After record year, bank purchases at credit unions could slow in 2020

The pace of credit union-bank deals could slow down following a spike in activity last year.

Sixteen banks agreed to be sold to credit unions in 2019, representing the busiest year for such deals.

Industry experts think the volume may have peaked — at least in the near term. Push back by the banking industry, fewer willing sellers and potential regulatory intervention could all be factors, they said.

One additional unknown is whether Thursday's decision by Colorado regulators to block Elevations Credit Union's purchase of Cache Bank & Trust will have wider repercussions. It is believed to be the first time a state regulator has blocked a credit union's purchase of a bank.

"My best guess is that the number of transactions this year won’t be much different than last year, a few more or a few less," said Dennis Holthaus, a managing director at Skyway Capital Markets in Tampa, Fla. "There doesn’t really seem to be a sense of urgency."

A growing number of credit unions are taking the time to learn about how recent deals were structured and what the potential impact could be, Holthaus said. The challenge is forecasting the amount of time it will take for more credit unions to get educated and buy banks.

"It’s also difficult to say how many banks left in the diminished pool of potential targets will be putting themselves on the market," he said.

On top of that, potential regulatory changes being contemplated by the National Credit Union Administration could impact the volume of deals, said Peter Duffy, a managing director at Piper Sandler. Duffy said the agency originally planned to announce a proposed rule containing elements that could reduce the likelihood of credit union-bank deals at its December 2019 board meeting, but the discussion was pulled from the agenda.

Dennis Dollar, a former NCUA chairman and credit union consultant, said the number of banks electing to sell their assets to a credit union will fluctuate based upon the number of banks on the market in a given year. He said most banks would rather not sell to a credit union, but bank boards have a fiduciary responsibility to their stockholders to get the best deal.

And the bankers are clearly not happy. The latest example: The Colorado Bankers Association on Monday said it sent a letter to State Bank Commissioner Ken Boldt objecting to plans by Elevations Credit Union in Boulder to buy the assets of Cache Bank & Trust in Greeley. State regulators agreed with CBA's interpretation of Colorado law and on Thursday blocked the deal in 6-1 vote.

“If banks want to slow down the number of their own brethren selling their assets to a credit union, those same banks need to step up their offers to buy the assets of other banks," Dollar said.

The final CU-bank deal of 2019 also involved the largest bank ever to sell to a credit union and the largest credit union ever to buy a bank. In early December, $10.4 billion-asset Suncoast Credit Union in Tampa, Fla., agreed to buy $747 million-asset Apollo Bank in Miami. Suncoast is the tenth largest credit union in the U.S. by assets.

But attorney Michael Bell at Howard & Howard, who has advised the buyers in many of these transactions, said he expects a seller larger than Apollo to emerge in 2020. He believes the pace of deals will be the same or greater this year compared to 2019.

Six of the 16 deals announced last year involved a Florida seller, and another three of those banks were based in Illinois. In 2020, one state to keep an eye on is Texas, Holthaus said. No Texas bank has ever sold to a credit union but that could change. He said a large number of Texas-based community banks are in the asset range typically being acquired by credit unions. Such deals would mostly fall in and around the major cities of the Lone Star State, he said.

That’s not likely to go over well with Texas banking groups.

Christopher Williston, president and CEO of the Independent Bankers Association of Texas, is baffled by the recent trend of credit unions buying community banks and suggested it calls into question whether CUs are as unique as they claim to be.

"It verges on the nonsensical," he said. "The credit union mantra of 'we’re different' simply no longer holds water if they can purchase a bank and go on about their business."

There have been no whole-bank deals announced yet this year, but Alaska USA Federal Credit Union in Anchorage recently announced plans to acquire seven Phoenix-area branches from TCF Financial in Detroit.

"What possible common bond would a credit union from Alaska have with residents and bank customers in Arizona – that their state begins with an A?” Williston said. He believes a handful of large, aggressive credit unions are pushing the envelope well beyond what is logical and reasonable. "The traditional CUs, who are actually doing what they were chartered to do, should be horrified with the behavior of some in their industry," he said, adding that he hopes Texas does not become this year's Florida.

Bell predicted a larger-than-normal geographic spread for the deals this year with some first-time states getting into the mix. Two more branch deals in the Northwest are expected to be announced soon, he said, along with a couple of whole-bank deals now getting "finishing touches," although he added they are not close enough for an announcement in January.

Duffy from Piper Sandler agrees and said the operating environment and regulatory expectations for banks and credit unions will continue to bring more institutions to the table. Judging by the conversations the firm is having with its clients, Duffy said he expects to see an increase in the average asset size of a bank selling to a credit union.

The sweet spot on economy of scale continues to increase, and even well-managed institutions above $1 billion in assets are looking for either a meaningful acquisition or to sell, Duffy said. That's because their members and customers are tuned in to their choices, and satisfying them is getting tougher every day.

"The story is that the environment for consolidation is strong and increasing," Duffy said. "We think 2020 has the makings of being a pretty big year."