Credit unions aim to resume bank-buying spree

Third-quarter results for community banks could determine if the pace of credit union-bank deals will return to pre-pandemic levels.

Fallout from the coronavirus pandemic has had a chilling effect this year, with just five credit unions annoucing deals to buy banks after a record 16 such deals in 2019 and a then-record nine in 2018.

But several factors have dampened interest in deals. A surge in deposits at community banks, coupled with pressure on credit unions’ capital ratios, has made some potential sellers too big to buy, said Dennis Holthaus, a managing director at Skyway Capital Markets in Tampa, Fla.

Added economic uncertainty, questions about credit quality and a lack of clarity around the Paycheck Protection Program also have some potential buyers and sellers sitting on the sidelines, industry experts said.

“Some of the answers will come to the surface in the third quarter, but it may take to the end of the fourth quarter to get a clear enough picture for buyers to come back to the market,” Holthaus said. “I don’t think we’ll see too many new deal announcements until the end of the first quarter of 2021 and into the second quarter.”

Rodney Showmar, CEO of the $1.5 billion-asset Arkansas Federal Credit Union in Jacksonville, has made no secret of his desire to buy a bank. But he said that might not happen anytime soon because his institution is dealing with some capital pressure.

Total assets at Arkansas Federal increased by $181 million during the first seven months of 2020, including $156 million in new loans. That growth has also reduced the credit union’s net worth ratio and, by extension, its ability to buy a larger bank.

Showmar said the credit union recently looked at a potential transaction, but it wasn’t the right fit.

“I’m not sure if the current environment is a challenge or an opportunity as I have seen almost an equal amount of bank deals canceled as I have seen new ones announced,” he said. “The review of loans will be even more important in this challenging environment, and we anticipate the value of deposits is lower due to the overall rate environment.”

Holthaus said credit unions experienced an unusual level of organic deposit growth in the second quarter, resulting in a decline in capital ratios, loan-to-share ratios and return on assets. Margin compression has also crept up as loans repriced more rapidly than deposits. On top of all that, noninterest income also fell as loan sales decreased.

“The big question is how sticky are the deposits, where are capital ratios going as a result and when will margins stabilize,” Holthaus said. “The lack of answers to these and other questions is making buyers somewhat more cautious.”

But don’t tell that to Crane Credit Union in Odon, Ind.

The $700 million-asset Crane said recently agreed to buy the assets and assume certain liabilities of the $74 million-asset Our Community Bank in Spencer, Ind. Crane President and CEO Kevin Sparks said in a press release that the deal will expand the credit union's access to Owen and Putnam counties, “which fit within our existing [markets] stretching from the greater Indianapolis area down to Evansville.”

Crane in June agreed to buy the $90 million-asset Community State Bank of Southwestern Indiana in Poseyville; that deal is expected to close in the fourth quarter.

Michael Bell, a lawyer at Honigman in Michigan who has advised many credit unions on bank acquisitions, said a handful of deals in the works “are going to happen” sooner or later. Echoing Holthaus, he said many CEOs are waiting for the next wave of financial results before pulling the trigger.

“Everybody is interested to see the [third quarter] numbers come out," Bell said. "Then the question will be is that enough? I think it will be for some, and then we’re going to need [fourth quarter] numbers for others."

Bell said there will be at least two more whole-bank deals announced before the end of the year with a larger number of branch transactions.

Other factors that might be tempering M&A include a regulator's decision to block a sale in Colorado. The Colorado Banking Board in January rejected Elevations Credit Union’s deal to buy Cache Bank & Trust.

Bell said that some sellers specifically want to do deals with credit unions to get a cash payout, and that the situation in Colorado has not cooled interest too much.

Traditional bank M&A has also been relatively stagnant this year. Less than 60 bank acquisitions have been announced in 2020, putting activity well off the pace of 270 deals reached last year, according to S&P Global Market Intelligence.

Jacob Thompson, a managing director at SAMCO Capital in Dallas, said current conditions are unfavorable for an upswing in M&A, though he added that the groundwork was laid for some deals before the pandemic hit.

SAMCO, for instance, is working on a merger of equals that dates to 2019. Both sides remain committed and have made significant progressed toward an announcement, he said.

“But most buyers are so focused on getting their own house in order that it’s just too risky to step out there to try to acquire another franchise," Thompson said.