By Ray Birch
KENT, Wash.—A lack of enough suitable merger partners within the movement is leading more credit unions to consider buying a bank, says one merger expert, who believes the deals to date are worth the kinds of premiums being paid.
“I think there is a big shift in the mentality of credit unions when it comes to mergers and acquisitions,” said Glenn Christensen of CEO Advisory Group, who pointed to the increasing number of deals in which CUs have purchased banks. “It’s definitely one of these trends that is beginning to take off among credit unions, and in the years ahead I expect to see many more credit unions enter this market space.”
As CUToday.info has extensively reported, the number of CU/bank deals has been steadily rising each year since Michigan's United FCU got things started by acquiring $81-million Griffith Savings Bank in Indiana in 2011. The number of CU/bank deals has now exceeded 30. Michael Bell, attorney and counselor at Royal Oak, Mich.-based Howard & Howard, who has been part of 25 CU/bank deals, including three mergers of a bank into a credit union, says more deals will occur in 2019.
Christensen told CUToday.info that his client credit unions are showing a “greater appetite” for bank buys and have asked him to look for potential bank partners.
Difficulty Finding Partners
Christensen said not only is the regularity of the deals piquing more CUs’ interests, so, too, are the limited number of potential CU merger partners that fit with acquiring CUs’ objectives.
“Some of this increase in interest has to do with difficulty in finding merger partners among credit unions that are of the size the acquiring CU is seeking,” said Christensen. “If you look at this year’s data, through the first three quarters there have only been ten credit union mergers where the merging CU was more than $100 million in assets. I am seeing, in the $100 to $500 million group of credit unions, there still are not a lot of them at the point where they are saying they want to merge.”
For a growing number of credit unions, Christensen believes a bank buy is seen as a quick way to achieve key strategic objectives.
“Bank acquisitions are giving them access to new geographic markets, access to new market segments, and often entry into commercial and small business lending markets,” explained Christensen. “By acquiring bank staff, they can gain immediate expertise and people who have relationships in commercial and business lending, and the bank has the lending processes. So rather than try to grow a commercial portfolio organically, they simply acquire it and then expand. For a lot of credit unions it just makes strategic sense. They pick up a new branch network, new members and a lot of expertise.”
What Credit Unions are Paying
What had been holding some credit unions back from buying banks several years ago, said Christensen, is paying a premium to buy a bank. Christensen estimated that CUs have been paying 1.4 to two times book value, based on recent deals.
“You pay the capital back to shareholders plus you pay a premium. And with a credit union merger you inherit the capital of the acquired organization,” said Christensen. “You either have to be quite large to absorb the cost or have a very strong capital position.”
Christensen believes there is a “new perspective” among credit unions with respect to the value of a bank.
“I think a lot of credit unions are looking at bank buys a lot differently than in the past,” he said. “Even though you are paying handsomely for the deal, when all the numbers are penciled out it becomes a very good investment for the credit union and can help quickly meet some strategic objectives—especially as credit unions are struggling to find merger partners of adequate size. You might say the industry is undergoing a cultural shift.”
As CUToday.info has reported, several CUs that have acquired banks, as well as university researchers, have stated that bank buys have proven to be boosts to the bottom line.
What About CU Mergers?
Turning to mergers within the industry, Christensen said obstacles remain in the way of more mergers occurring.
“We are about to release a study from a survey of credit union CEOs that does indicate a lot of barriers still exist,” explained Christensen. “Those obstacles, however, tend to be more emotional than rational.”
He said the most prevalent reason for mergers being nixed are egos.
“Whether that be on the board or CEO level,” said Christensen. “That’s pretty enlightening, when the CEO and the board are aware their egos are a major hurdle,” he said.
For 2019, Christensen expects mergers will keep to their traditional pace of about 3% of all credit unions merging out annually—about 200-250 per year today. Christensen noted, however, if a recession hits, that the number of CUs merging out will increase.