Credit union shop­ping for de­posit-rich bank

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - DAVID SMITH

Arkansas Fed­eral Credit Union has an un­usual busi­ness strat­egy that in­cludes buy­ing a bank in the state.

“That is in our short term strate­gic plan,” Rod­ney Show­mar, Arkansas Fed­eral’s chief ex­ec­u­tive of­fi­cer, said in a re­cent email. “We have al­ready spo­ken to two banks, that I’m not at lib­erty to name, about just such an ar­range­ment.” A re­cent ar­ti­cle in Amer­i­can Banker said credit unions na­tion­ally have agreed to buy seven banks in the past 18 months, a con­sid­er­able in­crease in what was once a rare prac­tice.

Arkansas Fed­eral, based in Jack­sonville, is the largest credit union in the state with $1.1 bil­lion in as­sets. It would con­sider buy­ing a bank with less than $200 mil­lion in as­sets, Chief Fi­nan­cial Of­fi­cer Eric Mang­ham said. Ex­actly half of Arkansas’ 100 banks have less than $200 mil­lion in as­sets.

“What would be ideal for us is a bank with a lot of de­posits and not a ton of loans, since we have a lot of loans and we need de­posits,” Mang­ham said.

Arkansas Fed­eral Credit Union has $904 mil­lion in loans and $882 mil­lion in de­posits.

Of the 50 banks in the state with less than $200 mil­lion in as­sets, 23 have more than $100 mil­lion in de­posits and less than five of those have twice as much in de­posits as loans.

In the seven deals since last year in which credit unions bought banks, the banks’ as­sets av­er­aged $82.6 mil­lion, ac­cord­ing to S&P Global Mar­ket In­tel­li­gence.

“We plan on be­ing the first credit union in Arkansas to buy a bank when the proper op­por­tu­nity, that fits into our strat­egy, presents it­self,” Show­mar said.

The ra­tio­nale for Arkansas Fed­eral to bid on banks is ac­quir­ing loans and de­posits and en­ter­ing new mar­kets at a lower cost, Mang­ham said.

For var­i­ous rea­sons, some bankers are in­ter­ested in sell­ing their banks.

“And as a credit union, we could be an­other bid­der, pro­vid­ing more price com­pe­ti­tion to the seller of the bank and [pos­si­bly] al­low­ing us to en­ter into the mar­ket­place,” Mang­ham said.

Arkansas Fed­eral’s im­me­di­ate fo­cus is banks in Arkansas, Mang­ham said.

The credit union’s cur­rent mem­ber­ship is fo­cused in Lit­tle Rock, so it is more in­ter­ested in banks close to Lit­tle Rock that don’t have branches near Arkansas Fed­eral branches, Mang­ham said.

A credit union buy­ing a bank is a lot more com­pli­cated than a bank buy­ing a bank, from a reg­u­la­tory per­spec­tive, Mang­ham said.

“You still have to qual­ify ev­ery­body for mem­ber­ship,” Mang­ham said. “That’s why it makes more sense in ar­eas that are closer to where you’re at. It would be good if we could find some­one who is lo­cal or some­one in an un­der­served mar­ket, like pos­si­bly south Arkansas.”

Arkansas Fed­eral has more than 775 mem­ber­ship groups that al­low de­pos­i­tors to join the credit union. In­cluded in the larger groups are em­ploy­ees of Arkansas state gov­ern­ment and the Lit­tle Rock Air Force Base in Jack­sonville, Mang­ham said. And Arkansas Fed­eral has signed up many of the ma­jor busi­nesses and as­so­ci­a­tions in the state, he said.

“One of the things we are in­ter­ested in are fi­nan­cial in­sti­tu­tions that have good lo­ca­tions,” he said.

Credit unions are tax ex­empt and banks are re­quired to pay taxes.

Bankers have long ar­gued that credit unions should also be taxed, said Gar­land Binns, a Lit­tle Rock bank­ing at­tor­ney.

“I don’t think we’re go­ing to see a trend [of credit unions buy­ing banks],” Binns said.

It would just have to be the right match for a credit union to buy a bank, Binns said. Should a credit union ac­quire a bank, it would be be­cause the credit union needs de­posits to make loans, he said, adding that would be the same mind­set a bank would have in buy­ing a credit union.

A credit union is like a mu­tual sav­ings and loan, Binns said. Nei­ther have any eq­uity share­hold­ers. A credit union’s mem­bers own the credit union. Credit unions, there­fore, only have cash and no stock to buy an­other in­sti­tu­tion. For that rea­son, small, pri­vately owned banks can see a credit union as a fa­vor­able buyer, the Amer­i­can

Banker said.

But not all bank share­hold­ers want to sell their in­sti­tu­tion in an all-cash trans­ac­tion, Peter Duffy, a man­ag­ing di­rec­tor at San­dler O’Neill and Part­ners, an in­vest­ment bank­ing firm based in New York, told the

Reg­u­la­tors, man­age­ment teams and share­hold­ers gen­er­ally pre­fer at least a par­tial pay­ment of stock, Duffy said. More than half of all bank sales in­volve some stock con­sid­er­a­tion, Duffy told the bank­ing-fo­cused news­pa­per.

Arkansas Fed­eral is not in a rush to make an ac­qui­si­tion, Mang­ham said.

“At the same time, if some­thing came up we could be very in­ter­ested,” he said. “We’re keep­ing our eyes open to find some­thing of in­ter­est to us. But if we don’t see some­thing for two years, so be it.”

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