The credit union merger scene appears to be in a funk as 2010gets under way.

For one thing, according to consultants, the availability ofmerger partners is drying up based on a variety of factors, not theleast is the poor economy and strict field of membership rules.

However the NCUA will have to become more flexible oninvoluntary consolidations to protect the insurance fund, theypredict.

“One trend I see is that credit unions are beginning to refuseto take in troubled merger partners without some assistance orguarantees from the NCUSIF, and on that, NCUA at times is wiselyproviding this support,” said Dennis Dollar, former NCUAchairman.

It is better, maintains Dollar, for the insurance fund “to putup $10 million in guarantees than to swallow $100 million if theyare forced to liquidate the troubled credit union, and this trendwill likely increase unless field of membership issues can benegotiated more effectively for voluntary mergers.”

One common assumption David Bartoo, a Portland, Ore. consultantand president of Merger Solutions Group, said is that continuingcredit unions are large and high performers. In reality “55% of thecontinuing credit unions in 2009 were under $100 million in assetsand 60% of those were under $50 million,” he said.

There is little doubt, said Bartoo that the merger environmentis now gripped by the “shrinking partner” phenomenon.

“When we look at some simple, yet key metrics, we seeperformance numbers falling during 2008-2009, with more than 35% ofthe continuing credit unions in the fourth quarter showing anegative ROA.” Another aspect of the shrinking partner pool, saidBartoo, is the large combination of healthy and at-risk CUs. Whenthis occurs, a strong potential partner may be unavailable to mergewith a smaller partner, he argued.

Moreover, because of the increased level of incentives used topersuade good credit unions to take on large problem CUs, some“will simply wait for a credit union to go under and try to getguarantees or get another credit union to absorb a failed creditunion,” he said.

If the merger is voluntary, said Dollar, principal of DollarAssociates, the tight FOM rules “often get in the way, and if themerger is of an emergency nature, there are few potential mergerpartners who can make the numbers work to take the losses withoutsome NCUSIF guarantees.” The number of large CUs that can “make thenumbers work is very limited.”

Another trend Dollar noted is that state charters are findingmore flexibility in their field of membership interpretations, andas a result, the surviving CU in many voluntary mergers is astate-chartered one.

“To avoid this trend continuing more dramatically, NCUA willneed to become more flexible in allowing credit unions with unlikefields of membership to voluntarily merge prior to an emergencysituation,” Dollar concluded. “In other words, they shouldn't waituntil a credit union gets on its death bed to allow atransfusion.”

Another factor in the merger slowdown has been new FASBaccounting rules on fair-market value implemented at year-end.Those complicated rules, in addition to Federal Trade Commissioncompliance for large CUs, require the surviving CU to revalue loansand other assets when placed on the books rather than on the dateof the merger.

“I guess you could fairly say we've been the guinea pig thisyear on those accounting rules,” said Brian McVeigh, senior vicepresident of the $839 million NuUnion CU in Lansing, Mich., whichis on track to complete one of the nation's largest mergers in2009-2010 by combining with the $639 million Detroit Edison CU ofPlymouth.

The surviving CU, the fourth largest in the state, will becomeknown as Lake Trust CU. Management has already made known itexpects the $1.4 billion CU will eventually become a statewide andregional power by expanding into neighboring Ohio and Indiana.

The members of NuUnion were slated to vote on the merger plan ata meeting on Feb. 17 with management expecting approval.

As for the FASB accounting rules, “They have been time consumingand costly and we appear to be charting new ground for other creditunion mergers,” said McVeigh.

The two CUs had to hire additional CPA help to computevaluations and “the testament to that is just look at the reportwhich is five inches thick,” said Stephan L. Winninger, thedesignated president/CEO of Lake Trust and the current head ofNuUnion.

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