For all the convergence and consolidation in financial services, there is one kind of deal that so rarely gets mentioned even as a possibility that some may wonder if it is even an option: Can a bank or a thrift buy a credit union?
The short answer is yes - there are no laws or regulations specifically precluding such a transaction. In December, Nationwide Financial Services Inc.'s thrift unit acquired a credit union affiliated with the insurance giant, and in 2001, Thrivent Financial Bank, a Wisconsin unit of Thrivent Life Insurance Co. of Minneapolis, acquired two affiliated credit unions.
For community banks struggling with increased funding costs, acquisition of a credit union, at least in theory, could provide a solution because credit unions generally have a solid base of core, low-cost deposits.
But industry observers say that any bank attempting to acquire an unaffiliated credit union would face an uphill battle, as scrutiny from the National Credit Union Administration, opposition from credit union supporters, and the lack of a clear regulatory path to approval would make such a transaction difficult to complete.
"It would be very controversial," said Bucky Sebastian, a spokesman for the National Center for Members Trust, which provides financial and legal support to groups that oppose credit union conversions.
The idea of a bank acquiring a credit union moved to the forefront this week in a story in a credit union newsletter about the decision by directors at Continental Federal Credit Union to reject an unsolicited takeover bid from the $1.6 billion-asset Wings Financial Federal Credit Union of Apple Valley, Minn.
The story, which appeared in Monday's CEO Report, included mention that an attorney for a group of bankers had contacted Continental's chief executive March 15 to express interest in acquiring the $178 million-asset El Segundo, Calif., credit union.
The report did not identify the lawyer or the "banking interest" he represented, and Continental's CEO, Tom Glatt, has not responded to American Banker's requests for comment.
Richard Garabedian, a Washington lawyer who has helped a number of credit unions convert to savings banks, said that he believes the Nationwide deal, and the report that a banking group is interested in Continental Federal, "have certainly opened up certainly more possibilities" for the future.
"It's got people thinking about these types of transactions, where perhaps they wouldn't have five years ago," said Mr. Garabedian, a partner at Luse Gorman Pomerenk & Schick PC in Washington.
But even though bank/credit union mergers technically may be legal, he said there are lots of unanswered questions about the process. Among them: "What kind of policy parameters would the NCUA impose on such a transaction?"
The NCUA has strict rules for converting credit unions to thrifts, and critics of the agency - including bank trade groups and some lawmakers - have said they believe the rules are written to discourage such conversions.
Given the NCUA's stance on conversions, Alan Theriault, a consultant to converting credit unions, said that he would expect the approval process for a bank/credit union merger to be anything but smooth.
"I'm not sure it's going to fly," said Mr. Theriault, the president of CU Financial Services in Portland, Maine. "Clearly NCUA would fight it."
John McKechnie, the NCUA's director of public and congressional affairs, said this week that the Nationwide model also could be used by banks or thrifts to acquire unaffiliated credit unions and that the agency would apply the same standards it uses for mergers between two credit unions, which are common.
Bruce O. Jolly Jr., a partner at the Washington law firm Venable LLP, worked on the Nationwide transaction. He said a key reason the deal went through was because of a little-known Office of Thrift Supervision regulation that permitted the transaction.
Nationwide Bank, the $112 million-asset thrift subsidiary of the Columbus, Ohio, insurance company, paid $79 million for members' ownership interest in the $523 million-asset Nationwide Federal Credit Union. The cash was distributed to credit union members on a pro rata basis, and the members were later absorbed into Nationwide Bank's customer base.
"Having those [regulations] there gave everybody the comfort factor that we needed," Mr. Jolly said.
But similar regulations regarding a bank acquisition of a credit union do not exist at the Office of the Comptroller of the Currency or at state bank agencies - nor are there rules expressly prohibiting such combinations.
"It's kind of uncharted territory," said Mary White, a spokeswoman for the Conference of State Bank Supervisors.
Mr. Jolly said this lack of regulation could make the process challenging for any bank that tries to buy a credit union.
"I can make a tremendous offer to purchase a credit union as a bank, but unless I have a regulatory path that works, I'm not certain that I can get it approved," he said.
The report that a banking group might be interested in acquiring Continental came two weeks after Continental's board rejected Wings' fourth unsolicited takeover attempt in the last 18 months. The bids are believed to be the first-ever hostile ones for one credit union by another.
Wings now plans to take its proposal directly to Continental members, offering them $200 if a deal should be completed, according to news reports.
Mr. Glatt is urging credit union regulators to "take a stand" against unsolicited merger proposals, according to the article in the March 26 issue of CEO Report, which is published by the National Center for Credit Unions in Rockville, Md. Otherwise, he said, more credit unions could become targets of hostile bids by other credit unions or banks.
