By Ray Birch
ROYAL-OAK, Mich.—When Michael Bell looks back on what are now the “early days” of acquisitions of banks by credit unions, he recalls all the phone calls he made to tell potential bank sellers that credit unions are good buyers.
“I used to make call after call every day,” said Bell, attorney and counselor at Howard & Howard. “Six to seven years ago I was calling people daily, saying, ‘Involve us. Credit unions can buy a bank. Trust me. Let us participate. I called and called. But today, I don’t do that anymore.”
The reason, explained Bell, is credit unions are now recognized by banks as solid, potential buyers, and sometimes a better choice than selling to another bank, since credit unions are cash buyers.
Since Michigan's United FCU pioneered such purchases by acquiring $81-million Griffith Savings Bank in Indiana in 2011, approximately 30 CU bank acquisitions (including banks that have merged into CUs) have taken place, noted Bell, who has led credit unions through most of those deals.
Bell has been part of 24 CU/bank deals, including three mergers of a bank into a credit union. His last deal was in November of this year when Lake Michigan Credit Union in Grand Rapids, Mich., agreed to purchase a branch of CCF Bank, a subsidiary of Citizens Community Bancorp.
“Ten years ago there was never a seat at the table for credit unions at bank sales,” recalled Bell. “Seven to eight years ago there was one, occasionally. Now, a credit union is considered in nine of 10 deals. It has finally come full circle.”
Improved Profile of CUs
Bell called 2018 one of the biggest years for credit unions in terms of bank buys, saying that not just because of the number of deals that were struck, but due to the marked elevation of credit unions’ profile as potential buyers.
“2018 was a watershed moment for credit unions,” Bell told CUToday.info.
Bell said the number of CU bank buys in 2017 picked up over 2016, and 2018 outpaced 2017. Based on interest he is seeing today from banks, Bell said the number of deals should increase again in 2019.
In addition to credit unions receiving greater consideration as buyers in such deals, the pace of bank purchases by CUs has also increased due to a growing number of small banks wanting to sell, Bell said.
“Good or bad, It’s getting harder and harder for small institutions to compete, whether that is a bank or a credit union,” said Bell. “It’s really hard to be a small anything today, like a small grocery store, a small hardware store...”
Why Banks Are Selling
The owners and shareholders of banks, too, are seeing better value as purchase prices have rebounded from the rock-bottom lows that resulted when the Great Recession arrived. That, Bell said, is spurring more small community banks to sell, which have comprised the majority of the CU bank buys in recent years.
“Prices today have stabilized,” said Bell. “I don’t think they are increasing anymore, and they are still below the pre-recession, early 2000s record levels. We are not seeing the crazy dollars that were being asked pre-recession. But, again, bank values have been steadily rising in recent years.”
Industry analysts have suggested credit unions might be overpaying on bank acquisitions, and many of the banks credit unions purchased in the early years of these transactions were losing money. That trend has changed in recent years as credit unions began purchasing small banks that have been marginally profitable.
What One Study Showed
In addition, as CUToday.info reported here, a study by Georgetown University business professor David Walker on CU bank acquisitions found credit unions that buy banks are outperforming their peers. The report, which included feedback from Bell as well as CUs that have bought banks, suggests the payoff in buying a bank can be found in entering new markets, getting profitable loan portfolios that include commercial loans, and acquiring talented staff with skills the CU did not previously possess.
Bell emphasized his belief credit unions are not overpaying for banks.
“Some people may think this,” said Bell, who acknowledged the prices paid for banks by credit unions are not publicly shared. “But that’s not accurate. If a credit union is very interested in a bank, it will make a top-of-market offer. But that is different than overpaying.”
Bell also contended if the return on the deal is good, the price should not be an issue.
“If the credit union can get its money back with a new location or two that are profitable quickly, say in three to four years, then how can that be overpaying?” asked Bell. “We are often seeing those kinds of results with these acquisitions.”
Turning Customers into Members
Another driver in the determining whether a price was fair is, not surprisingly, the effectiveness of the acquiring credit union in turning those former customers into profitable, contributing members. In that previous CUToday.info report, Walker’s study suggests credit unions are getting former bank customers to take more products at a pace faster than their existing members.
“You often see these former bank customers, whether they know it or not, want to be treated like a credit union member,” said Bell. “They typically respond well to being a credit union member and wallet share increase happens quickly.”
Bell said that as more credit unions purchase banks the market has begun to evolve in terms of the deals, the buyers and even regulators.
“Regulators continue to become more comfortable with these transactions and therefore are taking less time to do them—the review period is shortening,” said Bell.
Becoming Better Buyers
Credit unions, too, have become better buyers over the years, noted Bell.
“They’ve become a more aggressive participant,” he said. “They no longer hesitate when a deal makes sense for them. This is a significant undertaking and can be a significant expense.”
Buying a bank requires the credit union to have a strong capital position, Bell also noted.
“In the past, the credit union may have heard about a potential deal, but often hesitated because they did not trust the modeling or the metrics. Now that we have this solid history behind us, credit unions are more willing to trust the modeling and just go and get the bank.”
The 2019 Forecast
Bell repeated his forecast the number of bank buys by CUs will increase in 2019, attributing that forecast partly to different types of deals growing.
“I am seeing increased activity across the spectrum—whole bank deals, branch buys and what I call ‘the others,’ such as acquisitions of specialized lenders,” said Bell. “I have all these in the pipeline for 2019. Across the board we will see more transactions.”