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Roughly a decade ago, Gary Easterling was asked a question arguably no credit union CEO had ever been asked before: “Would you be interested in buying a bank?”

Easterling, now retired, was at the time president and CEO of United Federal Credit Union in St. Joseph, Mich., and while Easterling said he doesn’t specifically remember who asked him that question, he’s never forgotten the exact wording.

On the same night Easterling was approached with the option to buy Indiana-based Griffith Savings Bank, United’s board held a meeting to consider the deal. Since the CU’s growth strategy at the time involved mergers, the board ultimately agreed to pursue the transaction. Acquisition of the $88.5 million-asset bank allowed United to cross state lines into Indiana. Work on the deal began in 2010 but it was not announced until the following summer. When everything was finalized in 2012, United had become the first federally chartered credit union to acquire a state-chartered, FDIC-insured bank.

"It was excruciatingly slow because it was a path no one had ever done before,” Easterling said.

What seemed unusual at the time has become comparatively normal. Bank purchases have arguably been credit unions’ biggest growth trend of 2019. Sixteen banks were sold to CUs this year, setting a record and nearly doubling the figure from 2018. When Easterling led United through that process, however, it was uncharted territory.

“The big question mark was that no one had ever done it before,” he said. Easterling and his colleagues were faced with a variety of questions: Would regulators approve the deal? Would the board approve it? How to even get started? “We just didn’t know," he added. He likened the process to going through a jungle with a machete and then climbing up a tree to make sure you're going in the right direction before climbing back down and moving ahead.

One of the many obstacles United faced was that there was no clear framework for these transactions, noted Michael Bell, an attorney with Howard & Howard in Royal Oak, Mich., who has since worked on several of these deals. Specifically, there were questions about regulation. In addition to getting bank and credit union regulators to sign off on the deal, officials at both the federal and state level had to give the OK since Griffith Savings was state-chartered while United is federally chartered. That included convincing the National Credit Union Administration to insure assets that the credit union regulator never had to insure before, and questions of whether the bank’s assets were tainted, damaged or a risk to the share insurance fund were all fair game.

Taking on the bank’s assets didn’t pose a problem, however.

“As the acquiring entity, we were very financially sound, so there were no issues if we could absorb it onto our balance sheet,” Easterling said. “Their size was no greater than one of our branches.”

Griffith, Ind., was struggling at the time with underemployment in the wake of the Great Recession, Easterling said. Of the bank’s 15 employees, six took early retirement after the deal with another three retiring within the next two years. The remaining six are still United FCU employees. Joanne Jones, the bank’s CEO, was in the process of leaving the bank during the purchase process, while James Morris came on as interim CEO until the deal closed.

Credit Union Journal did not successfully reach Morris or Jones for comment on this story.

Changed landscape

Credit union industry groups have supported credit unions acquiring banks. Not only must both parties approve the transaction, but CU trade associations argue that credit unions buying a bank help prevent a banking desert from emerging.

Though today’s landscape holds fewer hurdles than in 2012, concerns remain around credit unions buying banks as these transactions continue to tick up. The past three years have witnessed record highs for the amount of banks acquired by credit unions, much to the dismay of the banking sector.

The Independent Community Bankers of America has these deals are a direct frontal assault on the banking business, and one of the group’s priorities for the year ahead is making sure Congress weighs in on these deals.

Aaron Stetter, EVP of policy and political operations at ICBA, suggested bankers’ concerns could partly be alleviated if credit unions were subject to the same CRA requirements as banks.

“I think that would be helpful because in one aspect, it levels the playing field,” Stetter said.

There are signs Congress is listening. Some lawmakers, including Rep. Bill Huizenga, R-Mich., seemed receptive to bankers’ arguments during a recent House Financial Services Committee hearing when Jelena McWilliams, chair of the Federal Deposit Insurance Corp., said “the playing field may not exactly be level” between banks and credit unions.

NCUA Chairman Rodney Hood previously indicated the regulator would provide guidance for CUs acquiring banks by the end of 2019, but those proposals have not yet been released.

Despite pushback from banks, these types of deals are not expected to reach the same momentum of credit union-to-credit union acquisitions. That’s because a credit union needs to pay cash for a bank, which limits the amount of banks that credit unions can acquire, said Frank Bonaventure, co-chair of Baker Donelson’s Financial Services Transactions Group.

“I don’t see this becoming a wave of acquisitions,” he added.

What remains to be seen is whether additional guidance from NCUA will have any impact on the number of these transactions. One institution waiting for clarity is the $1 billion-asset Amplify Credit Union, which has indicated an interest in acquiring a bank.

Amplify has focused on organic growth throughout its 53-year history, said CEO Kendall Garrison, but “this is the first time that we’re considering these alternatives.” Garrison took the helm earlier this year and the credit union has a new three-year plan that includes a focus on alternative forms of growth. Many credit unions have struggled to grow organically this year as lending has slowed, and in addition to CUs buying banks, some large, healthy credit unions have joined forces in “mergers of equals” to better position themselves for the long term.

“In order for these [bank purchase] deals to pick up speed, there needs to be a streamlined regulatory process and I think NCUA is really struggling with what that framework should look like," added Garrison.

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