Credit union-bank deals could pick up as pandemic recedes

The coronavirus pandemic put a damper on credit unions buying banks this year, but there is evidence that these transactions could begin to pick up again.

By early May, only two credit union-bank deals had been announced this year, but there has been roughly one such agreement reached per month since then. Most recently, United Federal Credit Union agreed to buy Edgewater Bank. Both institutions are based in St. Joseph, Mich.

That was the seventh deal with a credit union acquiring a bank announced this year after 16 such transactions were announced in 2019.

And more may be brewing.

“We’ve had a lot of buyers say, ‘We’d like to get something closed by the end of 2021,’” said Kirk Hovde, head of investment banking at Hovde Group. “And that’s a big change from six months ago.”

Hovde said his firm is starting to see deal discussions heating up, and he is currently working on three credit union-bank deals. The recent announcement that coronavirus vaccines could soon be avaialble, along with the presidential election being in the rear-view mirror, have banks and credit unions feeling more optimistic and looking toward deal announcements in the first two quarters of the new year.

“I don’t know if 2021 will quite get back to normal,” Hovde said. “It really depends on what happens over the next few months.”

Hovde — who has been involved in 17 of these transactions, usually on the seller’s side — said these cash deals are enticing to some sellers because many would-be acquisitive banks are still dealing with depressed stock valuations.

“It’s a little more attractive than taking stock and maybe having to hold on with that bank for 24 or 36 months to really extract the value out of it as the stock continues to trade up,” he added. “They’d rather just take the cash and be done with it.”

Michael Bell, an attorney with Honigman, said many potential transactions that were placed on hold due to the pandemic are now active again.

“They’re not killed but paused,” said Bell, who has advised many credit unions on bank acquisitions. “Depending on when [the pandemic] ends, I expect all of those things that are paused to heat right up.”

Bell said 2021 is shaping up to be busier than it would have otherwise been because of the volume of deals that were delayed.

But Geoff Bacino, a credit union consultant and former National Credit Union Administration board member, said credit union-bank purchases may face some challenges. For one, he noted that banking groups don’t like credit unions “infringing” on their territory, and he envisions banks combining forces to work against credit unions that are looking to purchase a bank.

“Credit unions buying banks is a sound strategy, but outside influences may serve to stymie the opportunities,” Bacino said.

Hovde said the Midwest could be a hotspot for these deals in 2021 because of the number of community banks there, many of which are in the $100 million to $500 million asset range, which has been the sweet spot for these transactions. Additionally, some traditionally acquisitive banks in that region have grown too large to have much interest in smaller bank targets.

Three of the seven transactions this year have occurred in Indiana. Michigan and Minnesota have also seen credit union-bank deals in 2020.

Verve, a Credit Union in Oshkosh, Wis., might have been on the forefront of the run on Midwest banks. Verve in January closed its acquisition of the $300 million-asset South Central Bank in Chicago, though it subsequently filed suit against the bank’s management due to “significant accounting irregularities.”

But these legal challenges hasn’t soured Verve on additional bank deals. Kevin Ralofsky, president and CEO of the $1.4 billion-asset credit union, said Verve has grown more than a billion dollars in assets in the last six years and understands the challenges involved with mergers and acquisitions.

“We know that in large‐scale deals, things aren’t going to be perfect. But this is something we’d do again,” he said of a buying a bank.

Though Verve has been an active acquirer of banks, the institution is also willing to grow organically and be patient to find the right targets for an acquisition, Ralofsky said. It is also interested in merging with other credit unions.

More small credit unions may be looking to partner. The National Credit Union Administration approved 34 mergers in the third quarter, which was up from 25 in the second quarter but down from the 50 mergers approved in the third quarter of 2019.

These institutions already faced financial challenges and declining membership prior to the pandemic and that may only get worse given the recent economic turmoil. Credit unions with less than $10 million in assets reported an almost 18% drop in loans and a 14% decline in membership in the second quarter from a year earlier, according to NCUA data.

“We have an emphasis on finding partners who share our focus on building relationships with our members and passion for their success,” Ralofsky said. “The more we grow, the more assets we have available to pool and the better services and products we can offer.”

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