Anatomy of a Merger (Part 4 of 4): Long Term Consolidation Effects

Part 1: Merging for the Right Reasons
Part 2: Common Mistakes When Contemplating a Merger
Part 3: Merging for Success

By Christian Mullins

Credit Union mergers have been a regular occurrence for decades. Once almost 24,000 strong in the United States, today there are barely 8,000. While some credit unions will protect their ability to remain independent, more credit unions will merge, further reducing their numbers. At the current rate of absorption, there will only be 4,000 credit unions in 2032 meaning that, on our watch, more than half of America’s credit unions will be lost. While there will be many ramifications from this continuing trend, three outcomes are assured.

Fewer numbers expose credit unions to adjusted regulatory control. In March 2008, the Treasury Department proposed an overhaul of the nation’s regulatory agencies, including, among others, a consolidation of the FDIC, NCUA, and additional agencies into one body. While Henry Paulson’s plan is logical in nature, the idea of folding the NCUA at this time is sure to fail. However, every merger between credit unions, as well as banks, bring this possibility closer to reality. Currently, there are more than 16,000 banks and credit unions in the United States. If that number were halved, it would be far easier for the government to justify streamlining the organizations. While the long term effects of this action is unknown, it likely would not benefit the credit union industry.

Less competition will culminate in higher loan rates and lower savings rates. In theory, a greater number of competitors in any given market leads to a more competitive (affordable) pricing structure, and the financial industry is no different. A trip to just about any small town will verify that fewer choices correlate to less competitive rates, and there’s no reason to believe that this couldn’t happen on a larger scale. Asset/Liability Management will also indirectly lead to an overall decrease in favorable rates.

When a credit union is in need of deposits because they’re approaching a 100% loan to deposit ratio, they’ll raise their lending rates to temporarily deter lending, while raising deposit rates, typically on certificates, to attract outside deposits (new money). When they reach a comfortable ratio, they’ll adjust their rates accordingly. Conversely, a credit union with a low loan to deposit ratio will do the opposite. Currently, this gives an opportunistic consumer several choices when seeking either a loan or a certificate. Fewer credit unions will lead to fewer extremes in the loan to deposit ratio, resulting in lower overall rates for members, both current and potential.

Social lenders will fill the void once held by credit unions. Peer to peer (P2P) lending, though currently an insignificant portion of the lending pie, is slowly increasing its presence. These lenders allow their investors (also called lenders) to select the individual borrowers they lend to, embracing the ‘people helping people’ slogan that has been a credit union hallmark for years. With large credit unions losing their ‘credit union feel’ and P2P lenders keeping rates competitive with a minimal fee structure, this type of investing and lending is increasingly attractive. Unfortunately for credit unions they are still reliant on small loans, and the increased presence of social lenders will force them to reevaluate their lending configuration.

The subject of credit union mergers is a difficult one. As a nation, we are continually evolving and, as a result, our credit unions evolve as well. Asking credit unions to forgo change is asking for marginalization, making it an impossibility. Change comes in many forms, however, and the method by which credit unions choose to evolve will help shape the market around them. While no one can say for certain, it is safe to assume that the credit union industry will be vastly different 20 years from now. Whether or not that’s an improvement is for you to decide.

CU News Briefs - 4/10/08

Executive Summary:

• In a move that should be heralded as both environmentally sound and brilliant marketing, Vancouver City Savings CU (VanCity) in British Columbia is North America’s first carbon neutral credit union, meaning their carbon dioxide emissions are equal to the emissions it has reduced or offset elsewhere.  Their plan, begun in 2006, originally had a 2010 completion date.

• The League of Credit Unions in Ireland mark their 50th anniversary this year, but some within the movement are wondering whether they’ll still be around 50 years from now.  With credit unions unable to shake their ’scrimp and pinch’ reputation of the past, many find themselves only lending about 20% of what they take in.  They have also been unsuccessful building in affluent suburbs or remaining competitive in their lending rates.

• Phishers have embraced the belief that your cell phone can be used for anything.  Financial institutions in Arizona, including Arizona Central CU, report that their account holders are being phished via text messaging.  Unsuspecting recipients call the number provided to reactivate their account, unknowingly handing over vital account information.

Robbed:

• Nothing to report today.

Arrested, Arraigned, Charged, or Sentenced:

• Felicia Gallmeier has been sentenced to 10 years in prison for the robbery of Community FCU in April 2006.  Gallmeier used a BB gun and fake grenade to rob the Great Falls, Montana credit union.  The defense’s stand that Gallmeier was suffering from a mental illness was unsuccessful.
• Already charged with two robberies, including a Fort Oglethorpe credit union, Brian Scott Terry was charged Wednesday with the robbery of Lockheed CU in Dalton, Georgia on March 20th.
• Police used DNA evidence to link 55 year old Betty Hudson to two financial institution holdups in 2007, including GTE FCU in Ocala, Florida.  In both robberies, the woman displayed a firearm and wore a ‘ninja outfit’.