When credit unions buy banks: The real story

Loud, bold headlines splashed across the banking press a few weeks ago: 

“Michigan credit union aims to buy Florida bank in year’s 5th such tie-up” reads one.

The sky is falling, the sky is falling.

Or isn’t it?

The headline refers to the $97 million buyout of Pilot Bank by Lake Michigan Credit Union.

That is Lake Michigan’s second bite of the Florida banking apple. In 2018, it bought $395 million Encore Bank.

In other deals this year, Michigan based  United Federal Credit Union bought Edgewater Bank for around $30 million.

Iowa-based GreenState Credit Union announced they have entered into purchase and assumption agreements with Oxford Bank & Trust of Oak Brook, Illinois, and Premier Bank of Omaha, Nebraska. GreenState assets are $7.5 billion.

In March, Jacksonville, FL based Vystar bought Jonesboro, GA based Heritage Southeast Bank with its 22 branches.

The beat goes on and the expectation is that we will see more such deals. “Lots of people are talking with each other,” said Cornerstone Advisors expert Vincent Hui. And some of those conversations will result in deals.  

Know three important facts:

There are no hostile takeovers here, said Hui. A survey of bankers found 60% to be open to being acquired.

Community bankers may scream that such deals prove credit unions should lose their federal tax exemption but nobody thinks that is happening in today’s Washington DC. There will be drama, probably hearings, but the sparks won’t light a fire. “Though there has been some news regarding tax exemption, motions haven’t made much momentum,” said Jim Pendergast, senior vice president at altLINE, a company partnered with The Southern Bank Company.

Even if credit unions lost their tax exemption, significant impacts would be felt by a handful or three of credit unions, most experts predict. The only impact 3400 with assets below $100 million likely would see is they would have to pay a new invoice from their CPA for preparing tax documents.

Third: Very, very few community banks have been swallowed by credit unions.

There are about 5000 community banks in the US. Let’s say there are 10 bank acquisitions by credit unions in the first half of 2021. Maybe 20 in the year.

And so?

In 2019 there were 16 purchases of banks by credit unions. That more than doubled the 7 deals made in 2018.

There were five in 2020.

Let’s do the math. Under 50 in the four years through 2021. That is 1% of community banks.

Sometimes, too, bankers are sufficiently irked to persuade state officials to block a bank acquisition. That has happened when the Colorado State Banking Board stopped the 2020 acquisition of Cache Bank and Trust by Elevations Credit Union.  

Know, however, that banks sell out to a credit union when the bank wants to sell and a credit union has put the best offer on the table. When an acquisition is blocked, shareholders of the bank just may be the most disappointed of the many players.

Understand, too, credit unions aren’t buying banks because they have money to spend. They buy when they see a strategic opportunity, said Hui at Cornerstone Advisors. They are seeking new markets, either geographic or lines of business, he elaborated.

The Lake Michigan purchase of Pilot is a classic case in point. That bank has had a specialty lending practice involving aircraft (note the institution’s name). Between that and the geographic location, Pilot was a strong target for Lake Michigan.

Hui conceded that an acquiring institution has to look at the option of simply seeking to build a practice inhouse, perhaps involving strategic hires, but that always involves a risk of failure. When an existing practice is bought and staff retained – deals sometimes are contingent on key employees signing employment agreements with the acquiring institution – the likelihood of success is that much higher.

Of course, acquiring institutions also often are looking to expand into an attractive geography. Florida, for instance, is attractive to Michigan because Michigan has seen many residents leave the state to retire in Florida. There’s undeniable logic in following members who are moving away.

Hui added that “there is a ton” of merger activity involving two community banks (here’s a list). It’s not just credit unions that are buying but also community banks as institutions seek a size they believe will enable them to stay competitive in an era of even bigger mega banks.

Bottomline: expect merger activity to continue. Bigger looks to be better to many in financial services today and an acquisition is an undeniably fast way to bulk up. Size does matter.