By Ray Birch
WASHINGTON—The merger of $12-billion Digital FCU and $17-billion First Tech FCU already has Capitol Hill talking, according to a Washington insider who is concerned the mega merger may take CUs one step closer to taxation.
“For one thing, people are relieved it's not a big bank purchase, because we've already got a brush fire started there,” an analyst, who requested anonymity, told CUToday.info. “The banks are going to say this is very un-credit-union-like. That credit unions are becoming these mega-national institutions and their tax status needs to be looked at. Not everybody on the Hill is going to agree with them. But some people on the Hill are saying maybe these mega credit unions are different. So, maybe we better look a little harder at credit unions overall.”
The source added that several CEOs have stated they are concerned that a growing number of large credit unions only see merger as their primary growth strategy, and that solid, organic growth is not possible anymore.
“That's a little bit disturbing,” the person stated. “While we are hearing some cheery comments about this Digital/First Tech deal, underneath the surface I am hearing people are getting a little bit uncomfortable with it—and this adds one more brick in the wall being built that supports credit unions are not doing very credit-union-like things.”
Dennis Dollar
More Large Deals Likely
Former NCUA Chairman Dennis Dollar told CUToday.info the movement should simply prepare for more large CU combinations.
“With scale being essential to financial performance, operational efficiency and enhanced technology, you can expect to see more and more mergers of larger credit unions,” said the Dollar Associates principal.
Dollar pointed out the top 100 banks have captured over 75% of the financial services market and accomplished that through mergers, acquisitions and scale building.
“It is only natural that the marketplace is going to drive more mergers among credit unions in order to compete,” he said. “It is the nature of today’s marketplace, and I don’t see that changing—probably only accelerating…You cannot separate safety and soundness from the ability of a financial institution to compete effectively in the marketplace. Banks have realized this for decades. Credit unions are now moving in that direction, even though they are doing so through the not-for-profit cooperative model. The business basics are the same.”
Both CUs Performing
CEO Advisory Group merger expert Glenn Christensen was glad to see the big shops combine.
Glenn Christensen
“They are both doing well and are trying to achieve scale,” Christensen said. “That's going to allow them to be a difference maker.”
Christensen said the recent deal reminded him of when First Tech merged with Addison Avenue FCU in 2010.
“Just like the Addison deal, this is two high-tech credit unions coming together,” Christensen said. “I think the combined credit union will be able to do a lot more than each CU could on their own. I think we will see the credit union’s growth accelerate as a result.”
Christensen believes the industry will see more very large CUs combine.
“As credit unions grow in size, they begin to look at the environment a little bit differently, even more strategically,” he said. “They want to know how they can do even more for members and potential members into the future. As boards get more strategic about this they are going to say let's work in the best interests of our membership—and I think we'll see even more bold moves in the future.”
Christensen is certain banks will zero in on the recent deal.
“That's what keeps the lobbyists in businesses, right?” he said. “They need to have an enemy and be able to point to these kind of deals and say credit unions are becoming more bank-like and they should be taxed.”
Time And Fortitude
Michael Bell
The pioneer of CU purchases of banks, Michael Bell, also termed the merger a bold move.
“These kinds of deals take a great deal of time and fortitude. I applaud them for doing it,” said Bell, a partner and chair of the Financial Institutions Practice Group at Honigman, LLP, who does not represent Digital or First Tech.
Bell said he does not believe credit unions are relying too much on mergers to grow.
“I would say many of the large, sophisticated credit unions, if you look at them closely, you’ll see they have strong organic growth,” he said.
Bell, too, does not believe rumors that the Digital/First Tech agreement was made to give the departing CEO a nice retirement package.
“It's easy from the outside to think that. And it's human nature. And I'm not criticizing anybody. But to look at a transaction and simply think somebody got paid off…,” said Bell, who added that regulations and disclosure rules typically prevent that from occurring.
Bell, like many other analysts, believes bank trade groups will zero in on the huge merger.
“Any time a credit union does anything that is mildly different or mildly exciting the bankers will jump on it,” he said. “Whether it's a sports team sponsorship or two large credit unions merging.”
Financial Performance Heading In Opposite Directions
According to NCUA data, First Tech's annual net income has been steadily falling in recent years, dropping from $175 million in 2021 to $41 million in 2023, and $905,684 through June of '24. Digital has moved in the opposite direction, going from $38.8 million in net income in 2021 to $84 million in 2023, and $38.2 million through June of this year, according to Call Report data.