First Bank of Berne in Indiana is spurring conversation after agreeing to buy a credit union.
When the $700 million-asset bank announced
The question is whether there is enough interest to encourage more such deals in a year in which
"Once one or two of these take place, others will venture into the game," said Richard Garabedian, a lawyer at Hunton Andrews Kurth. Smaller banks and credit unions need to build scale, cut costs and bring in more low-cost deposits to cope with tighter margins and increased competition, he said.
Credit unions, on average, sell at lower prices than commercial banks due to portfolios skewed toward lower-yielding consumer loans, Garabedian said. Merger pricing is typically tied to tangible book value and earnings.
Bank acquisitions of credit unions are doable even though there had not been a deal like that in more than a decade, said Michael Bell, a lawyer at Howard & Howard who has handled many credit union-bank deals.
"This is a real and legal option for both credit unions and banks," Bell said.
Kent Liechty, president and CEO at First Bank of Berne, and Max Beer, his counterpart at Adams County Credit Union, declined to comment for this article, though Beer said in a press release about the deal that rising regulatory costs contributed to the decision to sell.
At least one other credit union has worked out a deal with a bank this year.
Texas Farm Bureau Credit Union
There may be a limited number of opportunities for banks to buy credit unions, industry experts said.
The most likely scenario would involve sellers that, like Adams County Credit Union, are state-chartered and backed by a private insurer instead of the National Credit Union Administration. About 150 credit unions fit that description, said Michael Fryzel, a lawyer and former NCUA chairman.
Some credit unions prefer to deal with a state regulator, based on a belief that having NCUA insurance can invite added federal scrutiny, Fryzel said.
Bankers have complained that the NCUA has policies that make it hard for federally chartered credit unions to sell to banks. The agency's disclosure requirements are designed to ensure that credit union members realize they are giving up their ownership rights any time a credit union converts to a bank — or is sold to one.
"That will, within itself, be a tough sell in most cases," said Dennis Dollar, a former NCUA chairman and credit union consultant who predicts there will be very few bank purchases of credit unions.
Bell disagrees. "I don't think the NCUA rules on this are tough or unfair," Bell said. "I think [deals are] doable and achievable."
Market forces are more likely to limit how many credit unions sell to banks, said Bell, who recently was an adviser on two potential credit union sales to banks that fell through due to business reasons. Bell said there are only so many relevant strategic combinations available, adding that a credit union must give up its tax-exempt status as part of a sale.
Adams County Credit Union is a small institution. In comparison, the banks that have agreed to sell to credit unions this year had an average asset size of $235 million.
At the very least, the credit union's pending sale is giving people like Ben Jackson, vice president of government relations at the Illinois Bankers Association, something to watch.
"It’s mind-boggling to think that when this acquisition is complete, the community bank will pay taxes on the revenue it makes from the assets of the acquired entity," Jackson said. "If the situation were reversed, the credit union would have gotten larger without tax consequences."
