The first credit union takeover of a bank was in 2012. Since then, the market has seen a wide range of credit union acquisitions – from FDIC insured banks to OCC regulated banks to converted mutuals. The trend for both state and federal credit unions to buy banks has increased in number and size.
Looking at the past eight years of activity, trends have emerged that answer the all-important questions why credit unions want to buy banks:
1. What financial considerations should credit unions consider before entering the market?
2. Why is membership conversion so important to the transaction?
3. How has the regulatory approval process developed since this first transaction in 2012?
While the past cannot predict the future, we can use the lessons learned from answering these questions to anticipate what the future of credit unions that banks buy might look like.
Merger and acquisition activities offer credit unions an inorganic growth opportunity. Whether a credit union wants to acquire an entire bank or part of a bank branch network, the transaction provides an opportunity to strengthen the credit union’s services to its members, expand the credit union’s geographic reach and strengthen its balance sheet.
Inorganic growth can have an immediate impact and open up new opportunities compared to the more traditional growth model. Inorganic growth will continue to be a part of the buy or build decisions that credit unions will make in the years to come.
Important financial considerations in CU bank transactions
Because of the unique way a credit union must acquire banking assets, pricing and tax issues have been – and will be – critically important in evaluating and determining whether an acquisition is economically feasible. Without delving too deep into the tax mechanics, credit unions generally pay a higher price than a bank buyer to make a competitive offer. Often times, the credit union must pay some of the tax expense incurred by the selling bank entering into a transaction to sell to a credit union buyer.
This is particularly relevant if the target bank is organized as a C corporation. The transaction creates a tax layer that is not triggered when a share is sold to another bank. While bank balance prices may fall due to the economic climate, tax challenges remain. In certain situations, this will continue to force credit union buyers to pay a higher premium to enable a bank to achieve the same financial return that its shareholders would receive if the bank were sold to another bank.
While the pandemic has slowed the acquisition market compared to 2019, deals are still being announced and completed. Interestingly, the announced takeovers of bank branches exceeded the announced takeovers of entire banks by the end of October. Branch takeovers offer similar benefits as taking over an entire bank, but they do not require the same financial outlay. With the immediate focus on capital preservation in the wake of the pandemic, the short-term trend could lead to an increased number of store purchases. This enables a credit union buyer to enter the acquisition market and be more strategic in using their capital while still achieving non-organic growth.
Strong community involvement and marketing are proven benefits for CUs in effective customer loyalty
Another key element to the success of any acquisition is converting bank customers into credit unions. In the past, bank credit unions, whether it be taking over an entire bank or buying a branch, have seen a high retention rate from bank customers who ultimately became members of the credit union.
Anecdotally, credit unions see less than 5% runoff associated with taking over a bank. This deductible may surprise some as it is a better-than-expected settlement in the context of a bank-to-bank deal.
The success here is essentially due to the communication plans and messages that have been developed, which convey the values of membership to the acquired bank customers. As a credit union wants to expand its concentration in one geographic area, it often tries to buy smaller, community-linked banks. In this way, the credit union can easily demonstrate that it can serve banking needs while providing at least the same level of community service. This will continue to be a driving factor in the success of converting customers to credit union membership.
Navigate successfully through the regulatory landscape
Due to the structuring requirements of an overall bank takeover and the official approval process, acquiring an entire bank is more complicated than acquiring another credit union. However, the regulatory process is well traveled at this point, particularly in Florida, Michigan, Illinois, and Wisconsin, to name a few.
While traveling a long way doesn’t necessarily reduce complexity, lawyers and state and federal regulators are familiarizing themselves with the process. This familiarity, in turn, ensures greater efficiency. In contrast to merging with a credit union, buying a bank will involve more regulatory complexity; however, that alone should not be a deterrent.
While the future is unpredictable, history can serve as a guide. As an industry, we have eight years more experience than in 2012. As consolidation continues throughout the industry, there will continue to be opportunities for inorganic growth. This consolidation could be the reason for more store purchases than in recent years as credit union buyers seek to retain more capital.
While the regulatory process is not entirely free from bumps, it will continue to evolve, evolve and refine, resulting in a smoother and more efficient process for approving transactions.
Despite the changing framework conditions in the financial services sector, the future of acquisitions remains bright. Credit unions will continue to be a part of the bank acquisition market, and well positioned credit unions will be ready to achieve inorganic growth by using the acquisition market to their strategic advantage.
Justin Gingerich is a partner in the Chicago office of Howard & Howard Attorneys PLLC.