Is this the mergers tipping point?

Just maybe we are at the tipping point where, suddenly, credit union – credit union mergers become commonplace and also just maybe so will credit union – bank mergers. That’s the take-away I have after conversations with leaders in the merger world.

Yes, mergers still are rare. There were just 181 in 2022 (up from 161 in 2021) but, buckle up, the ride is getting bumpier.

Then, too, mergers are in the air. There’s CUNA and NAFCU and now Co-op and PSCU. Just maybe this trend now is drifting down to the financial institutions too.

Credit unions, even the biggest, face three immense problems that aren’t going away. They increasingly struggle to compete with the half dozen money center banks on a cost basis. Scale matters. It costs a Chase less to process a mortgage application or a car loan than it costs a credit union. The cost difference per instance isn’t a lot but multiply it with the volume a Citi or Wells enjoys and we are talking big dollars.

Another reality: one, low price now dominates in most transactions. Just about all players set the same interest rates on home mortgages and car loans for instance because a higher rate won’t win the deal. A BoA can make money on today’s rates because – remember – it has that cash kitty that comes with scale. A credit union struggles to do the loans profitably. Volume makes the difference.

A third reality: the cost of the technology needed to compete just isn’t getting cheaper. Today’s younger consumers make choices about where to bank on the basis of technology and, guess what, the big banks are winning this fight, again, because they have the money.

Add in the certainty that much fee income (such as NSF charges) will fall for most credit unions and, even more worrisome, consumer debt is climbing to dizzying heights.

Put the pieces together and it’s an ugly puzzle for credit union executives.

That’s why Peter Duffy, a managing director at Piper Sandler, recently told me that when it comes to credit union mergers we ain’t seen nothing yet. “I just got off the phone with the CEO of a smaller credit union, under $500 million in assets,” said Duffy. “She had just gotten back from a conference where, she said, everybody was talking about credit union mergers.”

He added that he is getting a steady stream of inquiries from credit unions with over $1 billion in assets who say they have put together a list of institutions they want to explore a possible merger with – but they also know they are on the list of yet other institutions that see them as possible merger targets.

The other merger expert who expects to see more deals is attorney Michael Bell who was the architect of the first credit union – bank merger when United Federal Credit Union in Michigan bought Griffith Savings Bank in Indiana in 2012.

A reason he expects more deals coming his way: Bell told me that a majority of community banks are for sale or at least would welcome a purchase offer. They are battered by the same competitive pressures that are hitting credit unions and, as executives and board members age, they begin to wonder if selling out just might be the smart move.

Bell adds that multiple factors fuel a credit union – bank merger. Three of the biggest are:

• A geographic expansion (as when United Federal increased its Indiana footprint with Griffith)
• A merger grows the business volume and may lower operational costs.
• Talent and capabilities. Some mergers are sought to add key staff (such as experts in business banking).

Other reasons to merge include failing performance, usually by a very small institution, and in ever more cases it’s a failure to hire a suitable CEO when a long serving incumbent retires.

He added that, unlike a credit union – credit union merger, a credit union – bank deal is a business transaction and it is cashflow positive on day one.

Another difference with credit union – bank mergers: it takes cash to do the deal which, remember, is a business transaction. Bell estimates that maybe only 250 of roughly 5000 credit unions have the wallets needed.

Are the regulators on board with credit union – bank deals? Bell, who said he had a role in probably 90% of successful credit union – bank deals, told me he had encountered no friction from regulators and, if anything, the credit union regulator just may welcome the additional assets that are brought under the NCUA umbrella.

But Bell offers a cautionary word too. He said that around 90% of the deals he gets involved in never come to fruition. Reasons for failure are as plentiful as there are institutions. But many more deals fall apart before the papers get signed than ever reach the finish line.

Keep that in mind.

But also keep an open mind about merging: it just may be the new credit union path to lasting prosperity in a business environment that just isn’t getting easier for small financial institutions.