Credit union-bank M&A could have banner year in 2019

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The number of deals involving credit unions buying whole banks is rising, and the 2019 tally could double last year’s.

Nine whole-bank acquisitions were disclosed in 2018. Two more deals have been announced this year, and another one is potentially on the horizon in Arkansas.

Rodney Showmar, CEO of Arkansas Federal Credit Union in Jacksonville, Ark., has made no secret of his desire to buy a bank. The $1.1 billion-asset credit union has been looking at deals for about two years, and Showmar said it has been in negotiations with banks a handful of times.

With credit union growth starting to slow after several strong years, many institutions are turning to bank purchases as a way to expand quickly.

While Arkansas Federal Credit Union has been unable to reach an agreement with sellers, Showmar said he anticipates announcing at least one bank acquisition this year — and possibly another in 2020.

The credit union is primarily focused on targets in Arkansas, but Showmar said management is open to buying banks in surrounding markets such as Memphis, Tenn.

Added distance makes deals "more difficult, but it doesn’t make it impossible,” Showmar said. “If the right opportunity came along ... we’d be all over it.”

Arkansas Federal Credit Union would also be open to merging with another credit union, but Showmar said he believes there are more opportunities with banks. “Banks have more urgency and propensity to sell than credit unions do to merge,” he said.

Six credit unions announced deals to buy banks in 2017, though one of those was ultimately called off. That number jumped by 50% last year and could increase even more in 2019.

“My best estimate is that there could be double the number of deal announcements when compared to 2018,” said Dennis Holthaus, managing director at Skyway Capital Markets, which has advised several credit unions on bank acquisitions.

The two deals announced this year involved Florida sellers, and Holthaus, who is based in the state, said the Sunshine State is a long-term-growth market with a reasonably large number of community banks. Its current economic strength makes it a good time for banks to sell.

Michael Bell, a lawyer at Howard & Howard in Royal Oak, Mich., who has assisted in several bank purchase deals, said he also expects Florida to be a major spot for credit union-bank purchases.

“There are plenty of great banks for sale or that will be for sale,” Bell said. “There is a lot of runway left.”

Bell also said he expects some very large credit unions to become more active with such deals.

The largest credit union to buy a community bank so far is the $8 billion-asset VyStar Credit Union in Jacksonville, Fla., which agreed in January to buy Citizens State Bank in Perry, Fla.

It takes roughly the same amount of work to put together a $100 million transaction as it does a $1 billion transaction, Holthaus said, which means larger credit unions looking for growth opportunities are more likely to target bigger banks.

“It takes a larger deal to have a noticeable impact on the buyer’s net income,” Holthaus said. “The large buyers are looking for membership growth, which is not going to come from a small transaction.”

Not everyone is aiming that high.

Eric Mangham, chief financial officer at Arkansas Federal Credit Union, said its ideal bank target would have $300 million or less in assets, along with a complementary balance sheet and risk profile. He said it would also be a positive if the acquired bank offered a product the credit union lacks, such as agricultural or Small Business Administration lending.

As interest rates rise, banks with large amounts of core deposits are becoming more valuable, Mangham said, though he stopped short of saying bank pricing has risen lately.

Some industry observers say banks could start to identify deals for credit unions.

Blaine Jackson, CEO of NewDominion Bank, a Charlotte, N.C., division of Park National, said such deals would allow banks to remove competitors. That could be a tougher sell, however, since a credit union’s membership would have to approve a deal.

Holthaus said he could also see such deals happening because community banks want to grow their assets, their customer bases and their branch coverage just like credit unions. The bank would have to be in a position to pay cash, he said.

“It would be difficult, if it could be done at all, to use stock as their currency in a transaction,” Holthaus said.

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