By Ray Birch
KENT, Wash.—Just as was the case during the Great Recession, the pace of mergers within credit unions has also slowed during the current economic downturn, according to one analyst, who is projecting the pace will increase once the dust settles.
In fact, those numbers could rise quickly, forecast Glenn Christensen of CEO Advisory Services, noting 170 CUs’ capital levels currently stand below 7%.
Christensen told CUToday.info that not only will more mergers take place post-pandemic due to the delayed effects of the downturn on financials, but also because credit unions will want to rebuild their capital positions before striking any deals.
“We’ve certainly seen a slowdown in merger activity, which in some ways surprised me,” said Christensen. “I had spoken with a number of credit unions when the pandemic hit and they were anticipating more mergers would happen during this crisis due to the financial pressure they were all feeling. But we have not seen that.”
Christensen pointed out during the Great Recession mergers among CUs slowed, but then once economic recovery began merger activity spiked. He believes the same trend will take place in the coming year.
“I think a lot of credit unions are not feeling motivated now to move forward with mergers, but there is a group that is beginning to head that way due to their net worth positions falling,” he said.
Dip in Net Worth
As CUToday.info has reported, net worth among U.S. credit unions overall dipped slightly in large part due to the influx of deposits. But the industry average has been holding steady at approximately 10.5%, and many of the deposits have been drawn down. With an average ratio, of course, half of credit unions are on the lower side.
“Some of these credit unions I've talked with have seen significant hits to their net worth ratio, but they seem to think they are doing well,” said Christensen. “Maybe they are not recognizing that this might be an opportunity for them to really look at what their strategic options might be, and what would be in the best interest of their members.”
Christensen said he saw some of those same attitudes during the Great Recession.
“There certainly was a two-to-three-year lag in mergers following the last recession and then we went to an all-time high in the annual number of mergers,” he said.
Glenn Christensen
For many CU leaders, looking forward is going to mean having to “face reality,” according to Christensen.
“This is an emotional situation, too,” he added. “It’s an emotional reaction to the situation they're finding themselves in. I think oftentimes what I've seen through the years is credit unions don't like to necessarily merge when the pressure is on them to merge. They don't want to merge because they have to merge; they want to merge because they want to merge, and when it's in the best interest of their members. I think when the pandemic ends and the economy turns around and credit unions begin to see a slight rebound in their financial situation, more will look at merging.”
NCUA’s Role
Asked if NCUA, which has stated examiners are attempting to be flexible with credit unions as they work through the health crisis, might begin forcing more mergers as some CUs see a decline in capital, Christensen said it is possible.
“Well, NCUA’s first obligation is to protect the share insurance fund,” observed Christensen. “Yes, and it is true that capital levels are dropping now due to the forbearances and credit unions assisting members, which is a different situation than during the Great Recession. So the agency will give some additional consideration here, I believe.”
What is concerning, suggested Christensen, is June NCUA data showing 170 credit unions had net worth ratios below 7%.
“That’s a pretty big number. Now that does not mean all are financially troubled, but it certainly begins to indicate you're going to have to find ways to take care of the situation,” he said.
Christensen believes many credit unions will seek to rebuild net worth through organic growth, but that might come at a price to current members.
“That means that you're going to have to reduce your dividend rates, raise loan rates, and possibly add fees. And is that fair to members?” he asked.
One More Factor
Christensen also believes the merger pace has slowed as the pandemic has put another new limit in place.
“It’s now much harder for credit unions to have in-person meetings. And a merger is based on trust. And if you have difficulty meeting face-to-face with someone, and can’t look them in the eye, that's certainly going to slow down the number of mergers,” he said.