Credit union’s deal for bank part of trend

For now, HomeBank sale marks a first for Arkansas

Barksdale Federal Credit Union of Shreveport announced recently it will jump into Arkansas with a deal to buy a Greenbrier bank, the first-ever acquisition of a credit union taking over a bank in the state.

Barksdale's bid to purchase HomeBank of Arkansas, which has five branches and about $78 million in assets, likely won't be the last purchase of a bank by a credit union in the state and industry analysts say similar transactions could be coming soon.

They cite a growing trend across the nation of credit unions acquiring banks -- this year is projected to set new records for the crossover transactions.

"I think you will see more activity in Arkansas," said Randy Dennis, president of DD&F Consulting Group in Little Rock. "There isn't any question there will be more opportunities for credit unions in Arkansas as well as across the country."

Dennis' company has put together deals in Alabama and Wisconsin involving credit unions and banks.

Credit union-bank transactions have raised objections from the nation's largest banking industry trade groups, which contend credit unions enjoy an unfair tax-exempt status that helps stockpile cash to fuel the acquisitions. One of the quirks of the crossover transactions is that they are all cash deals since credit unions don't have stock; they are owned by their depositors, or members.

Arkansas Federal Credit Union of Little Rock, the state's largest with $1.8 billion in assets, has considered several acquisitions of banks but has yet to settle on one that fits culturally and matches the organization's growth strategy.

"We've gotten to the second layer of due diligence on all of those," said President and Chief Executive Officer Rodney Showmar. "Once you get into it, they didn't meet our level of expectation or with our strategy so we moved away from those. We're not opposed to it. We've had three or four opportunities and we've not pulled the trigger on one yet."

The potential acquisitions all were banks operating in Arkansas.

Across the nation, credit union-bank acquisitions have picked up over the past few years and reached a high of 13 deals last year with total assets of $5.96 billion, according to S&P Marketing Intelligence. Efforts continue to build on that momentum and five deals, including the Barksdale and HomeBank transaction, have been announced in the first few months of 2022.

Industry consultant Mike Bell is projecting upwards of 25 deals this year. "I'm most certain we'll break a record this year for the most ever of these deals," said Bell, partner in the financial practices group at Honigman LLP and is based in Kalamazoo, Mich. Bell was involved in the first credit union-bank transaction in 2010 and has worked on about 45 of the 50 deals that have occurred since, he said.

Though the deals continue to gain traction, Bell points out that bank-to-bank acquisitions will dwarf those involving credit unions. "We will remain always the minority of these deals," he added.

For example, there were 190 bank acquisitions last year, the lowest level -- excluding the 2020 pandemic year when there were only 99 transactions -- since 2011, according to data from the banking analysis team at Stephens Inc. Stephens is projecting more than 220 transactions this year.

Increasing acquisitions by credit unions has drawn criticism from both the American Bankers Association and the Independent Community Bankers of America (ICBA), which have called on Congress to strip away the tax exemption for credit unions.

Credit unions were established to support lower-income consumers and focus on local communities, banking industry officials contend.

"In the past few years credit unions have been expanding on that statutory mission," said Michael Emancipator, ICBA regulatory counsel. "It doesn't seem like the tax exemption is warranted if they're expanding beyond that very narrow purpose of why Congress gave them the tax exemption."

Credit unions, if given free rein to buy and compete with banks, should be subject to the same regulatory, supervisory and tax requirements as banks, banking industry officials say.

The industry has had some luck at the state level. Iowa and Colorado have barred state banks from selling to credit unions. Lawsuits are pending in Nebraska and Tennessee to block deals announced last year.

Arkansas, Emancipator said, has not been a focus to seek regulatory aid -- most industry efforts are focused on the handful of states with the most credit union-bank acquisitions. Since 2015, Florida has had the most deals with 12, followed by Georgia and Illinois with seven apiece while Alabama, Indiana and Wisconsin all have had five deals, according to S&P Capital.

Arkansas Bank Commissioner Susannah Marshall declined comment on the credit union buying trend since the department has to rule on the proposed Barksdale-HomeBank acquisition. Terms of the deal were not disclosed and it is projected to close in the third quarter.

Four variables are moving credit unions to acquire banks, according to Bell. Credit unions want to expand their footprint, boost loans and deposits to diversify, add bank-trained talent and make sure the transactions are revenue positive from day one. "Those are the four key strategies that drive the majority of these deals," Bell said.

Banks are interested in selling to credit unions because it adds another level of competitors in the bidding process. Industry consolidation has reduced the number of banks, thus potential buyers, significantly over nearly the past 40 years.

"Adding a credit union to the process just increases the number of possible bidders," Bell said.

The Federal Reserve Bank reports there has been a steady decline in commercial banks for nearly 40 years, driven primarily by mergers and acquisitions. There were 14,496 banks in 1984. Between 1984 and 2020, the number of banks decreased by 70%, meaning more than 10,000 disappeared during the period.

Arkansas Federal executives say a bank acquisition remains on the table and the company would be most interested in expanding its footprint -- it operates mostly in Central and Northwest Arkansas -- or growing a new loan portfolio in the agriculture or small business lending areas.

"We're going to be focused on any opportunities that might arise," CEO Showmar said.

Along those same lines, Showmar said the credit union would be interested in adding a bank that can raise talent levels and increase core competencies. "When we go into a new market we want to make sure we hang on to the talent that's there," he added. "Acquiring or keeping good talent is especially difficult in this market."

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