multi-SEG charters, and still others are adopting Trade, Industry, Profession charters. There are plain vanilla credit unions offering auto loans, share drafts and savings accounts. Other CUs provide members everything under the sun, including brokerage and trust services, a full menu of insurance products (much of this done through CUSOs of course), and an array of online services. Credit unions have different philosophies. Some are more bottom line driven, embracing relationship pricing, risk-based pricing new sources of non-interest income. Other credit unions treat members the same no matter if they have $5 in their account or $50,000, and choose to stick to their core products. Unfortunately there are also major statistical differences between credit unions that show a wide discrepancy in performance. An analysis of the latest stats shows that while this may be one industry, it's clearly divided. Where is that dividing line? That's up for debate, but for purposes of this column I offer up $500 million as the equator. * Membership growth for CUs over $500 million is 4.37%, nothing to write home about until you look at growth at CUs below $500 million-a paltry 1.24%. * Asset growth in the larger category is 7.67%. Not bad at all. In the smaller sized CUs it's only 4.20%. * Loan growth at $500 million and above CUs is a solid 13.85%, compared to 8.92% for those below $500 million. * Shares are growing at a 7% clip at larger CUs, and at just a 3.43% pace at the smaller CUs. * Return on Assets in the $500 million group is 0.93%, certainly not great by historical standards, but respectable. At the smaller CUs it's just 0.70%. These stats are the story of the day folks. They tell us everything we need to know about where credit unions are going and what they are going through now. It's getting tougher and tougher for small and mid-sized CUs to compete. Some have nice member niches and that's terrific, but most are going to find themselves continuously squeezed by margins, the marketplace and the future. We're already losing about one credit union a day, whether through merger, failure or regulatory action. The writing is on the wall. The bigger credit unions that can compete with larger banks will be able to weather storms such as we have now with tight margins. Smaller and mid-sized CUs will face a tough time and many will fade away. This isn't doom and gloom. The credit union philosophy can still live on, it will just do so with fewer and fewer credit unions, and consequently bigger and bigger credit unions. If you think I'm exaggerating, talk to small and mid-sized CUs. I have and I hear about declining ROAs, CUs that are considering layoffs for the first time ever, and some that are looking at the possibility of either merging, or god forbid, converting to a bank charter. What can be done? Everyone must accept the fact that there will be less CUs as time goes on, but I think there are a few things credit unions can do to make this change much more palatable across the board. A number of credit union groups have started online loan participation networks. These networks allow credit unions from across the country to participate in other credit unions' loan portfolios. This serves two purposes. It allows a loan-making-machine CU that is lending out money as fast as it comes in to get some of these loans off their books to free up capital. It gives purchasing CUs that might not have booming loan portfolios a high earning asset. The credit union industry should set up something similar for mergers-a merger network. One CEO asked me the other week what's the best way for one credit union to approach another credit union about a merger, an obviously touchy subject. (I believe CEO to CEO is the best way, but that's another column). Wouldn't it be great for there to be some type of source in each state where credit union mergers could be brokered? A network that would let CUs explore potential merger deals without the awkward call from one CEO to the other, saying, "Do you care to merge?" This would give CUs considering a merger the ability to see how much interest there is from other CUs and allow them to broker the best deal for their memberships. It would give larger CUs a single source to find such merger partners. If this network kept records of merger financial details, it can also provide a more accurate benchmark for valuating credit unions. This of course is sensitive stuff and to have it on a Web site for all to see could cause lots of problems. But maybe state leagues could lead the charge and be the conduit for merger deals, or a CUSO could be set up. However it gets done, it would be a popular network. For those CUs under $500 million that don't want to merge, but survive and thrive on their own, they need to lean on the bigger industry players-the corporate credit unions, CUSOs like CO-OP Financial and PSCU Financial, and large vendors that are dedicated to credit unions. Remember, CUSOs aren't the only good guys, there are plenty of for-profit vendors that have shown their commitment to credit unions. Smaller CUs need to rely on the economies of scale of these larger organizations. There are exceptions to all the stats cited in this column. There are still some high-flying small and mid-sized CUs, but no one can argue about overall consolidation continuing. The faster that credit unions get together and talk about what this means, and how to best consolidate, the better off credit unions will be. Talking about the disappearance of smaller CUs is never a nice conversation, but isn't it time to bring this out in the open? -Comments? E-mail [email protected]