ATLANTA — The number of credit unions buying banks will likely increase next year, along with the size of the deals.
That's the opinion of industry experts and insiders following a KPMG survey that found one-fourth of banks from $1 billion to $20 billion in assets expect to sell in 2014 due to growing earnings and compliance pressures.
Bank executives planning for 2014 don't expect substantial improvement in business conditions, said Thomas Rudkin, a principal at Atlanta-based broker/dealer FIG Partners.
And there is an overall sense of fatigue among bank executives and directors, according to Chip MacDonald, a lawyer at Jones Day, also Atlanta.
"People are tired," MacDonald said. Banks are "having a hard time generating sufficient profits in this low interest rate environment."
What has sources saying they see the number of credit union acquisitions of banks rising — and experts are divided in how big the total could be — is that earnings and regulatory pressures among banks are the greatest for the very small, the current credit union target. The largest bank acquired by a CU has been $190 million in assets.
"If the KPMG study says 25% of small banks are thinking about selling, then I would say that percentage could double for tiny banks," said Michael Bell, attorney and counselor with Royal-Oak, Mich.-based Howard & Howard, who sees deals increasing in the $100 million to $500 million asset range of banks.
The audit, tax and advisory firm conducted its survey in October, gathering responses from 105 CEOs and senior executives at banks with $1 billion to $20 billion of assets.
Bell, who has worked on four deals involving credit union purchases of banks, said the KPMG study confirms what his firm has noticed in the last few months. "More credit unions are looking at potential bank purchases."
Five Deals In Two Years
Five deals involving credit unions and banks have been signed in the last two years: The $260 million-asset Five Star, Dothan, Ala., is acquiring the $23 million Flint River National Bank in Camilla, Ga.; in Baltimore, the $1.2 billion Municipal Employees CU is purchasing $61 million Baltimore-based Advance Bank; Wisconsin's $2.1 billion Landmark CU acquired $190 million Hartford Savings Bank; Massachusetts' $429 million GFA FCU acquired New Hampshire's $83 million Monadnock Savings Bank; and the credit union that put everything in motion, Michigan's $1.6 billion United FCU, acquired the $81 million Griffith Savings Bank in Indiana.
Richard Garabedian, a partner with the Washington firm of Luse Gorman Pomerenk & Schick, who represented Monadnock Savings Bank in the GFA deal, said he thinks sentiment among smaller banks to sell is similar if not greater than banks reflected in the KPMG survey.
"The increasing regulatory costs, operational costs, compensation costs... you name it, are really putting pressure on institutions $500 million and less going forward, and many will look for an exit strategy," said Garabedian. "Add to that the results of the mortgage pipeline drying up, and I hear from a number of clients saying they are going to have a hard time going forward."
David Bartoo, president of Merger Solutions Group in Forest Grove, Ore., expects CU acquisitions of banks to pick up simply because "it's a strategy going forward for large credit unions to expand. The number of small and medium-size CUs is shrinking, so there are fewer acquisition opportunities than there were years ago for large credit unions to grow."
Bell says that with more banks, and larger ones, looking to sell, it will certainly increase the size of CU bank purchases. "I have never had more interest from very large credit unions with some real capital to do big deals. I believe next year we will see a credit union buy a $500 million bank, and even higher."
But Garabedian is skeptical about credit unions' ability to open their pocketbooks a lot wider in the near future. "I think you will see purchase amounts creep up over the next few years. But credit unions face the disadvantage of only offering cash. So you need to find that right relationship between the size of the bank and the size of the credit union."
Garabedian estimated that the credit union, depending on its capital level, should be about three times the size of the bank it is buying. "Simply because of the amount of cash the credit union would have to come up with, I think instances of CUs acquiring a billion-dollar bank will be rare, unless the bank being purchased is really stressed," he said.
Dennis Dollar, principal partner at Dollar Associates in Birmingham, Ala., says the KPMG survey supports what he predicts will be mega-banks scooping up community banks once TARP funds are repaid, and banks "can't be accused of using taxpayer money for an acquisition binge. I predict there is going to be a major movement among the big international, national and regional banks."
The former NCUA chairman said there is more than five years of "pent-up acquisition and sales demand" in the banking industry.
"Can credit unions play a role in this coming community bank sales frenzy? Perhaps in a small way. While there will likely be a small number of larger credit unions doing a purchase and assumption of a smaller community bank's assets, the field of membership issue gets in the way of many such P-and-As."
Bell contends that the larger the bank the easier it will be to get a deal done. "The regulatory issues don't change but the transaction gets easier because the larger the bank the greater likelihood it will not be stressed and will be in a better financial position."
But Bartoo cautions that no matter if the deals get easier or harder, credit unions buying banks gives anyone who wants to take away credit unions' tax exemption more ammunition.
"I see increasing credit union purchases of banks just another step in the process of all financial institutions becoming a bank. By acquiring banks credit unions are proving they are bank-like," he said.
-- Jackie Stewart contributed to this story.