A new front has developed in the ongoing battle between banks and credit unions. While relatively unheard of in prior years, credit unions have been aggressively pursuing bank acquisitions over the last three years, winning over sellers with large cash premiums and frustrating potential bank buyers that cannot bid competitively. Given the competitive advantage that credit unions have in the bidding process, this trend is expected to continue for the foreseeable future.
Since 2011 there have been 16 acquisitions of banks by credit unions nationally, including several transactions that are currently pending. Initially starting as a trickle, the pace has been picking up steam in recent years. There were a handful of deals between 2011 and 2014, three deals announced in 2015, four in 2016, and four in 2017—and the year is not over. Many industry experts believe that several additional transactions will be announced before year-end. Much of this activity has been in the Midwest and Southeast, which traditionally have been large markets for credit unions.
Credit unions are cash buyers and have two big advantages over banks during the bidding process. First, because they have no shareholders looking over their shoulders, credit unions can more aggressively price a transaction without fear of shareholder retribution. Second, credit unions can offer a far higher premium than bank suitors since credit unions are exempt from federal and most state taxes.
What does this mean? On one hand, banks that want to cash out are able to obtain a higher premium for the institution, which ultimately is good for shareholders. However, banks that want to grow through acquisition could miss out on attractive acquisition opportunities that only a few years ago would have been within their grasp. The tax advantage enjoyed by credit unions poses a significant hurdle for traditional bank bidders. Even banks sitting on the sidelines will be affected by this trend, as local competitors are acquired by credit unions.
If the banking industry determines that bank acquisitions by credit unions are, on balance, a net negative, one solution is to advocate for an “acquisition tax” to be paid by credit unions at the state and/or federal level at the time of acquisition. Such a tax could help level the playing field and protect taxpayers (at least in part) from the loss of tax revenue generated on income of the bank going forward.
Another strategy is for banks, either individually or together with other institutions, to explore the possibility of turning the tables and acquiring a credit union. Such a transaction would eliminate a credit union competitor and also give credit union members a one-time payment, compensating them for the loss of any perceived benefits that a credit union may have with regard to more favorable customer interest rates and fees. Challenges abound with this strategy, including finding a suitably motivated credit union, navigating a very complex structuring and regulatory approval process, and retaining the credit union’s members as customers.
Regardless of the industry response to this issue, selling banks need to understand and appreciate the complexity posed by a credit union acquisition. Since a credit union cannot acquire a bank charter, the transaction needs to be structured as a purchase and assumption transaction, in which assets and liabilities need to be individually transferred and assigned. This is a costly and burdensome process and requires, among other things, consents from vendors and service providers, the preparation of mortgage assignments and allonges, and the filing of deeds and other documents related to the transfer of real estate.
Since the transaction must be structured as a cash asset sale, the transaction is taxable to the bank and shareholders. Additionally, the selling bank and, if applicable, its bank holding company, has to go through a liquidation and dissolution process, which is further complicated if there is outstanding debt at either the bank or holding company level. All of these costs need to be considered in determining the adequacy of the final bid. Finally, in our experience, the regulatory approval process is much longer than a traditional bank acquisition.
Whatever your bank’s situation, it is important to understand that credit unions and their investment bankers are actively and aggressively searching for banks to acquire, adding a new and rapidly expanding dimension to credit union competition.