Credit Unions Banking on Acquisitions as a Growth Strategy
The number of CUs acquiring banks will grow, the question is by how much – and there are a few dynamics at play.
It’s the end of the year, and looking into 2020, the most frequently asked question in my office by far is: What do you think the future trend will be for credit unions acquiring banks?
Since the first credit union acquisition of a bank in 2012, there have been 26 additional bank acquisitions, with some credit unions acquiring more than one. The consensus is that the number of transactions will continue to grow – but by how much they’ll grow is the real question, and there are a few dynamics at play.
Capital deployment: Unlike banks, credit unions aren’t beholden to the quarterly interests of shareholders and stock prices, which gives their boards more freedom to act or even not act on calculated risks presented to their operations. Of course, credit unions are approaching these transactions just as thoughtfully as they do other growth strategies. Credit union boards are charged with a huge fiscal responsibility to their members to manage their money prudently and competently, so they are very careful in the decisions they make as to the best way to deploy their capital.
Given the difficulty and cost of growing organically, I believe we will continue to see a steady increase in the number of credit union acquisitions of banks across the country. The Florida market is particularly active – nearly 40% of these transactions have happened in the Sunshine State. The potential for more Florida transactions would be even greater if not for the dwindling number of community banks available for sale. I’m talking to credit unions outside of Florida as well, and there seems to be more interest in the space overall.
Regulatory impact: The future activity in this space will also depend on the NCUA’s regulatory proposal currently under development, which will define the processes for a credit union buying a bank. We should get a better understanding of these new rules by the end of this year or early in 2020.
Post-acquisition financial performance: Credit unions are watching the outcomes of previous transactions very closely. They should see some assurances of financial gains from the fact that, of the 27 transactions since 2012, four credit unions have purchased more than one bank. For example, Achieva Credit Union based in Dunedin, Fla., and IBM Southeast Credit Union based in Boca Raton, Fla., have both purchased two banks.
New ideas take time: There is still an educational process taking place in the credit union industry. More and more conferences are putting this subject on their agendas, and these sessions are usually well-attended. There are a lot of questions in the industry about the success of these transactions.
For example, I recently attended the AICPA’s annual credit union conference, and the most frequently asked question was whether a credit union loses bank customers after the transaction closes. It’s an important question, and the answer is that the erosion of the bank customer base has proven to be minimal if the credit union implements an appropriate marketing plan and educates the bank staff on what it means to be a credit union member. Another frequent question in industry meetings is, “What makes a community bank interested in selling to a credit union?” My answer is that credit union culture and philosophy very closely aligns with that of a community bank – and, the fact that the credit union is paying cash for the stock of the bank.
I believe we’ll continue to see an increase in credit unions buying banks as a growth strategy. The upside is tremendous.
Top 5 Reasons to Buy a Bank
1. Increase membership base: More members means more loan and deposit opportunities, which translates into growth in total assets.
2. Expand branch footprint: Extend the cred union’s reach within its existing field of membership and/or into new markets.
3. Boost earnings: Introducing greater scale and operating efficiencies, eliminating redundant administrative costs and generating more income all add up to a powerful incentive for acquisitions.
4. Deploy excess capital: While excess capital can be deployed through organic growth, an acquisition provides a faster, more efficient means of deployment.
5. Enhance business lending, and business services expertise and opportunities: Most community banks are more focused on business lending than consumer lending, bringing an experienced staff to the credit union.
Of course, regulatory changes and other factors can always influence this trend. That’s why I’ll be keeping a close watch on these transactions in 2020.
Dennis Holthaus is Managing Director for Skyway Capital Markets, a Tampa, Fla.-based boutique investment banking firm.