‘$1 billion is not enough’: Why credit union M&A is poised to accelerate

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Competition from banks could drive more large credit unions to join forces in 2021.

The number of mergers among institutions with assets of $500 million and above has been inching upward in recent years, but analysts expect that trend to accelerate in the months ahead.

Last year, two of Minnesota’s largest credit unions, Firefly and TruStone, merged to create a $3 billion-asset institution, while two Southern California mainstays, Xceed and Kinecta await member approval on a deal to create a combined institution with assets exceeding $6 billion.

Credit unions are generally considered to be large if they have assets of $500 or more, and the number of mergers among those institutions was ticking up before the pandemic began. More than a half-dozen large credit unions merged in the 18 months leading up to the COVID-19 crisis, which is believed to be the biggest concentration of large credit union mergers in history.

Still, mergers among credit unions of that size make up only a small portion of the industry’s total merger activity, which generally sees small and midsize institutions coming together or joining larger shops. Analysts suggested the pressures facing the biggest credit unions will force many of them to consider merger strategies in the months to come.

“What these institutions are determining is that even at $1 billion in assets, it’s arguably not enough today — but they fervently believe that $1 billion is not enough for tomorrow,” said Peter Duffy, a managing partner at Piper Sandler.

Large banks in many major markets have now outpriced credit unions on consumer deposit rates, making the operating environment more challenging, added Duffy.

“The cost to get deposits and maintain the deposits has moved up in relation to what you’re earning on assets, so even though a lot of money has come into these banks and credit unions due to the pandemic — and it’ll stay that way for a while — once that works its way out, we’ll go back to where we were pre-COVID, where money center banks aggressively seeking retail deposits is going to drive margins tighter for the other banks and all the credit unions,” he said.

Larger shops may be increasingly interested in finding like-sized merger partners, said Steve Rick, the chief economist at CUNA Mutual Group. Institutions over $1 billion “don’t want to be the one big credit union that doesn’t get called up to do a merger" because now they’re competing against an $8 billion-asset credit union.

The industry’s consolidation rate has held steady at about 3.5% a year for the past 40 years, with most mergers happening at the smaller end of the asset spectrum. And with more credit unions crossing the $1 billion-asset threshold each year, many are finding more opportunities by partnering with larger shops.

Credit unions with assets of $500 million and above make up just 12% of all credit unions but hold about 81% of assets, according to third-quarter data from the National Credit Union Administration. Forty-five credit unions passed the $1 billion threshold in the 12 months ending Sept. 30, 2020.

More growth at the upper end of the industry could also widen the gap between large and small credit unions. While large credit unions continue to add members and assets at a healthy clip, third-quarter data from the NCUA shows loan volumes, membership and net worth all in decline at credit unions with assets below $500 million.

Deals that bring together large credit unions are also increasingly likely to cross state lines, many said, such as a 2018 transaction that combined Denali Federal Credit Union in Alaska with Nuvision in Orange County, Calif. Today the combined institution holds over $2.5 billion in assets with operations in four states.

Expanding fields of membership and regulatory changes in recent years have also helped credit unions gain a foothold in multiple states as institutions push to diversify their member base.

“Moving across state lines now is not a big barrier and you’ll see credit unions doing more and more of that,” said Rick. “We need not just economies of scale but regional economies of scale that come from that. You might see a tri-state-type thing, where these bigger credit unions are moving into bigger regions instead of just one state.”

Despite the possibility for more mergers among large institutions, deals among small and midsize credit unions are likely to make up the bulk of activity, as normal. But an increase over last year could still be in the cards, many said, since overall activity slowed down for much of 2020.

Analysis from CEO Advisory Group shows a decline in deals during the first half of the year before picking up in the third quarter. At a 3.5% average annual rate of contraction, that would mean about 185 fewer credit unions by the end of 2021, according to CUNA Mutual, with most of those being merged holding $400 million of assets or less.

“The trend of looking for larger market share and trying to gain new members is going to be part of the pressures that are seen in community organizations like credit unions,” said Elizabeth Kim, head of market intelligence at SS&C Intralinks. “In order to just survive they need to combine a lot of operational assets [and] operational know-how.”

But merger activity was already slowing in 2019 and there hasn’t been a “normal” year for M&A since at least 2018, at which point the three-year average for deals was about 225 mergers per year, said Rick. Just as merger activity following the Great Recession didn’t really kick up until 2010, it may take another year or so before higher numbers of deals return.

“I don’t think you’ll see increases occur in a material way until perhaps later in 2021,” said Duffy, “but I think what you will see is if some of these larger deals … get announced and move toward closure, those kinds of transactions have the effect of boards and managers asking ‘Why are they doing that?’ and getting an understanding of why that can benefit their members as well.”