By Ray Birch
DETROIT— Credit union acquisitions of banks deals are getting bigger and bigger on both the buying and selling sides.
What initially began a decade ago as a market in which a midsized credit union would acquire a smaller, often troubled bank, has begun to evolve, as the most recent acquisitions make clear.
“There's exceptions to every rule, but if we were to generalize I would say the credit union buyers’ sophistication and size are materially increasing,” said Michael Bell, a partner and chair of the Financial Institutions Practice Group at Honigman. “And then I would also say on the sell side you are typically seeing the size and sophistication increasing as well.”
Bell has been part of more than 60 whole-bank agreements, plus additional bank branch purchases.
“Now, let's remember that even with that being the case, credit unions remain somewhat at the bottom end of the market regarding the size of banks being bought,” he continued. “We are buying the smallest of the small community banks. I don't want that to get lost here. But it is true that the size, materiality and sophistication are inching up, no question.”
As CUToday.info reported, large deals that have closed in 2024:
- The $11.8-billion Global FCU in Anchorage, Alaska is buying the $1.5-billion First Financial Northwest Bank in Renton, Wash.
- The $4.7-billion TDECU in Lake Jackson, Texas, has agreed to buy the $1.2-billion Sabine State Bank and Trust, based in Many, La.
- The $2.5-billion Atlanta Postal Credit Union and its subsidiary Center Parc CU are purchasing the $870-million Affinity Bank, based in Covington, Ga.
- The $1.52-billion ELGA Credit Union is buying the $650-million Marine Bank & Trust, based in Vero Beach, Fla.
Some ‘Default’ Growth
“With time, our economy grows, so there's a little bit of just default growth here,” Bell observed. “But I also believe that on the sell side that the banks we're buying are performers. However, even though they're performing, growing and have some scale, they still remain at a competitive disadvantage. The banking industry is so big, so huge and even though we're seeing these banks announced, the $600-$700 million community banks…comparatively, in credit union land, these banks are $20-million asset CUs. You cannot overlook the sheer size and complexity of the banking market.”
The New Model
Clearly, CUs are moving away from that old model of buying the troubled, small institution, acknowledged Bell.
“We really don't see that much anymore. What we're seeing today are selling banks that have seen enough of this hyper-competitive environment,” Bell told CUToday.info. “There's been enough history to where they now realize credit union buyers are a viable option and they're being sought out or added to the bid list. More and more the selling banks are making the voluntary choice to include credit unions in the process, and that is a key reason why the purchase size is increasing—the pool is increasing.”
Bell said there are other reasons the old model of picking up troubled banks has faded. For one, more banks are coming on the market available for sale that have stronger ROI. S&P Market Intelligence recently reported, for example, that of 12 bank targets so far this year, five had an ROAA above 1%.
“These banks may be successful, however they are still unable to effectively scale up to compete based upon the nature of the banking market,” Bell said. “Too, credit union buyers are out there that understand the science of buying and how it works when you buy a strong earning asset, and they're comfortable with pursuing that strategy.”
The Four ‘Main Things’
Michael Bell
What about credit unions themselves as buyers and how their perspectives have changed? Are they now only looking for larger banks and the portfolios they can bring, such as commercial clients?
“It has always been about four main things: Certainly geographies are involved,” Bell said. “And then it's about loans and deposits. Third, it's about bank trained talent. And then, it’s about the bank’s institutional and technological capabilities.”
Bell, as noted in a previous CUToday.info report, said more credit unions are seeking to buy banks that are strong commercial lenders, to either bolster a growing commercial lending department or simply to enter that market.
The ROI
Bell said it generally takes three to five years for the bank addition to “pay back” for the credit union in terms of generating sufficient new revenue to cover the purchase expense. Bell said that formula has remained true over the years, whether the CU buys a performing asset or not.
“Nine times out of ten we will see this happen,” he said. “You pay more for a performing asset, however it delivers more revenue. Sure, you have a higher purchase price to cover, but you are earning more money to do that.”
The Appeal of Cash
Bell said the fact credit unions are all-cash buyers is appealing to many banks and has grown the pool of those willing to consider CU offers.
“Many banks are valuing the certainty of cash and perhaps preferring that versus some unknown or volatile bank stock value,” Bell said. “Up and down the scale, sellers have a preference for cash at the current time.”
Trends to Watch
Bell said the trend of larger bank buys is going to continue, and pointed to other trends to watch for in 2024.
“This year we will do more first-ever states,” Bell said. “We will continue to cut new ground. And, too, we will announce more deals than we've ever announced before. We're on pace to see 20-plus transactions announced this year.”
Bell agreed that with the size of the bank buys growing, it will only draw more fire from the bank trade groups.
“Certainly, this is a rallying cry of the bank lobbyists, and I understand that,” said Bell. “But their efforts distort the fact that a great majority of the bankers in America are not mad about this and they're leaning into these buys.”