Larger Credit Union Mergers Rise

In any given year before the pandemic, Piper Sandler Managing Director Peter Duffy went to six to 10 board retreat meetings. Before this year is over, Duffy said he expects to meet with close to 20 boards of credit unions that are making up for lost time in 2020, when COVID-19 created marketplace uncertainty and placed a temporary hold on just about everything, including credit union mergers and credit union bank acquisitions.

“Increasingly boards are determining that it’s just not business as usual, and it really hasn’t been for a while,” Duffy said. “It’s just that COVID, and more recently, the obvious impact of fintech, is bringing the [merger] discussions further along.”

Specifically, he said that larger financial institutions are discussing consolidations because they understand how important and influential the key trends have been.

“You’ve got more and more younger people coming into the workforce and they are banking with the bigger institutions that have the scale that affords them the ability to deliver the technology the younger consumers are looking for,” he said. “Over the years, community banks and credit unions have not been attracting younger people. They’ve got an older customer base, and so that’s left them vulnerable, and they’re starting to figure that out. We think that’s going to lead to more deals.”

Duffy said Piper Sandler is currently working on five credit union merger deals involving cooperatives that manage fairly large asset sizes.

Before COVID, Piper Sandler’s research showed more credit unions managing larger asset sizes, ranging from about $400 million to $1 billion, were expected to green-light merger agreements. Some examples included the $419 million McGraw Hill Federal Credit Union in East Windsor, N.J., with the $27.6 billion Pentagon Federal Credit Union in McLean, Va.; the $663 million Denali Credit Union in Anchorage, Alaska into the $2.7 billion Nuvision Credit Union in Huntington Beach, Calif.; the $25.8 billion SchoolsFirst Federal Credit Union in Santa Ana into the $1.9 billion Schools Financial Credit Union in Sacramento; and the $981 million Xceed Financial Credit Union in El Segundo, Calif., with the $6.3 billion Kinecta Federal Credit Union in Manhattan Beach, Calif.

What’s more, the asset sizes of banks that are being acquired by credit unions this year are substantially higher than in previous years, noted Paul Davis, research director for Strategic Resource Management based in Memphis, Tenn.

“If I remember correctly, the average bank seller [in 2021] has about $528 million in ­assets. That’s more than twice the size of the average [bank] seller in 2019 [approximately $225 million] when we had the high-water mark of 16 deals,” Davis said. “So even if we don’t hit 16 deals this year, the overall assets that are being absorbed by credit unions are going up quite a bit.”

Although 16 credit union bank acquisition deals were announced in 2019, three of them were called off: Cache Bank & Trust/Elevations Credit Union, Apollo Bank/Suncoast Credit Union and First Savana Savings Bank/Collins Community Credit Union.

This year, 11 credit union bank buy deals have been proposed and none of them have been called off so far.

The $11 billion Vystar Credit Union in Jacksonville, Fla., made the industry’s largest bank buy deal to date this year when it announced the proposed purchase of the $1.5 billion Heritage Southeast Bank in Jonesboro, Ga. This year’s second largest proposed deal came from the $7.6 billion Green State Credit Union in North Liberty, Iowa, which announced two bank buy deals in May with the $730 million Oxford Bank & Trust in Oak Brook, Ill., and the $344 million Premier Bank in Omaha, Neb. The third largest proposed acquisition was the $751 million Financial Federal Bank purchase by the $1 billion Orion Federal Credit Union in Memphis.

Davis also pointed out that credit union bank purchases are occurring in more states than in previous years, when many of the agreements seemed to be coming mostly from a handful of Southern states and a few from Midwestern states.

This year’s proposed credit union bank acquisitions originated from nine states.

“So, what you are going to see is that credit unions are testing the regulatory approval process in a number of states, which can only encourage more of those deals going forward,” he said.

Davis also said he expects large-asset-size credit unions to buy more banks because part of their strategy is to expand their commercial lending capabilities and expertise, and diversify their loan portfolios.

Although the trend of “mergers of equals” or “mergers of peers” is expected to gain momentum through 2022 and beyond, most of the NCUA-approved consolidations involve small-asset-size credit unions that are finding it increasingly difficult to compete and keep up with consumer demands, regulatory requirements and banking technology expectations.

But there may be a way for some small credit unions to take a different approach to consolidation beyond simply merging with a large cooperative.

Deedee Myers, president/CEO of DDJ Myers in Phoenix, said small credit union CEOs in the same marketplace who plan to retire over the next few years are starting to have discussions over the possibility of combining three, four or five credit unions to create a larger institution with a new CEO that could place it in a stronger competitive position.

“I think there is a lot to look at with this idea, and I’m looking forward to having more time to explore that,” Myers said. She said she is privy to discussions regarding one proposal that would create a combined credit union with $200 million to $250 million in assets.

“I’m in conversations with organizations that from a healthy perspective want to merge,” she said. “I’m also impressed with the kinds of conversations that are happening. So, I’m seeing a lot of boards and CEOs moving towards each other and having those conversations that are more in line with what is best for the membership versus putting table stakes on the table to begin with.”

Earlier this year, DDJ Myers published three white papers that provide in-depth insights from credit union executives and other industry leaders about the intricacies, challenges, risks and rewards of mergers and acquisitions.

“The entire industry was forced to pump the brakes and shift its focus,” Myers said. “Now they can restart those conversations, and with these white papers, they will have a strong roadmap to get them headed in the right direction.”

Vincent Hui, managing director of the Scottsdale, Ariz.-based Cornerstone Advisors, who oversees the organization’s mergers and acquisitions practice, also has found that credit unions are rethinking their strategies for future growth opportunities.

Credit unions have recognized that their strategic plans before the pandemic may not be relevant anymore, he said, because members’ behaviors have evolved to completing all or most of their banking transactions online, on their mobile phones or through interactive teller machines.

“I think a lot of discussions have revolved around what combined credit unions can do to accelerate strategic capabilities in the area of digital transformation to make sure that we continue to stay relevant to our members,” Hui said. “We have done research in the past about where [financial institutions] are on their digital transformation journeys. And we got a wide range of answers, from ‘we’re on it’ to ‘it’s on the roadmap,’ but now they realize that this can’t be on the roadmap any longer – they need to do it.”

Because digital transformation projects require major investments, credit unions of all sizes are looking at mergers to leverage combined resources to help them afford and deliver technology solutions that consumers expect from their primary financial institution.

But Hui also pointed out digital transformation is not just about delivering the latest features and functions of online and mobile banking. Because the pandemic is still ongoing, though there have been recent indications that infection and death rates are dropping, members have become comfortable with new habits of banking on their desktop or mobile screens. However, Hui added that doesn’t mean all members will stop visiting branches.

Another key strategic component that has emerged, he noted, is digital engagement, which refers to how credit unions deepen engagement with their members and prospective members to help them through their financial journeys. He said he believes this will lead credit unions to form new partnerships with fintechs to develop and expand digital engagement initiatives. According to Cornerstone Research, nearly 60% of financial institutions surveyed said that fintech partnerships are a critical part of their business strategy.