Coronavirus could worsen credit union merger slowdown

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After slowing down in 2019, credit union consolidation is likely to decline even further as executives focus on their response to the coronavirus pandemic.

But this drop could be temporary. There’s a chance some credit unions will suffer financially if members are laid off from jobs and are unable to repay debt. If that happens, it could spur some struggling institutions to find a partner.

“I would say credit unions in discussions with other financial institutions about mergers have been put on pause,” said Tom Rudkin, a principal in mergers and acquisitions for the consulting firm DD&F. “Banks and credit unions are worried about staffing. Schools have shut down. Kids are home and someone has to take care of them. The good news about employees being home is that in most cases they can operate remotely which is what a number of employees are doing.”

Last year there were 137 unassisted mergers, down about 21% from 2018, according to the National Credit Union Administration’s 2019 annual report. That’s also the lowest number of unassisted mergers in any year since at least 2010, according the annual report.

The driving force behind this decline is somewhat unclear, though it probably relates to social and emotional reasons more so than macroeconomic factors, said Michael Bell, an attorney at Howard & Howard.

“Mergers between [credit unions] are not necessarily controlled by the marketplace or market forces,” said Bell, who advises credit unions on mergers. He added, “They are a different animal and will forever trail or be below what pure economics or the market suggests regarding the amount that occur.”

The number of merger announcements is likely to take a temporary hit, experts said. For one, many management teams are currently focused on ensuring the health and safety of employees and members rather than thinking about broader strategic initiatives. They may also be processing the impact of changes implemented by the CARES Act and NCUA.

Additionally, M&A is a largely relationship-driven business. For instance, two credit union executives may meet at a conference, find they have a good rapport and then keep in contact after the event before eventually deciding to merge.

But with the coronavirus ravaging the country, officials at many levels of government have encouraged social distancing and most industry events stretching into mid-May have been cancelled or postponed. That limits opportunities for wheeling and dealing.

“When people gather, things happen,” Bell said. “And that’s not happening right now.”

Social distancing could also lead to complications with member votes necessary to approve these transactions. Many credit unions involved in a merger opt to host an in-person meeting for members to vote, but many states have limited large gatherings so these events can no longer take place.

Valley Gas Employees Federal Credit Union in Jackson, Miss., canceled its meeting for members to vote on its proposed merger into Mutual Credit Union in Vicksburg, Miss. The $4.9 million-asset Valley Gas didn’t respond to a request for an interview.

Still, there are other options for credit unions to move ahead with these deals. In March Fluke Employees Federal Credit Union in Everett, Wash., agreed to merge into Sound Credit Union in Tacoma, Wash. Members of Fluke Employees will vote on the transaction by mail and a virtual meeting will be hosted in June to provide additional information, said Jennifer Reed, vice president of public relations at the $1.8 billion-asset Sound.

Despite these headwinds for mergers, credit union deals are likely to eventually tick back up, experts said. For one, many of the factors that have driven consolidation within the industry — such as smaller institutions struggling to keep up with regulatory and technological demands — aren’t going to disappear just because of the coronavirus.

The merger of Fluke into Sound had been in the works for a while before the pandemic hit, Reed said. The $2.7 million-asset Fluke offers just three products — savings accounts and car and personal loans — so by joining Sound it will be able to provide members with a wider array of services.

“We didn’t want anything to hold up the merger,” Reed said. “We did think we needed to move forward with announcing it. There are other things on people’s minds but this is important for both organizations.”

Right now it’s unclear how deeply credit unions will be affected by the coronavirus pandemic. Certain areas, such as mortgages, have been positively affected while other industries, such as the travel sector, have been devastated. More than 3 million people filed for unemployment benefits in a single week last month, shattering the previous record.

At least one credit union trade group has suggested the U.S. is already in a recession, and there are concerns that a prolonged and deep economic downturn will affect members’ ability to repay loans from credit unions. If that comes to pass, some institutions may be forced to find partners.

With coronavirus cases on the rise, Hoosier Hills CU in Bedford, Ind., has chosen to temporarily restrict access to its facilities. Observers say other institutions are likely to follow suit eventually, whether they want to or not.
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“I think there is definitely a set of those mergers that will fall into, ‘I’m not as healthy as I was and I am not returning as much to my members as I could,’” said John Stockamp, a director in the financial services practice at the consulting firm West Monroe Partners.

Stockamp predicted that an uptick in deals could happen within the next 30 to 45 days. Other experts said they expect to see a surge in deals later this year.

It’s unlikely that deals that have been announced will be scuttled. However, the surviving institution may delay the transaction to take another look at the other credit union’s loan portfolio to gauge its quality, Rudkin said. Regulators may also take longer to approve a transaction.

“You might see some delays from the regulatory side simply because they are taking a look at the buyer and the seller,” Rudkin added. “The last thing they want to do is create a problem.”

Still, if there is a will, there is usually a way for a deal to happen, Stockamp said.

That’s been the case for Fluke Employees FCU and Sound. So far the partnership has proceeded as planned, Reed said. The two institutions are roughly 60 miles apart, so much of the communication between the two parties would have taken place via telephone and teleconferencing regardless of social distancing recommendations.

“If there are other organizations out there thinking about mergers, utilize the tools that you have,” Reed advised. “That’s what is really helping us, being able to pick up the phone or being able to communicate via email. Setting up videoconferencing has been great.”

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