Big Credit Union Consolidations Trending Up

Mergers approved by the NCUA in the first quarter of this year totaled just 29, down substantially from 43 consolidations approved by the independent federal agency during the first quarter of last year, 44 in 2017 and 55 in 2016.

While most of the merged credit unions had less than $50 million in assets, there is more evidence in the NCUA’s first quarter report and other recently announced consolidation deals that suggest mergers among credit unions with sizable assets – of $200 million and more – and billion-dollar cooperatives will continue this year and into the 2020 decade because of dynamic consumer expectations and demands.

The first quarter report showed that the NCUA approved the consolidation of the $425 million McGraw Hill Federal Credit Union in East Windsor, N.J., with the $24 billion Pentagon Federal Credit Union in McClean, Va., as well as the $223 million Constellation Federal Credit Union in Reston, Va., into the $3.4 billion Northwest Federal Credit Union in Herndon, Va.

What’s more, recently announced merger deals included the $583 million Sharon Credit Union in Sharon, Mass., with the $437 million Crescent Credit Union in Brockton, Mass. If the consolidation is approved by members and the NCUA, it will manage $1 billion in assets and serve more than 82,000 members to become the eighth largest credit union in the Bay State.

This proposed deal comes on the heels of the merger of the $630 million Merrimack Valley Credit Union in Lawrence, Mass., with the $378 million Bridgewater Credit Union in Bridgewater, Mass. The deal was finalized in February and made the combined credit union the ninth largest in the state with $1 billion in assets and more than 82,000 members.

Out West, the $193 million Canyon State Credit Union in Phoenix, Ariz., announced last month that it plans to merge with the $248 million Deer Valley Credit Union, also based in Phoenix, which is the epicenter of one of the fastest growing metropolitan areas in the nation. That combination, if approved by members and the NCUA, would create a cooperative with $441 million in assets that will serve more than 37,000 members.

So far this year, the blockbuster merger deal came out of California in January, when the $15.2 billion SchoolsFirst Federal Credit Union in Santa Ana and the $2 billion Schools Financial Credit Union in Sacramento reached a tentative agreement to consolidate.

If the proposed merger is approved by Schools Financial members, and state and NCUA regulators, SchoolsFirst will manage $17.2 billion in assets, solidifying it as the largest credit union in the Golden State by far. However, it will be a close second in membership at 1,018,067, behind the $12.7 billion Golden 1 Credit Union in Sacramento that serves 1,021,799 as of this month.

“Really what this [merger] is about is to better serve the school employees throughout the state,” Bill Cheney, president/CEO of SchoolsFirst FCU, explained. “Both SchoolsFirst and Schools Financial have charters that allow us to serve the entire state, and we’ve just been focusing on our own regions for many, many years, and now we think together we can serve the state.”

In addition to this California consolidation, another big merger deal was announced at the end of last year between the $2 billion Gesa Credit union in Richland, Wash., and the $1.3 billion Inspirus Credit Union in Seattle, Wash. This deal will create the second largest cooperative in the Evergreen State. The merger agreement, expected to finalize this year, will create a new credit union that will manage $3.3 billion in assets and serve more than 244,000 members.

“This merger represents a much greater presence across Washington and will provide enhanced capabilities and other significant benefits for our combined memberships and the communities we serve,” Don Miller, president/CEO for Gesa, said. He will become the president/CEO of the merged organization while Scott Adkins, Inspirus’ president/CEO, will continue to serve as a senior executive.

The Seattle-based Vincent Hui, a senior director for Cornerstone Advisors, said he believes the trend of larger credit unions consolidating has possibly reached an inflection point. Hui leads Cornerstone Advisors’ mergers and acquisitions practice for credit unions and banks, and has worked on merger deals such as Merrimack Valley/Bridgewater, SchoolsFirst/Schools Financial, GESA/Inspirus and others.

“These were not [financially-] troubled institutions,” Hui said. “They were saying, we don’t need to merge, but if one of our goals is to thrive – not just survive – for the benefit of our membership, which means being future-ready in products, services and delivery [then we will merge]. [Financial institutions] need to seriously think about whether they can do it alone in this environment where we have a digital channels race and member experience race, because the amount of investments that financial institutions, particularly large institutions, have made will continue.”

While credit unions may assume they can compete against the bigger institutions because even small and mid-sized credit unions typically deliver better service, that may or may not work over the long run.

“We are better in delivering service to members, but is it enough for credit unions to continue to be relevant to the membership over the next five to 10 years?” Hui asked. “That realization is opening up more strategic options to consider for the benefit of the membership.”

The ability to deliver the financial products and services consumers demand now and in the future has become even more critical for credit unions.

Comprehensive research conducted by CUNA for its current credit union awareness campaign, Open Your Eyes, revealed consumers are under the impression that because credit unions are local, it also means they are small, unsophisticated financial institutions and have limited offerings and technologies.

The research also showed that consumers think credit unions don’t have ATMs nationwide and worry about getting cash while out of town or on vacation. Other consumers noted they once belonged to a credit union but moved out of town and didn’t know they could join another credit union, and some consumers said they believe credit unions are unable to meet all of their financial needs.

If anything, perhaps the mergers of large credit unions will gradually help dispel these consumer assumptions.

However, Hui’s expectation is that some banks in the $10 billion to $20 billion asset range may consolidate because of recent regulatory rollbacks, which could put more pressures on large credit unions in highly competitive marketplaces and force more credit union consolidations.

Historically, when a financial institution reached a threshold of $1 billion in assets it meant that the bank or credit union “made it,” because it placed it in a more advantageous position to leverage that scale to gain greater efficiencies and attract new customers or members, according to Hui. But he also noted Cornerstone Advisors’ research showed that the “made it” threshold number of $1 billion is now closer to $3 billion.

“From my view, credit unions in the toughest position are probably between the $300 million to $1 billion in assets range,” he said.

They are large enough to make an impact on their community, which is great, Hui noted, but may not be large enough to keep fueling enough growth to not only survive but to thrive.