By Ray Birch
LAKE TAPPS, Wash.—While credit union mergers during 2023 were actually down when compared to recent years, one type of combinations was up—assets acquired via credit union deals with banks.
Glenn Christensen of CEO Advisory Group told CUToday.info the assets credit unions acquired via the acquisitions of banks during the third quarter of 2023 outpaced those from CU-to-CU mergers.
“It’s a really interesting fact,” said Christensen. “Credit unions made six bank acquisitions in the third quarter. In total these banks had assets of $1.4 billion, which is 50% more than the combined CUs acquired in the third quarter.”
Christensen said the data underscores that credit union purchases of banks, which picked up in 2023, will only continue to increase in frequency.
‘So Interesting’
“That is just so interesting that we saw more (individual credit union) assets entering the system through bank acquisitions than we did through assets from other credit unions,” said Christensen. “The large, successful credit unions that are well capitalized are utilizing bank buys as another strategy for growth. They can grow faster this way than acquiring credit unions. Credit union-to-credit union, it's pretty difficult to find many acquired CUs that are in excess of $100 million. It's mostly the smallest of the credit unions that are consolidating.”
Glenn Christensen
With bank buys, the deals are much larger, reminded Christensen.
“Credit unions are picking up banks that are well over $100 million in assets and they're profitable operations,” explained Christensen, who said the average ROAA of acquired credit unions has been low. “Banks have become a good opportunity for credit unions to get a very high-performing organization to join forces with. This trend is certainly going to pick up.”
A Trend That Will Continue
The pioneer of credit union purchases of banks, Michael Bell, said the deals have proven to be an efficient means for CUs and the CU system to grow.
“And new assets are entering the system—the credit union movement is growing, thanks to acquisitions of banks,” said Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP.
Christensen stated that a trendline that has been in place for some time will only continue as the big CUs continue to get bigger.
“These credit unions buying banks are big, and they need to be very well capitalized to be able to acquire a substantial bank, because the purchase dilutes their net worth ratio,” he said.
Christensen’s data as well as that from NCUA show that 39 credit unions were approved to merge during the third quarter, bringing the total number of CU mergers through Q3, 2023 to 107. That number is markedly below the first three quarters of 2022, when 146 consolidations were approved by NCUA.
2 Reasons for Slower Pace
Christensen said he believes there are two main reasons total mergers are down.
“For one, it’s retirement of CEOs that has slowed,” he said.
Christensen speculated many CEOs’ retirement plans were affected by a decline in the stock market that affected their retirement assets, especially at smaller CUs, which do not typically fund the kinds of generous retirement packages found at larger CUs.
Christensen thinks smaller shops have also simply performed better in the last year due to having a large influx of deposits, brought on by pandemic savings.
“Yes, that could lower their capital ratios. However, as a result of these deposits, there just has been a level of general success among smaller credit unions that they might not normally see,” proposed Christensen. “They aren’t as tight on liquidity, their cost of funds is still very low, they're still able to generate a nice spread between what they can get on the on their investment portfolio and what they're paying out for their cost of funds. I think for these two reasons more smaller credit unions
Michael Bell
are deciding to hang on for a while, rather than merge out.”
What’s Ahead?
What’s ahead this year for CU mergers?
“I think they will climb from this year’s totals,” forecast Christensen. “I think we're going to continue to see more and more large-scale mergers. I think there is a greater shift in mentality in the movement toward uniting rather than going it alone—look at what has happened with the leagues, and now CUNA and NAFCU and Co-op and PSCU…”
Bell, who has been part of nearly 50 whole-bank agreements, plus additional bank branch purchases, said not only are bank deals growing in number, but he expects CU-to CU deals to be larger in size in 2024.
“I am in the middle of multiple significant CU-to-CU combinations,” said Bell. “I have seen a material uptick in conversation among larger credit unions around mergers of equals. Sit tight – big things are coming soon,” he said.