When deal lawyer Michael M. Bell worked on the purchase of Griffith Savings Bank by United Federal Credit Union in 2012, the transaction marked the first time a federally chartered credit union acquired the assets of a state-chartered, FDIC-insured mutual savings bank.
With pressure to consolidate in the industry, Bell’s pace of credit union purchases of banks has quickened significantly since then.
“You have to scale,” Bell told MarketWatch. “It’s a fact of our economy [and] that’s happening in this industry. The small are disappearing and the big are getting bigger.”
Fast forward to 2022 and Bell is currently working on a pipeline of 20-plus credit union deals as co-chair of the financial institutions practice group at Detroit-based law firm Honigman LLP. This bumper crop of deals follows the more than 35 credit union acquisitions of community banks that Bell has worked on since 2017.
To be sure, the practice still amounts to a tiny slice of the overall financial mergers and acquisitions (M&A) business. Out of the roughly 250 bank deals expected this year, only about 20 of them will involve a credit union.
Before Bell came along, Credit Unions had rarely if ever turned to bank acquisitions for growth, and instead would expand by adding more depositors.
While credit unions offer many of the same products to customers such as checking accounts, car loans, and savings accounts, they stand apart from banks in how they operate.
As entities owned by their depositors, credit unions have no shareholders while banks have either public or private shareholders. Instead of returning earnings to shareholders, credit unions retain their capital and use it to offer friendlier fee structures to depositors. They often lend lower into the credit spectrum than commercial banks.
The National Credit Union Administration serves as the main regulatory body for the industry, which includes federally chartered credit unions as well as state-chartered credit unions.
Another reason that credit unions didn’t buy banks is because they’re typically smaller than commercial banks.
With more than $100 billion of assets, eight million members and 300 branches, Navy Federal Credit Union ranks as the largest credit union in the U.S. Compare that to, say, JPMorgan Chase & Co.
which ended the second quarter with $2.5 trillion in deposits, $1.1 trillion in average loans and 47.4 million active mobile customers.
But there are many small community banks out there for a credit union to absorb. Bell typically works on acquisitions of community banks with assets of about $200 million to $600 million.
“The motivations for credit unions to bulk up include geographic expansion, growing service offerings and acquiring talent,” Bell said. “Often the banks credit unions acquire have more deposits than loans so buying them helps credit unions build deposits and therefore secure their loan growth.”
Bell said his idea of a credit union buying a bank came out of conversations with a credit union about the challenge of non-organic growth in the business.
Instead of a typical merger pact, Bell crafted a purchase of assumption agreement for United Federal Credit Union to buy nearly all the components of Griffith Saving Bank for cash, but not the bank’s charter, which included its articles of incorporation.
The purchase of assumption agreement covered loans, investments, real estate, accrued interest receivables, and other banking-related assets of Griffith Savings Bank. It also assumed all deposits, Federal Home Loan Bank advances, and accrued interest payable.
The deal won approval from regulators and provided a path for other credit unions to bulk up in the face of dwindling numbers, that have fallen to about 5,000 now from 15,000 a generation ago. The U.S. is currently home to about 5,000 banks as well.
“Small [bank] institutions are squeezed by the current economic pressure, tight margins, and they often face succession plan issues, as well as the challenge of finding replacement management, growth issues, competition issues, and cost of technology issues,” Bell said. “Add all those up and it’s really hard to be a small financial institution.”
Credit unions also manage to stand apart from commercial banks as buyers because they can’t use stock or equity as currency for the deal.
“A credit union buyer is an all-cash buyer,” Bell said. “That’s also very appealing compared to bank deals, which are often partially in stock.”
Credit unions may also be more attractive acquirers than commercial bank buyers because they’re less focused on generating quarterly profits.
“On the softer issues, [credit unions] are very friendly in terms of keeping branches opening and other issues,” Bell said. “They don’t have to find cost savings and fire people like other people would have to. This is what sellers are realizing.”
Bell said he’s built up a client list of 150 of the largest credit unions as the idea of buying a bank steadily picks up steam. The regulatory review process for mergers remains complicated, but navigable, he said. It takes five to seven months to close a deal typically.
To date, there has been no transaction size in the industry larger than a bank with$1 billion-plus in assets, but Bell expects that to change as soon as 2023 if current trends continue.