Bankers fight back against credit union takeovers
Bank trade groups have railed against the recent increase in the number of credit unions buying banks, and now some of those associations are stepping up efforts to combat the trend.
Elevations Credit Union in Boulder, Colo., earlier this month agreed to buy the assets of Cache Bank & Trust in Greeley, Colo. The deal was the 13th such announcement this year, compared with nine credit union purchases of banks in all of 2018.
Five of this year’s deals have featured a Florida seller, and another Florida credit union is expected to announce a deal for an out-of-state bank early next week.
The bank trade groups have been vehemently opposed to these deals in part, they say, because they result in taxpaying companies being removed from the tax rolls. The Independent Community Bankers of America has even formed a task force to look into the issue.
But Rodney Showmar, CEO of Arkansas Federal Credit Union in Jacksonville, Ark., said a state bankers association may have gone even further.
Showmar has made no secret of his desire to buy a bank as part of the $1.2 billion-asset credit union's growth plan. The credit union continues to identify potential bank targets and has investment bankers actively hunting for deals.
The credit union even had a signed letter of intent with a bank in late 2018, but the seller started new negotiations with another bank, he said. The banks then signed a definitive agreement in April without informing the credit union.
"It came as a complete blindside out of left field to us," Showmar said. "I do not have any way to confirm, but I have a feeling the state bankers association got wind of it and may have persuaded the selling bank to reconsider and possibly even persuaded the buying bank to increase their initial offer after the [letter of intent] was signed with us."
Because the credit union signed a nondisclosure agreement, Showmar said he could not provide further details about the banks involved.
Lorrie Trogden, president and CEO of the Arkansas Bankers Association, said the group has not been approached by a potential seller seeking advice on such a transaction. But if a bank were to ask, the association would advise against a sale to a credit union for myriad reasons, she said.
"If the bank is healthy, other than a one-time payout I can think of no positive reason for a shareholder to agree to sell" to a credit union, Trogden said.
Arkansas banks have seen a number of mergers and acquisitions in 2018 and 2019, and Trogden says there is still room in the market for banks to buy banks. "It makes much more sense from both a regulation and community service standpoint for a bank to seek out another bank rather than a credit union," she said.
Showmar said his recently nixed deal was a learning opportunity, if nothing else, and the credit union was able to force the buying bank to increase its purchase price. "That should be an incentive to any selling bank to have a [credit union] as a bidder," he said.
Other state banking associations said that, while they remain opposed to such deals, they have kept their distance from any negotiations.
Joe Brannen, president of the Georgia Bankers Association, said bankers’ anger about these deals is genuine and they have good reasons to be mad. That is especially true for buyers that cannot match seemingly "unlimited" offers from credit unions.
"If anything is going to change, we all need to focus our efforts at Congress and the regulators to remove the unfair advantages credit unions enjoy," he said.
Chris Mihok, a director at Keefe, Bruyette & Woods, said banks competing with credit unions to buy other banks face an uphill battle. That is because the higher prices credit unions are paying for banks actually create more capital. Banks have goodwill deducted from capital, but it is added to capital for credit unions.
"It makes no sense," Mihok said Friday at a conference hosted by the University of Mississippi School of Business.
Other recent bank sellers contacted for this report did not want to speak on the record but said their banking peers and trade associations have made it clear they did not approve of their sales to credit unions.
But could selling to a credit union haunt a bank CEO later in his or her career?
It is possible, said Danny Payne, a bank consultant and a former commissioner of the Texas Department of Savings and Mortgage Lending. "I can imagine they most certainly are tagged as traitors by their peers," he said. "It is uncanny how much animosity exists, mainly from the bankers."
Trogden said that while bankers would likely be disappointed in a CEO who sold to a credit union, she does not think such a deal would stigmatize any banker who was involved. "The community is too close-knit for that," she said.
Ultimately, the bank trade groups are trying to use the credit union-bank transactions to further stir the pot on the issue of credit union taxation, said Dennis Holthaus, a managing director for Skyway Capital Markets in Tampa, Fla. He does not believe the trade associations are against the deals at all.
"After all, the number of transactions has been relatively small, and the stockholders of the bank are getting cash for their stock," Holthaus added. "How can that be bad for their constituents and their stockholders?"
Dennis Dollar, a former National Credit Union Administration chairman and credit union consultant, said the "faux" outrage over banks selling to credit unions is totally trade association driven.
"No one is forcing these community banks to sell to a credit union," Dollar said. "In fact, their longtime competitiveness and political adversary position would normally work against such a sale."
Instead, Dollar said, community banks are scrambling because their market share fell from 53% to about 17% from 1992 to 2017, according to his analysis of data from the Federal Deposit Insurance Corp. and credit union groups.
Lawyer Michael Bell at Howard & Howard, who has advised the buyers in many of these transactions, said he has never heard of any sort of pressure being put on sellers. "In fact, I hear a lot of 'This was a good deal' or 'I really appreciate how the [credit union] hired most — if not all — of our employees,' " he said.
Payne said that when he was a regulator he urged community bankers and savings banks to take a hard look at purchasing credit unions. His thinking was that credit unions were capturing important customer segments through mortgages and a full array of consumer lending coupled with extremely attractive deposit rates.
"But this fell on deaf ears in the industry," he said. "I think the animosity and hatred of CUs by banks was so intense they simply couldn’t bring themselves to deal with them in any fashion."
There was one recent such deal. Alliance Bank Central Texas in Waco in April announced it was acquiring the assets of Texas Farm Bureau Federal Credit Union, also in Waco.
But the bottom line in any deal, regardless of the industry of the buyer and seller, is that it works for both parties, said former NCUA chairman Michael Fryzel. "When there is money to be made, the only ones complaining are those who have no part in the deal," he said.
Paul Davis contributed to this report.