Credit union mergers and acquisitions in 2020 were extremely volatile, just like everything else in the rollercoaster year. But is there room for optimism in 2021?
Highlighted below are the significant trends currently shaping the credit union M&A landscape. From the impact of the pandemic to difficult negotiation and contractual issues to regulatory changes, here are five things worth keeping an eye on in 2021:
Increase in M&As
Based on historical performance, many credit union executives expect credit union merger activity will experience a significant uptick once the COVID-19 dust settles.
The combination of many credit unions facing financial challenges, increased demand and lower acquisition target prices is expected to lead to an overall increase in M&As. This will especially affect smaller institutions with a narrow field of membership and facing financial stress, leading them to most likely seek a buyer as the "pandemic effect" sets in.
The number of credit union mergers declined in 2020, and experts are citing COVID-19 for the decline. They're expected to increase to pre-pandemic levels in 2021 or slightly up.
Community Bank Deals to Resume
Credit unions are also expected to resume community bank purchases in 2021. A recent survey showed nearly 60% of bankers to be open to an acquisition, even if their primary focus remained organic growth. A further 28 percent reported they would be active acquirers.
COVID-19 had slowed down most M&A deals, but with things steadily getting back to normal, there has already been a noted upturn in the number of CUs reconsidering community bank purchases as part of their forward-looking strategies. The impact of the pandemic has even led some institutions previously averse to the idea to now be open to the possibility, seeing it as an opportunity to both diversify their portfolios and venture into SBA (Small Business Administration) lending.
Most Mergers Will Not be Between Credit Unions
Although we will witness an increase in mergers and acquisitions in 2021, the majority, surprisingly, won't be among CUs themselves. A 2019 online poll conducted by West Monroe Partners, which surveyed 100 industry leaders whose organizations were actively pursuing M&As, found only 46% of respondents open to merging with another credit union.
Of the remaining majority, 22% sought to merge with fintech (Financial Technology) companies, while 32% were targeting banks. The rationale laid out by this group was that teaming with another CU simply wouldn't provide access to the better and more innovative technology they sought.
Considering teller transactions have declined by 7.5% over the past few years and close to 12 million Americans now cash checks via their mobile devices, this makes sense. To succeed in today's world, credit unions need a partner who will help them implement a personalized and convenient member experience with a solid technological foundation.
Such a partnership would allow for further diversified business offerings and greater reputability in the long-term.
Buying vs. Being Bought
There is no doubt credit unions are more open to M&As in 2021. However, most will want to be buyers. This is especially true for those open to merging with another CU. According to the same West Monroe poll, 64% of respondents say they would prefer to be on the buying end of any acquisition.
Conversely, those aiming to link up with a fintech company or bank are more receptive to the prospect, with 59% open to being acquired as long as the move led to sufficient cost savings and 56% welcoming any deal that would improve their member experience.
While the benefits of acquisition can be considerable, the M&A market is not always favorable to those looking to do the buying, while even those open to being acquired often must wait a long time before identifying the right partner.
Regulations Might Turn the Tables
There has been growing contention between community bankers and their tax-exempt, "not-for-profit" counterparts. The push for a hearing on credit union tax exemptions by Congress, although stalled somewhat by the pandemic, is an issue likely to soon be raised once again.
The West Monroe study shows that of CUs to have implemented a merger, 62% reported delays of more than a year due to regulatory issues. Further, considering the inconveniences regulations can create, 40% of credit union leaders now say they would need to do an in-depth assessment of any potential partners’ regulatory and compliance gaps.
What's in it for Members?
It all depends on the partnership itself. In a 2019 report titled “Do Credit Union Mergers Create Value for Credit Union Members? An Analysis and Review of the Empirical Evidence,” a research team found that a mid-size CU joining forces with a comparable peer does not actually result in any advantages to members. However, that same CU partnering with a larger financial institution would lead to increased value through loan and deposit benefits.
In conclusion, credit union consolidations in 2021 will not be overly beneficial to members, but instead serve as a tool to allow institutions themselves to leverage scale.
The Takeaway—The Future is Bright
2020 saw credit union mergers and acquisitions hit a record low following more than a decade of consistent increase. Like any other industry, this drastic downturn was largely driven by the pandemic crisis and forced closure of several businesses.
However, thanks to a vaccine that is now a reality and a workforce that can flawlessly handle remote operations, there is reason for optimism in the year ahead.
At the same time, it’s worth noting that while some partnerships do end up being a perfect match, they often change very little and can ultimately prove unnecessary. The mergers that lead to the most success are those focused on creating new member benefits and a sustainable long-term growth strategy.