Following a record year of credit unions acquiring banks, industry experts are split on whether the trend will continue into 2020.
Some expect the volume of these deals to stay high as more credit unions reconsider the idea of acquiring banks after seeing so many deals announced in 2019. But others think the trend could slow down if regulators become more skeptical of the deals, which could then lead to more merger activity between credit unions.
Sixteen such deals have been announced in 2019, almost doubling the nine deals in 2018, according to S&P Global Market Intelligence data. The influx of deals has created a snowball effect, raising awareness among more and more credit unions that they could gain scale by acquiring banks.
"The more these transactions occurred over the last few years and the more they were reported on, the more credit unions and banks had discussions," Peter Duffy, a managing director with Sandler O'Neill, said in an interview.
To increase their fields of membership and gain scale, credit unions have to be "aggressive," Tom Rudkin, a principal with DD&F Consulting, said in an interview.
"[Such deals] are definitely going to increase because it creates a number of opportunities for a credit union to expand," Rudkin said.
Not only do these deals allow credit unions to grow more than they would organically, they also pair financial institutions with similar community-serving missions. A credit union buyer is sometimes a better option for a community bank looking to ensure that there will still be a community institution in town after it sells, Charles McQueen, president and CEO of McQueen Financial Advisors, said in an interview.
"A credit union purchasing the assets of a community bank would be much better than a national player [doing so and] coming into a community," Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, said in an interview.
McQueen, who has been the adviser on many of these deals, said there will be more announced in the first quarter of 2020. Those deals are "geographically diverse" and not in one region, he said, but he declined to provide more information.
If these deals continue, they could get larger.
While a credit union acquiring a bank with over $1 billion in assets is a possibility in 2020, only a large credit union with enough cash could pull it off because credit unions cannot issue shares to help pay for M&A. The credit union would probably need to be twice the size of Suncoast CU, which had $10.41 billion in assets as of Sept. 30, according to Rudkin. Suncoast announced earlier in December that it was acquiring Miami-based Apollo Bank, which had $746.8 million in assets as of Sept. 30.
While Sandler's Duffy said he has talked with credit unions that are interested in buying banks with more than $1 billion in assets, he ultimately expects the number of bank deals with credit union buyers to decline in 2020.
Currently, Sandler O'Neill is discussing five potential mergers between credit unions with more than $500 million in assets each. As scale-driven mergers between credit unions increase, there could be less appeal for bank acquisitions, he said.
Acquiring banks could get somewhat more complicated for credit unions if new regulations are pushed through in 2020 as well.
In September, NCUA Chairman Rodney Hood said in an interview with The Wall Street Journal that he plans to introduce a rule clarifying credit unions' regulatory responsibilities when acquiring banks. Credit unions should acquire banks that mesh with their existing membership and with the business lines they operate, Hood told the newspaper.
That might curb some large credit unions' interest in seeking a big deal with a bank, if the target pushes the membership envelope too far.
However, an attractive offer is always going to pique a selling bank's interest. A credit union could offer a better price than other bank competitors, Dennis Dollar, a credit union consultant and principal partner at Dollar Associates LLC, said in an emailed statement.
"There is little reason to believe that the decision of banks to sell assets to credit unions will slow down in the foreseeable future," he said.