Credit Union Merger Momentum Falls Victim to COVID-19

Although credit unions have continued to consolidate throughout this year’s health and economic crisis, the pace of mergers has slowed down considerably – and the number of credit union bank acquisition deals have substantially declined compared to last year as well.

The pandemic has also slowed down the pace of the merger process, according to some credit union CEOs who shared their insights into how they have been managing consolidation challenges created by the COVID-19 pandemic.

Nevertheless, credit union leaders and consultants said they believe mergers and bank acquisition deals will pick up in 2021 as long as some semblance of certainty returns to the marketplace.

During this year’s second quarter, when the coronavirus began rapidly spreading in many states, leading to stay-at-home mandates, the NCUA approved 25 mergers – down from 34 consolidations at the end of this year’s first quarter and 32 mergers from the second quarter of 2019. The NCUA’s third-quarter Merger Activity & Insurance Report had not been posted as of Oct. 30. And the number of credit union bank purchases has substantially slowed down from 14 deals in 2019 to just six deals as of the end of October 2020.

In October 2019, the $47.5 million Gulf Power Company Employees Credit Union in Pensacola, Fla., agreed to merge with the $246 million Florida State University Credit Union in Tallahassee.

Because of COVID-19, the consolidation wasn’t officially completed until a year later on Oct. 1.

“It [COVID-19] definitely created a tremendous slowdown in the momentum of both due diligence and the integration of the two cultures and the two organizations,” Chuck Adcock, president/CEO of Florida State University CU, said.

Being onsite at Gulf Power Company Employees was a critical part of the transition process, but when Florida went into its initial phase of lockdown, it was difficult to travel or even be in a hotel.

“There’s three hours of geography between our headquarters and theirs, so staying onsite was obviously very limited,” he said. “We had to be really strategic about who was going and when, and of course, trying to be safe. With social distancing we couldn’t pile in a bunch of folks into our corporate car and just send them for an overnight stay. We lost some momentum in terms of being able to be onsite both for the due diligence side and then also just getting to know the folks in a better context.”

Florida State University CU employees involved in the merger due diligence process pivoted to leveraging technology, including video conferences, which wasn’t easy at first, but the teams managed to adapt to syncing the volumes of documents that needed to be carefully reviewed.

“From a workload perspective, there wasn’t anything we couldn’t get done. But it created a pretty significant workload on two parts,” Adcock said. “One, when their staff had to pull out information, you had the potential for a communication breakdown, when you ask for reports A and B and person on the other end is thinking you’re looking for reports C and D.”

And second, completing due diligence online can cause delays in accessing information.

“That was delayed because now we were waiting for emails and scheduling more calls. It was cumbersome, but I think everyone figured it out pretty quickly and used the same rhythm and cadence that we were using internally, and particularly leveraged the technology to make sure we were as effective as we could be,” Adcock said.

The merger of the $203 million NorthStar Credit Union in Warrensville, Ill., with the $318 million NuMark Credit Union in Joliet, Ill., will take effect on Jan. 1, 2021. Although the due diligence process was completed in 2019, COVID-19 slowed down the integration of teams from both credit unions.

“What really impacted us on the integration of our teams was the ebb and flow of being able to meet in person and not being able to meet in person,” NorthStar President/CEO Lloyd Fredendall, who will remain as president/CEO when the credit unions officially consolidate, said. “It was a little more difficult, I think for us, because we’ve been trying to take the best of the best from both organizations, which is a lot harder when a small credit union merges with a larger one. We’ve been very fortunate, however, because we have a great staff that has been working together diligently when they have gotten together in person or when they have met over a Zoom call.”

While many credit union staffers learned to become even more adept at leveraging technologies to help them manage through the many steps of consolidation, what helped Rogue Credit Union President/CEO Gene Pelham was increasing his focus on the merger process.

In early June, the due diligence process was well underway for the merger of the $180 million Malheur Federal Credit Union in Ontario, Ore., with the $2.1 billion Rogue in Medford, Ore. The rural cooperatives are separated by 400 miles.

During an interview in early October with CU Times, Pelham said the due diligence process had been completed, the NCUA gave the consolidation the green light, and the voting process was taking place and is expected to conclude on Nov. 16.

Pelham said focusing on the merger process is important for any merger, but it was even more important to keep sharpening that focus during the pandemic.

“Probably increasing that focus and doing it more is even more important when you’re not able to connect in the way that you normally do during the merger process,” he said. “The most important part is making sure that we keep the purpose of the merger clear. It’s really easy, when you’re not able to communicate and connect, to forget why you agreed to do this in the first place.”

Additionally, the project management teams for both credit unions, as well as the involvement of the senior management teams during the regulatory and member voting process, kept the merger process on track and transparent.

“That was really valuable in keeping up to date, not getting things lost and being fully transparent on the progress of the merger, transparent on the obstacles and transparent on just the feelings people are having as they go through the merger,” he said.

Looking ahead to 2021, executives and consultants alike said they expect the pace of credit union consolidations will increase, as well as the number of credit union bank purchase deals.

“At the end of last quarter, there were I believe 171 credit unions with net worth ratios below 7%,” said Glenn Christensen, president of CEO Advisory Group in Kent, Wash., who specializes in credit union mergers and credit union bank acquisitions. “I think in the coming year if we see more credit unions falling into continued negative earnings or poor capital positions, that’s going to cause more credit unions to consider their alternatives.”

He also said he believes credit union bank buys will restart in 2021.

“We were working with several credit unions on bank acquisitions, but once COVID hit, they just pulled out of the market, in part because there was a lot of uncertainty regarding who they were buying and what was going to happen to the risk in their portfolios of the target banks,” he said. “There also was lot of uncertainty about the pricing for the bank acquisition.”

What’s more, because there are still many uncertainties around how and to what extent COVID may impact their own revenue, earnings and loan losses, credit unions decided it’s just not a good time to make a bank acquisition, Christensen said.