Turns out banks and credit unions can find middle ground.
Seven banks have agreed to be sold to credit unions over the last 18 months. The trend will likely continue as regulatory costs, revenue pressure, succession and other issues spur more industry consolidation.
Achieva Credit Union in Dunedin, Fla., plans to take advantage of future activity. It has formed a mergers and acquisitions consulting practice group to advise other credit unions on buying banks. The $1.5 billion-asset Achieva has firsthand experience; it bought Calusa Bank in 2015.
The rationale for a credit union buying a bank is no different than the reasoning behind other financial institution mergers, said Dennis Holthaus, head of Achieva’s new M&A advisory practice.
“You want to grow,” Holthaus said. “You want to expand your customer base and your footprint. You want to bring on board additional lenders to help build the loan portfolio.”
Credit unions can be a favorable acquirer, especially for small, privately held banks. Credit unions, which lack stock, have to pay cash, which can provide liquidity to a seller’s investors. In the seven deals announced since early 2016, the sellers’ assets averaged $82.8 million, based on data from S&P Global Market Intelligence.
“The bank’s motivation to sell typically comes down to a business decision to exit a segment of its market or the means to recover value in the total business with tight margins,” said Guy Messick, a lawyer at Messick Lauer & Smith who has represented credit unions and credit union service organizations.
Besides the lure of cash, potential bank sellers may be enticed by credit unions’ tendency to keep staff after closing a deal, said Michael Bell, a lawyer at Howard & Howard who has handled 13 deals between credit unions and banks.
“I tell selling bankers that one of two things will happen if they involve a CU bidder,” Bell said. “One, the CU will win. Or two, the CU will raise the price — neither outcome hurts.”
Activity is picking up. Only nine banks agreed to be sold to credit unions between 2012, when United Federal Credit Union in St. Joseph, Mich., bought Griffith Savings Bank in Indiana, and 2015.
Bell, who worked on Achieva’s purchase of Calusa, said he is working on at least 10 more transactions, though some of them will not happen.
“I see a real uptick in these transactions,” Bell said. “Banks wanting to optimize their footprint can often find a nice partner in a CU buyer.”
Credit unions have financial reasons for buying banks. For starters, a credit union could buy a bank to boost commercial loans and deposits, said Keith Leggett, a retired American Bankers Association economist who runs the Credit Union Watch blog.
While the banks being bought are relatively small, they are typically bigger than an acquired credit union, said Peter Duffy, a managing director at Sandler O’Neill. Over the past decade, the typical asset size of a sold credit union has ranged from $9 million to $35 million.
“On that level it makes perfect sense for a credit union that wants to grow to go outside the fence and look at the banks … as a way to boost their growth,” Duffy said.
Credit unions that buy banks have an opportunity to accelerate member growth and, in some instances, establish an immediate local presence in new markets, Messick said.
Still, there are a number of obstacles that could prevent a bank from being sold to a credit union.
Not all bank shareholders want to sell their institution in an all-cash transaction. Regulators, management teams and shareholders generally prefer at least a partial payment of stock — more than half of all bank sales involve some stock consideration, Duffy noted.
“The less cash you use upfront the easier and more quickly the deal is accretive” to earnings, Duffy said. “The resulting combined institution doesn’t feel there is pressure to do anything out of the ordinary to overcome the premium they paid.”
Regulatory factors also play a role, industry experts said.
Federally chartered credit unions are currently barred from buying whole banks, so those deals must be structured as purchase-and-assumption transactions, Holthaus said.
The mergers also raise political questions, particularly as banks continue to rail against the credit union industry’s tax-exempt status.
“What is the purpose of the tax exemption if you have tax-paying banks being acquired by tax-exempt credit unions?” Leggett said.
Achieva’s M&A group aims to help other credit unions navigate issues by helping clients analyze bank targets, conduct due diligence and pricing analysis and prepare merger applications, among other things. Achieva decided to form the group after other management teams started seeking advice following the Calusa deal.
Holthaus, a former banker, says banks with assets of $300 million or less with shareholders interested in receiving cash would make good candidates. Potential buyers could include credit unions with assets of at least $500 million and ample cash to pursue deals.
“We’ve gone down this road before, and now we’ve gathered the experts and the resources to find these opportunities and execute transactions properly,” Holthaus said.