By Ray Birch
PHOENIX—Mike Thorell recalls when the letter from Arizona FCU was dropped on his desk, a letter of intent from the $2.8-billion CU to buy his $236-million Pinnacle Bank of Arizona, which was for sale.
“I said, ‘Hell no, I'm not doing that,’” Thorell told CUToday.info, recalling how in 2019 as president of the Scottsdale-based bank he had been a huge opponent of credit unions and was firmly behind all of the bank trade associations’ “rhetoric”—that selling to credit unions was bad for banks and for the communities they serve.
“But then I remembered all my fiduciary responsibilities to my shareholders and to my employees, and that was more important than what Mike Thorell wanted,” he said, noting he was once chairman of the board of the bank trade association in Arizona and a vocal CU opponent.
Thorell’s bank made the deal, and as CUToday.info reported, in 2019 sold to AZFCU. Thorell is now president of commercial and residential lending at AZFCU. It would be the first of two banks buys for the credit union, which recently agreed to buy $539-million Horizon Community Bank, headquartered in Lake Havasu City, Ariz.
Considering his fiduciary responsibilities over his own viewpoint was the right choice for his bank, said Thorell, who believes many other bankers today have increasingly begun to consider the option of selling to credit unions as being good for banks. He said the frequent criticism made by the banking trade groups that state selling to credit unions dramatically reduces tax revenue headed to Washington and negatively impacts communities of the selling bank, is flawed.
“I have seen it here with our credit union,” said Thorell, explaining how he has witnessed firsthand at AZFCU how credit unions not only treat former bank employees well, they also don’t let any of them go with layoffs. “We do get a tax break, but AZFCU puts that money back into the membership with better rates, and we put a lot of that money back into the community through our direct support. I would rather have the tax money go back into the communities we serve than to Washington.”
Ignoring the Party Line
Thorell said more banks are pushing aside the trade group party line, as the rising number of deals show, especially as small community banks are struggling to find buyers. As CUToday.info has reported, 2022 will likely be a record year for CU/bank agreements.
“The community banks, anymore, they're too small to be picked up by big banks, and they need the option to sell to credit unions,” Thorell said. “Credit unions are a viable option. I see it even much more clearly today, having walked in the shoes of a banker and now the shoes of a credit union employee and member.”
That issue, shareholder value, or the fact many credit unions are flush with capital and cash and are willing to pay the kinds of prices that open the ears of banks looking to sell, will continue to lead more banks to ignore their trade associations and sell to credit unions, according to Thorell.
“The bottom line is shareholders don’t care who the bank sells to, they just want their money,” he said. “These small community banks are struggling, and they have shareholder fatigue.”
‘Good for the Industry’
Chris Maher, CEO and chairman of the board at Omaha, Neb.-based $395-million Premier Bank, told CUToday.info that CU/bank agreements are good for the industry as well as local communities.
“The banking industry has experienced rapid and top-heavy consolidation over the last 30 years as banks with assets greater than $100 billion grew from one to 33 institutions during that timeframe,” said Maher, whose organization last year entered into an agreement to sell to $8-billion GreenState CU in North Liberty, Iowa.
However, as CUToday.info reported, that deal has been rejected by the Nebraska Department of Banking and Finance, and Premier Bank is asking the District Court of Lancaster County to overturn the decision, citing the state’s “Wildcard Statute” (see previous report).
Top Heavy
Much like the ratio in credit unions, Maher noted that banks with total assets of more than $100 billion comprise less than 1% of the total number of insured banks, but hold 70% of total industry assets.
“I think a rational, astute observer would be inclined to conclude this trend is not favorable to the individual bank customer, nor is community centric,” he said. “Also, it creates unnecessary risk in the event of failure due to sheer size when compared to the FDIC insurance fund balance.”
Maher pointed out that credit unions typically offer better rates and fees than commercial banks and have a focus on their individual members, employees and communities.
“So, they are a great fit for community banks,” he said. “CU/bank transactions provide another like-minded outlet for community banks that are interested in selling. This creates an avenue that circumvents the overall consolidation trend in the industry, which is selling to a mammoth bank.”
Best for Everyone
Maher said that is certainly true for Premier.
“Our proposed transaction is a combination of what is best for our employees, customers and community,” he said. “Our acquiror’s employee culture is extremely strong, and is rooted in service to the community. Ours will not be the typical M&A as far as employee retention, they are excited to retain all our employees and grow the asset base. Our employees are looking forward to the merger as they know it will create long-term benefits for them and our customers.”
Maher pointed out there are 152 independent banks in Nebraska with total assets about $92 billion.
“M&A activity of any significance is rare; banks typically stay in the family,” he said. “The average Nebraska bank charter is 87 years old. So, not only is there a dearth of activity in bank M&A, once a family is granted a bank license it usually creates massive, multi-generational wealth using the public’s deposits. It is literally a license to borrow money from the public for personal gain with no expiration date. The credit union model is much better for the community at large, especially considering the enduring nature of a banking license.”
Silencing the Talking Points
Maher said he’s been a banker for 30 years.
“I’ve heard all the bank lobbyist talking points, which are very similar to the political rhetoric of the day—one-sided and half true,” he said. “Lobbyists’ talking points typically revolve around CUs not being subjected to CRA or the tax issue. The truth is community investment is embedded in CUs’ charters. In Nebraska, a few state-chartered, big banks avoided nearly $20 million in state taxes in 2021 alone using Nebraska’s alternative financial institution ‘deposit tax,’ vs. paying state income tax. This loophole has been slanted heavily to favor big banks, and has been around for decades in our state and dwarfs the amount state-chartered credit unions would pay, if taxed.
“Finally, bank lobbyists work for bank owners, not bank customers, employees or local communities. They are paid to fight to protect bank owners’ profits,” continued Maher. “Ask yourself if it’s better to send 25 cents of every profit dollar of your local business to Washington, or be required by your charter to invest that money back into your community? Credit unions offer a much more efficient business model.”
Michael Bell
An Insider’s View
The pioneers of credit union/bank deals, attorney Michael Bell believes that despite what the bank trade groups are saying, the majority of banks today are open to selling to a credit union.
“But I think it's a silent majority,” said Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP, who has been involved in more than 45 whole-bank agreements, plus additional bank branch purchases. “The banking lobby has pounced on this issue of banks selling to credit unions. But, honestly, if asked, many of the bankers would tell the trades to stop, just because they are not concerned about these sales and they know these sales can help drive up the value of their bank. If you have fewer buyers then your price goes down.”
Bell said that may be one reason for the bank trade groups are turning up their lobbying activity related to bank acquisitions.
“I think the trade groups are actually picking winners and losers here among their bank members,” contended Bell. “They're actually helping some banks on the buying side—not the selling side—by trying to prevent or block these agreements. If there are fewer competitors to buy a bank, they are driving down the selling price.”
Winners & Losers
Bell added the winners appear to be the larger banks that are buying and have the attention of their trade groups, more so than the smaller banks.
“In reality, the bank trade groups are just hurting the sellers of the community bank world and helping the buyers,” reiterated Bell. “I think there's a group of community bankers out there that, regardless of what is being said, would never choose selling to credit union. I think that's wonderful and fine and totally within their rights. But what is happening now—with national and state trade groups attempting to block these sales—is having a much more dramatic impact on their smaller members. Ten years ago, if you eliminate a credit union buyer there are 15 other bank buyers left. Today, with consolidation and big banks steering away from buying the very small institutions, you’ve got maybe three buyers left. And your selling price goes down.”