By David Milkes, CPA, CFA – Director of M&A and Strategic Services

Exploring ways to expand geographical presence, enhance product and service offerings, and provide more competitive rates have caused many credit unions to turn to bank acquisitions as a source of growth. The industry has familiarized itself with credit unions merging with one another to accomplish just this, however, the trend of credit unions acquiring banks has become a hot topic of discussion.

Year-to-date, there have been eight completed bank acquisitions and seven announced, with an average of approximately $429 million in target assets. With an increase in activity this past year, it’s important for your board and management team to understand the strategic opportunities available to them.

Source: S&P Global Market Intelligence

If you’re contemplating whether to acquire a bank versus merging with a credit union, we have outlined key considerations, such as strategic goals, culture, financial, legal and regulatory expectations, among others.

Strategic Considerations

Why are credit unions acquiring banks? A transaction involving a credit union acquiring a bank has several proven beneficial outcomes. Typically, the goals of a credit union merger involve expanding geographical footprint and adding service and product offerings, while the alternative of purchasing a bank allows for:

  • Transaction-based – banks are purchased for cash with primarily objective price, so much of the emotion surrounding a credit union to credit union merger is eliminated.
  • Expanded lines of business, specifically commercial lending. Typically, banks tend to have more mature commercial lending portfolios. Purchasing a bank allows the credit union to absorb the business line and acquire expertise providing an opportunity for growth.
  • Diversification of its balance sheet.
  • Increased economies of scale, operating efficiencies and synergies.
  • An expanded, more diverse member base.
  • A unique governance structure. With credit union mergers, the acquired credit union may insist on joining in the governance structure of the combined institution. However, when acquiring a bank, the selling shareholders are paid in cash, and therefore will exit after the transaction is complete as they would no longer have economic interest in the bank.
  • Subordinated debt – credit unions can raise subordinated debt to acquire a bank and solidify capital position.

 Aligning Goals and Values

While community banks and credit unions are both focused on serving their communities, this is something to consider when evaluating a potential candidate. Assessing whether the bank has shared values with your credit union can help determine if they are a good fit. Furthermore, does your credit union’s business model and operating strategy align with the bank’s? Credit unions generally focus on consumer and residential real estate loans, while many community banks turn their focus to commercial real estate loans and other business loans.

Financial, Legal and Regulatory Expectations

Given banks are controlled by a different regulatory body than credit unions, and purchased for cash, acquiring a bank has complex financial, legal and regulatory issues. Below are some key items to consider:

  • The transaction structure of a bank acquisition is different for a credit union than a bank. While a bank can structure and account for the acquisition as a stock or asset purchase and exchange stock-for-stock, a credit union can only account for the acquisition as an asset purchase paid for with cash regardless of structure. Given the differences, credit unions must take into consideration the different financial and tax implications when determining purchase price.
  • The transaction typically includes a detailed purchase agreement, while a merger agreement details the structure and key considerations for a credit union to credit union merger.
  • Both institutions are required to file applications to their designated federal regulator (National Credit Union Administration (NCUA) and Federal Deposit Insurance Corporation (FDIC)) and state regulator, if state-chartered, which can result in a lengthy approval process.
  • Credit unions do not automatically acquire and retain all accounts and customers of a bank. The credit union must address with the NCUA why the customers fit within the current field of membership.

Navigating the financial, legal and regulatory aspects of purchasing a bank can be a complicated process. Receiving assistance from a qualified advisor, like those at Doeren Mayhew, will help simplify the acquisition process and provide expertise for a successful and smooth transaction.

Leveraging Subordinated Debt

To partake in strategic opportunities including bank acquisitions, many credit unions are turning to subordinated debt to boost their growth efforts. Unlike the regulatory accounting for a credit union to credit union merger, capital in a bank acquisition does not carry over to the acquiring credit union. To prevent capital dilution, credit unions should consider raising subordinated debt to fund a bank acquisition. Doeren Mayhew’s advisors suggest applying for subordinated debt at the start of a bank acquisition strategic initiative. Once approved by the NCUA (and state regulator, if state-chartered) the window to raise capital is two years and can be raised simultaneously to fund a bank acquisition.

Nearly $600 million has been raised since the start of 2021 for total outstanding of nearly $1,150 million – a record for subordinated debt levels. This year, the industry anticipates further increases following recent rule changes set by the NCUA that increases the number of credit unions that can gain access to secondary capital. Complex credit unions, defined as those with more than $500 million in total assets, and new credit unions, those in operation for less than 10 years and have total assets of not more than $10 million, can now access subordinated debt.

When to Seek Assistance

Is your credit union exploring the idea of acquiring a bank? While it may prove valuable in the long run, navigating the road to a successful transaction can be very complex. Whether your credit union is exploring a strategic opportunity, or ready to start the education process, it’s important to work alongside advisors you can trust to provide guidance for a smooth ride to the finish line.

Serving the industry for over 45 years, Doeren Mayhew’s Financial Institutions Group has experience with completing more than 100 credit union strategic transactions. Contact us today to learn more about our credit union merger advisory services.