How this bank beat the odds to snag credit union assets

How can a bank buy some part of a credit union? Take the loans but leave the deposits.

The number of credit unions buying banks has increased significantly over the last few years. In 2018, nine of these deals were announced, up 50 percent from 2017, and so far this year, four more have been announced.

That’s left bankers wondering how they can flip the script. Alliance Bank Central Texas in Waco may have figured out how to do just that with its unique deal with Texas Farm Bureau Federal Credit Union. The CU, which also is based in Waco, sold its loans and its only branch to the $315 million-asset Alliance Bank.

More credit unions may be open to these types of deals or selling the entire institution to a bank given the long list of issues they are facing.

“Discussions of this nature have recently started to come to the surface in the banking industry, if for no other reason than the quid pro quo of if it’s good for a credit union to buy a bank than why not vice versa?” said Dennis Holthaus, managing director for Tampa, Fla.-based Skyway Capital Markets. “Since the focus and discussion of bank/credit union transactions is in its early stages it is hard to say if this is a developing trend, but my guess would be, yes.”

A spokesperson for Texas Farm Bureau FCU, who asked not to be identified, said the membership voted to approve the sale on March 25.

“We just sold the loans. The deposits will do whatever they want with them. A lot of them are changing to Alliance,” the spokesperson said.

The spokesperson said the pending retirement of several veteran employees prompted the sale. In addition, with just $6.7 million in assets, Texas Farm Bureau FCU had difficulty “keeping up with technology.”

The credit union, which is located in the Texas Farm Bureau’s building, reached out to several CUs to discuss a possible merger, but was rebuffed when maintaining the headquarters branch was made a condition.

“Some said they would take us, but they wouldn’t put anybody here, so we went with a bank,” the spokesperson said.

Alliance Bank Central Texas did not respond to requests for comment.

The unique structure of the deal – in which the bank is buying the credit union’s loans but not deposits – was possibly an attempt to skirt National Credit Union Administration rules regarding bank purchases of CUs, experts said. Richard Garabedian, counsel with the Washington, D.C.-based firm of Hunton Andrews Kurth, who represents both credit unions and banks, recalls seeing a similar bifurcated transaction many years ago.

The process of a bank purchasing a credit union can be complex and is similar to the rules governing a CU converting to a bank, Garabedian added. Small credit unions such as Texas Farm Bureau FCU are facing a number of issues, he noted, including dealing with regulation, competing with fintechs and being unable to raise capital. This may drive some credit unions to consider ways to sell all or part of the institution to a bank.

Garabedian said he works with consultants who are talking with banks that have an interest in acquiring credit unions.

There are several reasons why a bank would want to acquire a CU or some of its assets, such as adding executive talent, eliminating a competitor, entering a new market, expanding their footprint and picking up new customers, experts said.

These deals could also help a bank diversify its loan portfolio if it is too heavily concentrated in commercial real estate. Banks with CRE loans that exceed a certain threshold face additional scrutiny from federal regulators.

“Many of these reasons are similar to drivers for a credit union acquiring a bank,” Garabedian said.

Still, there are a number of reasons why there aren’t more of these deals.

The most recent purchase of a credit union by a bank was in 2007, well before the NCUA issued the regulations that currently apply to this type of transaction, Holthaus said. Today, the selling credit union must engage an independent third party to establish a market valuation for the CU, and the purchasing bank must pay the credit union at least that amount. The new regulation also requires a series of votes by the credit union members on the proposed transaction.

The small size of most credit unions may not appeal to many bank buyers. More than 3,100 credit unions had just $50 million in assets or less in the fourth quarter, according to NCUA data. The time and resources necessary to get regulatory approval to buy and then integrate a relatively small target may not make business sense, Garabedian said.

There also is the issue that loan portfolios are different at credit unions compared with community banks. Holthaus noted CU loan portfolios are primarily consumer loans, while bank portfolios are more heavily weighted toward commercial credits. Credit union loan portfolios tend to be smaller so again a bank might not be interested in spending the time necessary to buy the credits.

Still, credit union members may be open to such transactions. Their biggest concern is usually their interest rates and getting good service, Garabedian said. Members could also see a payout from a sale to a bank, which could be another motivating factor.

“They don’t really care if it is a bank or a credit union,” Garabedian said. “I am getting some rumbling from colleagues in the industry is there will be more of these bank purchases of credit unions.”