Credit union-bank M&A has slowed. Is it a trend, or just a pause?

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After a spike in activity in 2019, credit union-bank deals have quieted down this year.

Only one credit union has announced a bank acquisition deal: Wings Financial Credit Union agreed this month to buy Neighborhood National Bank in Mora, Minn. A record 16 credit union deals for banks were announced in 2019, including four in the first quarter.

While several factors might be in play, including aggressive pushback from the Independent Community Bankers of America and a regulator's decision to block a credit union-bank deal in Colorado, industry observers say it would be wrong to interpret the lull as a sign that credit unions are getting cold feet.

"There are plenty of discussions and analysis taking place," said Dennis Holthaus, a managing director at Skyway Capital Markets in Tampa, Fla. "The NCUA — National Credit Union Administration — "is very supportive of transactions and is not very concerned about the banking trade groups on the issue of taxation."

Deal talks between banks and credit unions continue, and another announcement is likely to come soon in a state that has yet to have a credit union-bank deal, said Michael Bell, a lawyer at Howard & Howard who advises credit unions.

Credit unions may be taking their time to process the January decision by the Colorado Banking Board to reject a bid by Elevations Credit Union to buy Cache Bank & Trust. The ruling — believed to be the first time a state regulator blocked a credit union-bank deal — relied on a specific Colorado statute that bars mergers between different types of financial institutions.

While the Elevations ruling was tied to Colorado law, "it will probably put a little chill" on credit union-bank deals, said Richard Garabedian, a lawyer at Hunton Andrews Kurth.

The ruling has forced state-chartered credit unions in untested states to reach out to their regulator to verify that there is no prohibition on bank acquisitions, Holthaus said.

There is no appeal process in Colorado, so the banking board's decision is final, said Don Childears, CEO of the Colorado Bankers Association, which led the charge against the approval. While the credit union could challenge the decision legally, he said the courts tend to defer to regulators' decisions.

"I think it would be very difficult to change the outcome," Childears said.

A call to Elevations was not immediately returned.

Another factor could be the pricing expectations, Garabedian said. Credit unions that have yet to buy banks might be unwilling to pay what their predecessors have committed in other transactions, he said.

Prices of credit union-bank deals are rarely disclosed, though Tom Fraser, CEO of First Mutual Holding in Lakewood, Ohio, said in October that his company thought it had the high bid for WinFirst Bank in Winchester, Ky., before First South Financial Credit Union in Bartlett, Tenn., swooped in and struck a deal for WinFirst.

Fraser called First South's bid, which priced WinFirst at 180% of its tangible book value, "completely irresponsible."

A phone call to First South, which did not disclose the terms of the WinFirst deal, was not immediately returned.

It will take a few more months to determine the trajectory of credit union-bank deals, said Rodney Showmar, CEO of the $1.3 billion-asset Arkansas Federal Credit Union in Jacksonville. Still, he said complaints by banking groups have brought more attention to the issue, particularly assertions that credit unions are overpaying for banks.

Arkansas Federal is still looking at potential bank buys. Showmar noted that a new opportunity surfaced this week.

Other factors could revive the market for credit union-bank deals.

The NCUA is considering a rule that would let more credit unions issue subordinated debt, and some industry experts are convinced that the change could pave the way for more transactions. The agency is considered extending that authority, reserved now to just low-income credit unions, to complex credit unions — those with more than $500 million in assets — and to newly formed institutions.

But there are limitations. New and complex credit unions would need to have a capital classification of at least “undercapitalized,” as defined in the agency's capital standards, in order to issue subordinated debt. And the aggregate outstanding amount of sub debt issued by one of those credit unions may not exceed 100% of its net worth.

"I don’t see many credit unions under the threshold being able to issue sub debt," said Rick Childs, an accountant at Crowe. "Like any other regulator, the NCUA isn't going to let an undercapitalized credit union buy another institution."

For its part, the ICBA is bracing for an uptick in credit union-bank deals.

"Bank acquisitions of credit unions, on the other hand, are almost unheard of due to regulatory hurdles the NCUA has created for such transactions," the group said in a recent statement.

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