KENT, Wash.—It’s always been a point of pride when credit unions merge that there are no staff layoffs. But that may change, according to one expert, who said that as more large credit unions merge to gain market clout and efficiencies, moving forward not all the staff may make the transition.
That’s a chief trend credit unions will begin seeing in 2016 as competition from banks and new, non-traditional financial services players forces a rethinking, according to merger expert Glenn Christensen, president/CEO of CEO Advisory Group.
“The nature of the merger conversations are changing, and I think there is an ongoing acceptance that merger is a strategic option that all credit unions need to consider,” said Christensen. “I think we will continue to experience the same rate of consolidation as in the past, but the difference will be more large credit unions will consider merger as an option as they see greater value in joining forces.”
Christensen said the trend is already showing signs of starting. In the not-too-recent past, he said it was rare to see a credit union above $50 million in assets merging into another CU.
“Now we regularly see $100-million, $200-million, even $300-million credit unions being acquired,” said Christensen. “If you are a $500-million credit union in a large metro market, your voice gets drowned out by all the other financial services options people have.”
More Big Deals
Christensen said the large CU combinations will be efforts to stand out.
“These credit unions are not only looking for market clout, a voice, and critical mass to continue forward, but also to gain efficiencies to provide the very competitive offerings members, especially Millennials, are asking for,” said Christensen. “Credit unions know they need to remain relevant.”
The emergence of new, highly efficient and low-cost players such as Walmart and Target and the Silicon Valley lenders are making it harder to compete at a smaller size, Christensen noted.
Glenn Christensen
“The new competitors have more credit unions being very strategic about mergers as an option,” said Christensen. “Understanding there are so many disruptive forces in the market now, credit unions are saying, ‘How can we also be disruptive—by combining with another credit union to be a larger organization.’ So it may not become uncommon for two $2-billion credit unions to sit down at a table and discuss ways they can be better together than they can individually.”
But some obstacles to the large combinations are in the way, said Christensen.
“Acquiring credit unions have been very good about retaining the staff of the merged CU. And I think over time, as these mergers get larger and larger, it will become more difficult to find room for everyone. I think that is in the way of some of these larger mergers right now,” observed Christensen. “And not everyone has good protections in place with change of control agreements for their senior staff. Plus you still have the obstacle of board member representation and wanting to maintain the legacy of the credit union.”
Christensen said credit unions will continue to innovate to find new merger models, such as how a family of credit unions can partner.
Compliance Burden
Due largely to the growing compliance burden forcing more small CUs to throw in the towel, Christensen forecast the merger pace to at least hold steady in the coming years, at or above the roughly 4% annual pace the industry currently experiences.
“As I meet with CEOs across the country I hear that they feel the pressure of regulation and that they spend so much of their time meeting needs of NCUA and are not able to focus on the needs of members. Too much resources are being dedicated to regulations as opposed to members.”
Christensen projects that in 20 years there will be less than 3,500 credit unions, and that the average asset size (total industry assets divided by number of CUs) of a credit union—$190 million today—will be about $3 billion.