Less than halfway through 2019, the U.S. banking industry has already seen almost as many deals involving credit unions acquiring banks than were announced in the entirety of 2018. Investment bankers and analysts say the trend is likely to continue building momentum.
In the latest deal, Oshkosh, Wis.-based Verve a CU is acquiring Chicago-based South Central Bank NA, a unit of First Business Bancorp Co.
"There is a real desire by the larger credit unions to get even larger because they're recognizing that they're now competing with banks and money center banks head-to-head to get deposits," Peter Duffy, a managing director with Sandler O'Neill & Partners, said in an interview.
"According to our research, for the first time in history, money center banks are paying higher on deposits than credit unions are," Duffy added. Because of this, credit unions are realizing the need for scale and turning to banks, he said.
Dan Berger, president and CEO of the trade group National Association of Federally-Insured Credit Unions, or NAFCU, agreed that credit unions are looking to increase their scale.
"Credit unions want the assets, they want the bank's customers, especially if it fits in the field of membership, they may want some branch locations," he said. "A credit union buying a bank, it's always a strategic decision."
The deals can be financially compelling for banks, as credit unions are sometimes willing to offer higher prices.
"If [banks] make an acquisition and feel they've overpaid and it's going to take longer than they want to make the deal make sense, they're going to walk away. But credit unions are willing to go beyond that multiple of book," said Duffy.
"Credit unions are longer-term thinkers and planners so they can afford to buy a bank that's exactly what they are looking for at a high price," Tom Rudkin, a principal with DD&F Consulting, said in an interview.
That was the case in the latest deal. South Central Bank Chairman and CEO Marc Grayson said an investment banker presented many potential acquirers, but the bank chose Verve because it had the most compelling offer for shareholders.
"Quite simply, the price was higher than commercial banks," Grayson said in an interview.
These deals can make financial sense for banks, but they can also mean challenges for credit union acquirers. Carrie Hunt, executive vice president and general counsel of NAFCU, said that when credit unions buy banks, they often have to make changes to meet their field of membership requirements. For community-chartered credit unions, ensuring bank branches are in their community by either selling branches outside or expanding their charters is an option. For multisegment credit unions, it becomes more complicated.
"These are not easy things," said Hunt.
And the trend has some critics.
"I think, philosophically, I'd like to see these banks say 'no' to those offers," Rebeca Rainey, president and CEO of the Independent Community Bankers of America, said in an interview. She acknowledged that banks have a fiduciary responsibility to their shareholders, but took issue with the way credit unions are taxed.
"If credit unions want to operate as a bank, they should be taxed as a bank would be. Or if that's not the case, they should stay within the original intent of the charter and the common bonds of which they were originally created to serve," Rainey said.
Still, analysts and investment bankers expect the number of credit unions acquiring banks to keep climbing.
"Banks are going to continue selling and they're looking for a higher price than what other banks can pay, so they will clearly seek out credit unions to have conversations with them," Rudkin said.