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Credit union deals dip in H1 but advisers see growing pent-up demand

Credit union deals have slowed in the first half this year as the COVID-19 pandemic has sown uncertainty, but deal advisers said activity could surge next year, including among larger credit unions looking for a transformative merger-of-equals.

There were 65 credit union deals in the first half, down from 72 in the year-ago period and 90 in the first half of 2018. Deal advisers said credit unions have been hesitant to engage in M&A due to the economic uncertainty wrought by the COVID-19 pandemic.

"Those under financial pressures, I think there is still some reluctance to consider mergers in the near-term," said Glenn Christensen, founder, president and CEO of CEO Advisory Group, an M&A consulting company focused on the credit union industry. "Sometimes credit unions don't want to give up when they're down."

At the same time, some credit unions are seeing opportunity, leading deal advisers to predict a resurgence of activity over the next year. Similar to what experts anticipate for banks, advisers predict credit union M&A will speed up once there is clarity around COVID-19's economic impact.

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"About 45 days ago, the spigots turned back on," Charles McQueen, president and CEO of McQueen Financial Advisors, said. "Everyone is looking at everything, and we have a number of deals going on."

Deal advisers said the dynamics driving bank deals affect credit unions similarly. As more clients use online or mobile banking services, depositories increasingly benefit from scale that can enable technology investment, making mergers-of-equals more attractive.

"MOEs are taking on a lot more importance," Christensen said. "We are going to see more of the billion dollar-plus credit unions joining forces."

The credit union deals during the first half of 2020 were relatively small. The average assets for credit union targets in 2020 was $66.0 million while the average assets for the buyers was $1.40 billion. But deal advisers said larger scale deals will likely pick up soon.

Both Christensen and Peter Duffy, a managing director with Piper Sandler, said they are involved in discussions with larger credit unions interested in partnering with another credit union of similar size in a merger of equals.

Duffy said that if more credit unions of size do deals to gain additional scale, smaller players will feel pressure to do their own deals. "That's going to spark deals among all size CUs as those grow and cause discussion in the industry," he said.

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Tom Rudkin, a principal with DD&F Consulting, observed similar sentiments among credit unions and said that some credit unions see the pandemic as a potential opportunity to gain market share.

"Credit unions are being cautious [of credit quality issues], but they see this as an opportunity to continue their increased market share," he said.

At the same time, credit union deal activity might not match banking M&A trends, advisers said, since credit unions tend to be more hesitant about deal-making. Christensen said credit unions can be especially skeptical about selling, which he said has been a primary driver of the recent increase in credit union acquisitions of banks.

Structural differences between banks and credit unions will also continue to depress the pace of credit union consolidation relative to the banking industry, Duffy said. Bank board members are paid, so they feel a fiduciary responsibility to hold management accountable, but many credit union board members are compensated through perks such as travel, Duffy said.

"The system of accountability is nothing like it is on the bank side," he said. "If the board of directors of these credit unions were truly accountable to the membership, many of them would have merged already."

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