There was a time when commercial banks and credit unions existed in separate orbits within the same universe, serving different customers and — despite persistent sniping between their lobbying groups — generally staying on their own turf.
Those days are over.
The expansion of field-of-membership rules by credit unions and their movement into commercial lending has evolved into outright acquisitions of community banks.
If you’re a director, officer or employee of a community bank, here are nine reasons to pay close attention to these developments:
1. What had been unheard of before has now become a growing phenomenon. Since the first deal was announced in 2011, there have been 40 transactions where a credit union acquired a bank. There were nine transactions in 2018, and 16 as of mid-December for 2019.
2. A deal could be coming to a neighborhood near you. Many of these transactions have been in Florida, where 11 of the 40 deals have been announced. But it is becoming more widespread outside the Sunshine State: 15 of 50 states have experienced at least one announced deal.
3. Former commercial bank executives have now become credit union executives and are actively looking to deploy excess capital, given that there are no ways to return capital via dividends or buybacks.
4. Credit unions can only pay cash — the ultimate form of liquidity — though taxable to selling shareholders.
5. For many smaller community banks, there may not be a large universe of prospective buyers. If a bank’s shareholders need liquidity, it may be prudent to at least consider a credit union as a buyer. The smallest bank purchased by a credit union to-date had $20 million in assets, the median size was $122 million and the largest was $747 million.
6. There is the potential for larger premiums for bank sellers. While the terms of these transactions are generally not publicly disclosed, an analysis by Commerce Street Capital of all credit union/bank transactions completed to-date suggests that, on average, credit unions pay approximately a 15% premium versus similarly-sized transactions where a bank is the buyer. Many factors could contribute to this, but income tax advantages and lower return hurdles may allow a credit union to justify paying larger premiums.
7. The acquired commercial lending expertise is of great value to credit unions seeking to diversify their balance sheet risk stemming from mostly consumer-oriented assets. As a result, retention rates for the seller’s staff are very high in most transactions.
8. Buyers engaging in an auction process with a credit union may be outgunned on price, social issue concessions and employee retention. How should they compete? We believe banks have an edge by offering tax-free share exchanges, potential stock price appreciation and the retention of the bank charter.
9. Legislative action limiting or preventing these mergers is not likely forthcoming anytime soon. Credit unions have a powerful lobbying voice and have held their own against both the American Bankers Association and the Independent Community Bankers of America around taxation and field-of-membership issues.
Deals where a credit union bought a bank represent only 5% of all transactions announced since 2018. Yet that number is growing fast and presents an important consideration for community banks, whether they are looking to sell or buy. Banks ignore this opportunity — or threat — at their peril.