Most credit union’s strategic plans target growth: growth in total assets; growth in membership; growth in net earnings.

While credit union boards and management teams certainly are focused on organic growth, many are also open to growth through acquisitions. In today’s operating environment M&A transactions can take many forms.

The most common transactions involve a credit union merging with another credit union, typically a smaller credit union. These transactions certainly result in asset and membership growth and, in some cases, an expansion of the surviving entity’s branch footprint, however, the impact is somewhat muted because of the smaller size of the merged entity. While a number of larger credit unions are interested in a “merger of equals”, there’s no denying the fact that a merger of equals or near equals is more difficult to consummate and, as a result, there are fewer mergers of this type.

So, is that the end of the story? Are mergers of equals in the industry going to be few and far between? Is the scale necessary to stay relative as a credit union only achievable through organic growth which is a long, painful process?

Maybe!

Or maybe not! A transaction structure that has been used to a limited extent in the past that includes the disappearing credit union paying a special dividend to its members at closing could potentially be used more often. The return of capital to the members whose credit union is going away has a certain appeal to it.

Or, what if a credit union buys another credit union like when a credit union buys a bank? It may not require a multiple of capital as is the case in buying a bank, the remuneration goes to the members the same as what the bank stockholders receive and the accounting for the transaction is the same as it is for a bank purchase. I believe the “acquiror” would find that it would earn a very favorable return on investment justifying the purchase price and the “seller’s” shareholders should be pleasantly surprised at receiving a check at or near the merger date.

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Speaking of credit unions buying a bank, these are certainly still attractive transactions for achieving growth in assets and members, entering new markets including geographic expansion, improving net income and, in a number of cases, gaining or enhancing expertise in products and services not typically the strong suit of a credit union mostly related to commercial lending and business services, including the technology to support these services.

What may be surprising to some credit unions is that there are banks interested in buying a credit union. Why? There are a limited number of bank sellers, multiple expectations of sellers are in some cases unrealistic and some of the same reasons as credit union mergers: asset and customer growth, entry into new markets, increasing earnings per share but also gaining expertise in the consumer lending arena. As is the case of a credit union acquiring another credit union, the consideration paid by the bank goes to the members.

One last developing trend is credit unions, or their CUSOs, acquiring an insurance agency, wealth management operation and/or a fin tech company.

Besides increasing non-interest income, these types of entities provide the credit union with new members to market the credit union’s products to and new products to market to its existing members. One note of caution if considering buying these businesses. Since in many cases the credit union does not have resident expertise in the products these businesses offer, it is more important to retain the owner/business manager for a time post-closing of the transaction. This can be accomplished through a transaction structure known as an “earn out.”

One type of earn out structure is paying the seller 100% of the purchase price at closing and agreeing to pay additional monies to the seller, for a defined time after closing, if the seller’s business hits or exceeds contractually defined earnings targets.

Another structure is an installment sale paying the seller a portion of the purchase price at closing, paying the remainder of the purchase price in agreed annual installments. Even when the acquiring credit union currently has the expertise, the use of an earn out structure can still prove valuable.