By Ray Birch
WASHINGTON–Could banks actually start purchasing credit unions?
Two people who have been involved in the wave of credit unions buying banks in recent years told CUToday.info that scenario could also work in reverse, even if many believe the idea of for-profit banks purchasing the not-for-profit cooperatives is impossible. Not so, they say.
Richard Garabedian, counsel with Hunton Andrews Kurth, LLP, and who has been involved in a number of CU/bank agreements, believes there is a strong possibility banks will eye credit unions as acquisition targets.
“I think it certainly could happen. Last year I gave three speeches before bankers’ association meetings about this and what it could mean,” he said. “And I have had discussions with a number of banks that are interested in doing this.”
Such deals have already occurred. Garabedian said approximately five such deals have already taken place, the most recent a decade ago when Nationwide Savings Bank purchased the Ohio-based Nationwide Credit Union. He said most of the CU acquisitions have been made by mutual banks.
Also, earlier this year, Alliance Bank, Waco, Texas, bought the loans but not the deposits of neighboring Texas Farm Bureau FCU.
As CUToday.info has reported, it’s been a record year for CU/bank buys, approaching 10, with more expected by year’s end, according to the pioneer of these deals, Michael Bell, attorney and counselor with Royal-Oak, Mich.-based Howard and Howard.
Richard Garabedian
The potential for bank acquisitions of credit unions is being driven by the same market forces that have led CUs to buy banks—the opportunity to acquire market share at a cost and pace that are both better than doing so organically.
Reasonable Prices
As media coverage of the CU acquisitions of banks has grown, it hasn’t been just credit union executives thinking about deals.
“I think buying a credit union will probably be at a lower cost than buying a comparable-size bank,” said Garabedian. “The big reason is that most credit unions don’t do commercial lending at the same level as banks. They don’t have the same expertise here, and commercial lending drives greater profitability than mortgages and auto loans, which is a lot of what credit unions do. So I don’t think credit unions would command a price well above book.”
What could be attractive to some members, who would have to vote on the deal, is they would see a payout from the acquisition, Garabedian said.
“If you buy a credit union, you're going to buy out its net worth at some premium, and then that's distributed to the membership,” Garabedian explained. “Credit union members might look at that and say, ‘Wow. They're going to pay me for my ownership. Sign me up’.”
Such deals have already taken place in Australia.
As CUToday.info has also reported, the banking industry has been critical of credit union acquisitions of banks, with the Independent Community Bankers Association recently launching a “Wake Up” campaign aimed at Congress that argues CUs no longer deserve their tax exemption, in part due to the bank buys. But that isn’t expected to influence any decisions by banks to make CU acquisitions of their own.
Not a Simple Process
But while banks may be interested in purchasing credit unions, it is not a simple process. Garabedian said a bank acquisition of a credit union is a cumbersome and “daunting” undertaking.
“It’s an involved process. The rules are kind of similar to a credit union converting to a bank…but it’s harder than converting to a bank,” said Garabedian. “The NCUA rules here are not the easiest to deal with.”
In the wake of conversions and attempted conversions by credit unions to convert to for-profit banks, the agency cracked down on disclosures and procedures for doing so, requiring a majority of members rather than a majority of voters, for example, to OK the deals.
Pressure on Congress
It’s possible the banking industry will lobby Congress to pressure NCUA to ease its rules, Garabedian suggested. Garabedian indicated he believes some sort of change will occur in the near future related to rules around bank acquisitions of credit unions.
Michael Bell
“The banking trade groups are not just going to allow this to continue to go along as it is, unabated,” Garabedian said. “I think the bankers could possibly convince a regulator, maybe the FDIC, to make it more difficult for a credit union to buy a bank, or possibly bar this from happening—place a moratorium on these transactions until a study is done to assess the impact of these deals.”
Most likely, Garabedian said, the banking groups will again turn to their argument about a “level playing field.”
“If this was more of a two-way street, I think we might be telling a different story here,” said Garabedian. “But that's certainly not the case. And there are numbers of smaller credit unions that really need a life preserver. So I think that we will eventually see banks buying credit unions.”
Just a Matter of When
Michael Bell agrees.
“There is an absolute, black and white regulatory pathway for a bank to purchase a credit union,” said Bell. “Over the past few years I have been involved on behalf of a few CUs that have considered this. However, none of those deals came to fruition for business reasons, but not regulatory reasons. I absolutely think it will happen; it’s just a question of when.”