Credit union-bank deals may have peaked (for now)

The pace of credit union-bank deals could slow down after a spike in activity last year.

Sixteen banks agreed to be sold to credit unions in 2019, the busiest year for such deals.

Industry experts say the volume may have peaked — at least in the near term. Pushback from the banking industry, a shallower pool of willing sellers and potential regulatory intervention could make for a quieter year, they said.

Another unknown is whether Thursday's decision by Colorado regulators to block Elevations Credit Union's purchase of Cache Bank & Trust will have wider repercussions. It is believed to be the first time a state regulator has blocked a credit union's purchase of a bank.

"My best guess is that the number of transactions this year won’t be much different than last year, a few more or a few less," said Dennis Holthaus, a managing director at Skyway Capital Markets in Tampa, Fla. "There doesn’t really seem to be a sense of urgency."

A growing number of credit unions are taking the time to learn about how recent deals were structured and what the potential impact could be, Holthaus said. The challenge is forecasting how long it will take for more credit unions to learn that and be prepared to buy banks.

"It’s also difficult to say how many banks left in the diminished pool of potential targets will be putting themselves on the market," he said.

On top of that, potential regulatory changes being contemplated by the National Credit Union Administration could affect the volume of deals, said Peter Duffy, a managing director at Piper Sandler. Duffy said the NCUA originally planned to announce a proposed rule containing elements that would reduce the likelihood of credit union-bank deals at its December 2019 board meeting, but the discussion was pulled from the agenda.

Dennis Dollar, a former NCUA chairman and credit union consultant, said the number of banks electing to sell their assets to credit unions will fluctuate based on the number of banks on the market in a given year. He said most banks would rather not sell to a credit union, but bank boards have a fiduciary responsibility to shareholders to get the best deal.

And the bankers are clearly not happy. The latest example: The Colorado Bankers Association on Monday said it sent a letter to State Bank Commissioner Ken Boldt objecting to Elevations' deal to buy the assets of Cache Bank & Trust in Greeley. That state's regulator agreed with the association's interpretation of Colorado law, on Thursday blocked the deal in a 6-1 vote.

“If banks want to slow down the number of their own brethren selling their assets to a credit union, those same banks need to step up their offers to buy the assets of other banks," Dollar said.

The final credit union-bank deal of 2019 involved the biggest bank seller and the largest credit union to ever agree to buy a bank. In early December, the $10.4 billion-asset Suncoast Credit Union in Tampa, Fla., agreed to buy the $747 million-asset Apollo Bank in Miami. Suncoast is the nation's 10th-largest credit union by assets.

Michael Bell, a lawyer at Howard & Howard who has advised buyers in many of these transactions, said he expects a seller larger than Apollo to emerge in 2020 and that he believes the pace of deals will match or top 2019's.

In six of the deals announced last year the seller was based in Florida, and in three the seller was based in Illinois.

One state to watch in 2020 is Texas, Holthaus said. While no Texas bank has ever been sold to a credit union, Holthaus said a large number of Texas-based community banks are in the asset range typically being targeted by credit unions. Such deals would likely occur in and around the state's major cities, he said.

That would not sit well with Texas' banking groups.

Christopher Williston, president and CEO of the Independent Bankers Association of Texas, said he is baffled by the recent trend of credit unions buying community banks, suggesting that it calls into question whether credit unions are as unique as they claim to be.

"It verges on the nonsensical," Williston said. "The credit union mantra of 'we’re different' simply no longer holds water if they can purchase a bank and go on about their business."

There have been no whole-bank deals announced yet this year, but Alaska USA Federal Credit Union in Anchorage recently announced a deal to acquire seven Phoenix-area branches from TCF Financial in Detroit. And Blue Federal Credit Union in Cheyenne, Wyo., agreed to buy two branches in Colorado from Liberty Savings Bank in Wilmington, Ohio.

"What possible common bond would a credit union from Alaska have with residents and bank customers in Arizona — other than their state begins with an A?” Williston said.

Williston said he believes a handful of large, aggressive credit unions are pushing the envelope well beyond what is logical and reasonable. "The traditional credit unions who are actually doing what they were chartered to do should be horrified with the behavior of some in their industry," he said, adding that he hopes Texas does not become this year's Florida.

Bell predicted that a larger-than-normal geographic spread for the deals this year will occur, with some first-time states getting into the mix. Two more branch deals in the Northwest are expected to be announced soon, he said, along with a couple of whole-bank deals that are getting "finishing touches."

Duffy said the operating environment and regulatory burdens for banks and credit unions will continue to bring more institutions to the table. Judging by the conversations the firm is having with its clients, Duffy said he expects to see an increase in the average asset size of a bank sellers.

The sweet spot for economies of scale continues to rise, and even well-managed institutions with assets of more than $1 billion are looking for a meaningful acquisition or a buyer, Duffy said. That's because it is becoming more difficult for them to satisfy their members and clients.

"The story is that the environment for consolidation is strong and increasing," Duffy said. "We think 2020 has the makings of being a pretty big year."