Recently, I interviewed Michael Bell, an attorney for Howard & Howard. Michael has been involved in more than 30 deals involving credit unions acquiring banks.
Below is the interview.
Q. How many bank – credit union deals have you done?
A. I presume you are referring to just whole bank (not branch deals). I’ve stopped counting by over 30.
Q. What was the first bank – credit union merger you did?
A. UFCU’s acquisition of Griffith Savings Bank started it all.
Q. This year the number of announced bank deals has already topped the number of announced deals in 2018. What does the deal pipeline of deals look like for the remainder of this year and next year?
A. I expect the pace of this year to continue, I have never been this busy. I believe it will go into next year as well.
Q. What is the potential universe (number) of credit unions seeking to acquire banks?
A. I think this type of transaction is applicable for 150-200 Credit Unions, a small portion of the total credit unions.
Q. The acquisition of a bank by a credit union will dilute the credit union’s net worth ratio. Is there a minimum net worth ratio for a credit union bidder?
A. The acquisition will impair/lower the capital ratio in some fashion. That said it will rebuild quickly since the transaction is revenue positive from day 1. Most if not all of my clients have internal policies relating to their capital levels and they typically have a floor of somewhere near 8%-9%.
Q. What are the primary motivations for a credit union to acquire a bank?
A. Generally it falls into four buckets. Geographic expansion, acquisition of loans or deposits, acquisition of talent and capabilities, and general/overall growth to strengthen the Credit Union.
Q. What are the biggest due diligence challenges for credit unions associated with these mergers?
A. I don’t think there are any challenges nor do I think their due diligence differs from a bank buyer. It involved everything a Seller should expect, loan files, contracts, HR matters, facilities, etc.
Q. I’ve read that field of membership(FOM) issues can create a potential roadblock for a bank – credit union merger. How have credit unions gotten around these issues? For example, what mechanism allowed Advia Credit Union to add the customers of Golden Eagle Community Bank to its field of membership?
A. On all the deals I work on we solve FOM PRIOR to our bid. We don’t want to waste any time and we want to reduce the possible deal risk for the Seller. Transactions often involve a parallel FOM expansion but we are comfortable with its likelihood of approval ahead of time. FOM is a restriction and we must operate within its bounds.
Q. Credit unions are not subject to the Community Reinvestment Act. Have any of credit union – bank mergers encountered any resistance from community groups or community activists? bank? If yes, what type of commitments did credit unions make to overcome this opposition?
A. Credit Unions aren’t and shouldn’t be subject to the CRA. Credit Unions by their very nature and make up exceed any CRA requirement they would have placed on them. We have never had any issues here. Once the CU closes support in the community, support for low and moderate income lending and related items will be the same at worst and is always better than before.
Q. What has been the top concerns raised by bank regulators regarding credit union – bank mergers, if any?
A. The main concern usually involves the change of insurance (from FDIC to NCUSIF) and its proper disclosure to the customers. Beyond that concerns are few and far between. The Bank regulators keep their focus on the entity they regulate and its dissolution/liquidation.
Q. Have regulators, especially credit union regulators, ever expressed concerns about the price a credit union is paying for a bank?
A. No, I have never had a transaction where this concern is raised. We are very deliberate in our analysis and share all of it with the regulators so they can see the safe and sound nature of our actions.
Q. It appears that these mergers are concentrated in the Southeast (Florida, Georgia, and Alabama) and the Upper Midwest (Michigan, Wisconsin, Indiana, and Illinois). Why?
A. This largely has to do with the sheer number of small banks in those areas. These transaction happen nationally and will continue to do so.
Q. Have credit unions that acquired banks experienced depositor run-off after the merger? If yes, what has been the typical depositor attrition rate at banks acquired by credit unions?
A. NO. 5% runoff would be catastrophic. This is for two main reasons. First, people don’t move their accounts. Second, the rate and fee structure they have after the closing will be the same or better, never worse.
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