Credit Union Mergers Keep Falling
The number of mergers continues on a gradual downward trend as the NCUA approved 44 mergers across 26 states in the first quarter of 2017, down from the 54 mergers approved at the end of last year's first quarter.
In January, the federal agency approved 21 consolidations, 15 in February and only eight mergers in March, the lowest number of consolidations approved in the month of March over the last 10 years, according to a review of the NCUA's Insurance Reports of Activity for the month of March since 2008.
Over the last few years, the number of mergers has been declining. In 2016, the NCUA approved 200 consolidations, down from 238 in 2015, 262 in 2014 and 258 in 2013.
If the downward pace continues throughout 2017, the total number of mergers could fall to about 180 by the end of the year, surmised Glenn Christensen, president of CEO Advisory Group in Kent, Wash.
The NCUA's approval of only eight mergers in March surprised Christensen, however, because he continues to see more interest among his credit union clients that are pursuing strategic consolidations to expand their asset size, membership and market share.
The increasing interest in strategic mergers, however, could be one factor among others that may be contributing to the slower pace of consolidations because strategic mergers can typically take a year or longer to negotiate.
The improving economy also may be contributing to the slower pace of mergers.
“The economy drives mergers, clearly, and my gut tells me that you’ll [continue to] see a big drop off because I don't know of any credit union that is not making money though they’re not making the kind of money they used to make,” said Tom Randle, a 29-year credit union CEO who founded the KES Group LLC, a Clayton, Ga.-based management consulting firm.
“What I’m seeing now is that I have a few larger clients that really want to get to a billion in assets,” he said. “That's their mindset but the only way they are going to do that is through mergers because the organic growth just isn't there.”
While the economy may be helping some credit unions stay independent for now, they are still struggling to attract in new members and grow their loan portfolio, especially among credit unions that manage $30 million to $150 million in assets. But even among credit unions with $150 million to $500 million in assets, the competitive pressures are mounting.
“For many of these credit unions in major metropolitan markets, it's fairly difficult for them to compete, and many are looking at merging into another credit union. They have an understanding that they have to acquire another credit union because it is so difficult to grow organically,” Christensen said.
In the first quarter, there were seven credit unions with more than $100 million in assets that the NCUA approved to be merged, including two that were consolidated because of poor financial condition and one because the credit union was unable to find a new CEO.
One of the largest mergers approved in the first quarter was the $171 million Ocean Communities Federal Credit Union in Biddeford, Maine with the $1.1 billion Northeast Credit Union in Portsmouth, N.H.
Just 18 miles south of Maine's largest city, Portland, Ocean Communities was growing assets and loans, but its net income declined over the last five years. In 2012, the credit union posted net income of $551,288, which declined annually to $160,521 at the end of 2016, according to NCUA financial performance reports. The credit union's net worth slipped from 8.19% in 2012 to 7.11% in 2016, below peer average of 10.95, and its ROAA fell from 0.46% to 0.1% in the same years, below peer average of 0.51%.
In just about every quarter there are at least one or two credit unions with less than $50 million in assets that received NCUA merger approval because they were unable to find a new CEO, or as the NCUA calls it, the “inability to obtain officials.”
At the end of the first quarter this year, four credit unions, including the $164 million Michigan Community Credit Union in Jackson, Mich., secured the OK because of its “inability to obtain officials.”
The well-capitalized Michigan Community, with a total net worth of $15.1 million and 18,252 members, was consolidated into Community Choice Credit Union in Farmington Hill, making it the 11th billion-dollar credit union in the Wolverine State.
The largest merger in the first quarter was the $227 million Valor Federal Credit Union in Scranton, Pa., into the $22 billion PenFed Credit Union in Tysons, Va.
Valor received its merger approval because it was in poor financial condition, according to the NCUA.
Valor had been struggling financially, posting a net income loss of $2.2 million in 2016 with a net worth of 5.56% and an ROAA of -0.96% at the end of last year, according to NCUA financial performance reports. Valor was victimized by internal fraud when its former president/CEO, Sean Jelen, admitted last July that he embezzled more than $700,000. Though Jelen was scheduled to be sentenced in November 2016, it did not occur and a new sentence hearing has not been scheduled, according to court records.
The $116 million Martin Federal Credit Union in Orlando, Fla., also received approval from the NCUA to merger because of its poor financial condition. The credit union was consolidated into the $2.9 billion MidFlorida Credit Union in Lakeland.
Although Martin FCU posted a net worth of 6.64% in 2014 and 6.31% in 2015, it was deemed “adequately capitalized” by the NCUA. In 2016, the federal agency declared the credit union undercapitalized with a net worth of 5.61%.
In 2014, Martin FCU recorded a net loss of $1.3 million but turned a net gain of $175,204 in 2015. At the end of last year, however, the credit union posted a $678,584 net loss, according to NCUA financial performance reports.
Three additional credit unions with more than $100 million in assets gained merger approval for “expanded services.”
The $114 million Augusta Metro Credit Union in Augusta, Ga., had been consolidated into PenFed, which was its third merger of the year. Last year, PenFed merged six credit unions.
The $112 million Harbor Credit Union in Green Bay, Wis., was merged into the $1.3 billion Fox Communities Credit Union in Appleton, Wis. This is the second merger of a Green Bay credit union with Fox Communities in recent months. In January, the $42.9 million Horizon Credit Union, its 2,783 members and two branches were consolidated into Fox Communities.
Incidentally, Wisconsin posted five mergers, the most in the nation during the first three months of the year. Pennsylvania and New Jersey each had four, and Ohio, Massachusetts and Michigan each recorded three consolidations in the first quarter.
The NCUA also approved the merger of the $105 million Cornerstone Credit Union in Carlisle, Pa., into the $451 million Belco Community Credit Union in Harrisburg.
Dave Keffer, who served as the president/CEO of Cornerstone for more than three decades and retired two years ago, led a group of members who were opposed to the consolidation.
The Belco Community-Cornerstone consolidation was an example of what Keffer and other industry professionals, such as Callahan Chairman Chip Filson, said were nothing more than sales orchestrated by boards and senior managers at the expense of members whose interest they’re obliged to represent.
Filson argued that members elect boards to oversee the credit union's local focus and that selling out to a larger credit union that doesn't have this local focus and is simply buying unearned growth seems at best irrelevant, and at worst contradictory, to the local credit union charter that is being surrendered.
He also contended that members are not given full disclosure of proposed mergers because they are always promoted in only positive ways that lead members to vote for the consolidations.
New rules on merger transparency, however, could be in the making by the NCUA.
At the GAC in February, NCUA Acting Chairman J. Mark McWatters said that the agency should “require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote.”