With each year, the number of small community banks dwindles as institutions are absorbed by larger institutions or merge amongst themselves to gain scale.
Credit unions, many of which are under $100 million in assets, are following the same trajectory, with more than 900 mergers from 2016 to 2020, according to the National Credit Union Administration (NCUA). But in one surprising spin on the theme, 13 banks were acquired by credit unions in 2021, according to S&P Global. And the trend, if anything looks to heat up further. Michael Bell, Co-Chair of the Financial Institutions Practice Group at Detroit-based law firm Honigman, expects some 25 or more of these deals to be announced in 2022.
“My prediction is based on the work and deal flow I am seeing. I spend most — if not all — of my time working on these deals, and I have never seen so much activity,” Bell told American Banker.
S&P Global spoke with two deal advisers that work on credit union-bank acquisitions. Both firms said they too “anticipate around 20 such announcements in 2022.”
Acquisitions of banks may be helping credit unions gain ground. Between August 2020 and August 2021, credit unions added 4.4 million new members to their portfolios, a 7% bump from the year before, according to a report by the Credit Union National Association (CUNA).
All of this is uncharted territory for both banks and credit unions. It’s only been in the last five years that more than a handful of credit unions had acquired a bank or its assets at all. Prior to that, it was extremely rare.
“Many community banks are run by either families or groups of individuals that have run their course,” Joseph Silvia, a partner at the Howard & Howard law firm tells The Financial Brand. “There’s no real succession plan. They’re looking for an out. At the same time, the credit unions are saying ‘we’ve got opportunity to grow, and we want to acquire deposits to do that’.”
The Contention Around Credit Union-Bank Mergers
In banking circles the trend is not popular. Bankers have long objected to the tax treatment accorded credit unions, which are member-owned cooperatives, as well as what they see as very liberal interpretations of field of membership rules for credit unions.
Some bankers have been vocal on the issue, saying that by acquiring banks, credit unions can actually reduce tax revenue in communities, doing more harm than good.
The Independent Community Bankers of America has been calling for a moratorium on these cross-industry acquisitions. And a few states, including Nebraska, Tennessee, Iowa and Colorado, have put up one roadblock or another in the path of credit union-bank acquisitions.
But so far, the opposition has not slowed the trend.
The Why and How of Credit Unions Buying Banks
All this belies the question both sides may be wondering: How does a credit union-bank acquisition work? Banks and credit unions have very different ownership, regulations and cultures. Given such differences, how does a credit union even go through with such a deal without a massive overhaul of strategy? Do all the bank customers make it over to the credit union?
Here are some answers from credit unions themselves.
One example is FAIRWINDS Credit Union, which bought Friends Bank in 2019 and is almost done with its acquisition of Citizens Bank of Florida. The two deals have set them up strategically for growth.
“Our first acquisition allowed the credit union to enter an adjacent market that we have been looking to enter for many years,” Executive Vice President and Chief Operating Officer Phil Tischer tells The Financial Brand. “Our current acquisition of Citizens Bank of Florida is an in-market acquisition in one of the most desirable segments of our market. With the combination of the bank deposits, we anticipate a market share over 20%.”
Similarly, GreenState Credit Union of North Liberty, Iowa, purchased Oxford Bank in 2020 and in 2021 initiated three more bank purchases: two in Illinois and a third in Omaha, Neb. CEO Jeff Disterhold says there are a few things he looks for in a bank acquisition.
The first is an added convenience for his credit union’s members. “Any time that we can expand the convenience for our member-owners, either through our physical footprint, or the digital delivery that – in full candor – size allows us to enhance, that’s a good thing,” he told BAI Banking Strategies.
He also looks to expand product lines, introduce new talents into his workforce and — what he finds to be most important — build out the scope of the credit union. “We’ve always been believers that size lends itself to greater efficiencies, either through pricing advantages with our vendors or things of that nature,” Disterhold maintains.
These factors play a major role in which banks are even relevant to Greenstate’s long-term game plan. For instance, the CEO says he’s not interested in any financial institution with assets less than $200 million. They should also have a healthy branch and ATM network.
A few credit unions purchase a bank as a defense mechanism, according to a Wilary Winn report. Maybe they want to keep a similar-size competitor from expanding into their geographical area.
What Are the Obstacles to These Deals?
As complex as the acquisition of one stock-based company by another can be, a credit union buying a bank is much more complicated.
For one thing, Tischer says the timing of these deals take can be intimidating.
“The amount of time it takes to complete a transaction — which in our current acquisition will be about nine months — is a challenge,” he explains. “Keeping all the stakeholders engaged is daunting.”
Even before settling on a price, a credit union must decide whether they can adequately serve the accounts the bank already has. NCUA dictates business loan caps credit unions must meet.
Credit unions cannot have a business loan portfolio that exceeds 12.25% of their net worth. If a credit union purchases assets from a bank with a large commercial loan portfolio, some of these loans may need to be modified or divested.
Silvia tells The Financial Brand that the field of membership can be another tricky side of a credit union-bank acquisition.
Fields of membership vary from credit union to credit union, depending on an institution’s charter. Generally, however, the rules require prospective members be eligible under that credit union’s field of membership terms. As a result, not all customers from a bank can be instantly converted into members at the credit union. Most of the time, however, at least half these customers are transferred, Silva notes.
“These deals wouldn’t happen at this frequency” if at least 50% of customers weren’t carrying over to the credit union, he explains. However, issues still crop up. One of his current clients is buying a bank in a different state, which has created issues with the field of membership. The best resolution for this? Talking with the consumer.
“There are a number of pieces of correspondence that the credit union is going to be sending to the bank’s customers, introducing them to being a member,” Silvia explains.
Keep In Mind:
Regulators are often most concerned with customers and whether they will be able to easily make the transition.
At the end of the day, what banking regulators — specifically the FDIC — are most concerned with is where the customer will go, Silvia notes. Can they be recruited by the credit union? Where will their deposits end up? Will their loans be covered? He says this is what the regulators will be most focused on.
What Offer Can Banks Expect from a Credit Union?
When both the bank and credit union understand these obstacles, they can then move on to the brass tacks of a purchase agreement — which might arguably be one of the easiest parts. Despite how complicated such a deal can be, banks and credit unions can benefit more from these kinds of acquisitions than if they were to acquire an institution of the same type.
“We’ve heard from clients that the offers from credit unions are better in many cases,” Silvia says. “One of the most important things to think about is what is the best thing for the shareholders, which is generally getting the highest price.”
Not only do credit unions often offer the highest price, he says, they will likely pay in cash.
Regardless, one thing the authors of the Wilary Winn report recommend a bank evaluate is the potential tax consequences of a buyout by a credit union.