Credit unions are playing a significant role in Washington state's bank M&A landscape as cash payments to sellers provide the nonprofit financial institutions with key advantages over traditional banks amid depressed bank stocks.
Nationwide, credit unions were off to a hot start in 2024 regarding bank acquisitions and have made up a larger share of the buyers in the deals. In Washington, three of four deals announced this year were credit union acquisitions of banks, according to S&P Global Market Intelligence data. Washington has already seen more bank M&A announcements in 2024 than in 2023, which produced three transactions including one credit union buying a bank.
Michael Bell, the financial institutions practice leader at law firm Honigman LLP, expects credit unions will continue to play an outsized role in Washington's deal landscape.
"Washington has the two components you need to have an active space," Bell said in an interview. "There are strong and able credit union buyers and there are multiple, wonderful small community banks that want to sell."
Credit unions dominate deals in early 2024
Premiums on recent credit union acquisitions of banks in the state
The premiums are comparable to what Washington banks have paid in the past, with a median deal value as a percentage of tangible common equity of 151.0% for the 20 most recent deals in the state.
The key difference is that credit unions are paying sellers in cash, Bell said. Stock price volatility is not an issue that credit unions have to contend with, which gives them an advantage over banks, he added.
"We're paying at a market rate but we're paying with a 100% valued currency," Bell said. "A bank buyer would use bank stock and that value is impaired."
Among credit unions, the most likely buyers will have $1 billion or more in total assets and will seek targets with $1 billion or less in assets, Bell said.
Harborstone CU and Sound CU have been Washington's most active credit union buyers, accounting for four of the state's five credit union bank acquisitions since 2015.
Dealmaking challenges for banks
While bank stocks have recovered from 2023 lows, they have still been a massive underperformer. From Jan. 1, 2023, to April 11, 2024, the KBW Nasdaq Bank Index was down about 1% while the S&P 500 was up about 35%. Depressed bank stocks and underwater securities portfolios make it more difficult for bank buyers to digest acquisitions and have opened the door for credit unions to make up an elevated proportion of the buyers in Washington's deals, Troy said.
"That really impacts what they can pay," Troy said. "In order to make it attractive to the seller, there's got to be a good premium to get them excited."
Another reason bank buyers have been less active in Washington recently is distressed deals in the state such as
M&A outlook
However, a wave of bank M&A in Washington this year is unlikely, even if the Fed begins to lower rates, Holland and Knight law partner Jeffrey Haas said in an interview.
"There's going to be a lag period, so I think you're looking at the latter part of the year and probably more realistically flowing into next year before you see any meaningful pickup," Haas said.
Still, catalysts for bank M&A remain, Haas said, adding that he would not be surprised to see a measured pickup in deal volume. Troy expects the proportion of credit union deals to decline as bank stock prices recover, and bank buyers regain the ability to pay at or close to the levels credit unions are paying. Should the interest rate environment improve, it will also relieve the pressure of purchase accounting marks on buyers, he added.
"Nobody is abandoning M&A. Conversations have been picking up," Troy said. "I think buyers and sellers both are preparing for that day."
Potential bank buyers
The most likely buyers will be publicly traded banks with less than $10 billion in assets that have been active in the state historically, Haas said.
Three of the top 20 Washington community banks by total assets, 1st Security Bank of Washington, Timberland Bank and Heritage Bank, have made acquisitions since 2015, and two others, First Financial and HomeStreet, agreed to sell earlier this year.
In general, Washington's community banks perform well. While the top 20 Washington community banks by total assets have experienced median deposit outflows of 4.6% year over year, median loan growth was 6.3%. Additionally, the group median efficiency ratio was 62.88% while medians for return on average equity, net interest margin and nonperforming assets as a percentage of total assets were 9.51%, 3.57% and 0.30%, respectively.
Larger banks, on the other hand, will be more constrained from striking deals given more stringent regulation under President Joe Biden's administration, Haas said. Of the top 10 banks and thrifts by deposits in Washington, only Columbia Banking Systems Inc. has had a deal since 2020 and the buyer was not a Washington-based bank.
