Credit Unions Buying Banks: The Great Misnomer

There has been a lot of press over the past several years about credit unions purchasing banks.  And the bank trade associations are crying crocodile tears to Congress over how wrong they feel it is that their own members are selling to – of all things and, heaven forbid – a credit union.

Well, it’s time for some perspective on this issue. And some facts.

Let’s start with the fact that the term “credit union buying a bank” is totally a misnomer. A bank exists through its charter, and no credit union has ever purchased a bank’s charter. That is not even allowed by law.

The transaction that has taken place about 35 times over the past eight years, each time upon the initiating decision of the bank as to who its board of directors chooses to sell the bank’s assets and/or deposits to, is not a credit union purchasing a bank. The charter is never sold, nor is it transferred to a credit union.

This action is a sale of a bank’s assets by the bank itself, in whole or in part, to a credit union that purchases and assumes the assets. It is a purchase and assumption, not an acquisition or a merger as banks and credit unions have traditionally known the terms.

A credit union cannot buy a bank, but a bank can choose to sell some or all of its assets and/or deposits to another bank or to a credit union. It is a distinction with, frankly (because the bank trade associations don’t want to admit it), quite a major difference because the initiating party in the sale of such assets is always the bank, not the credit union.

Will It Continue?

Whether there is an increase or a decrease in the number of banks electing to sell their assets and/or deposits to a credit union will be determined each year not by the number of credit unions willing to buy the assets or deposits. It will be based 100% upon the number of banks looking to sell.

If bank sales are up in a particular year, then those banks are going to be looking for the best deal with the best premium value. If that comes from another bank, they will obviously prefer to take that deal as most banks would rather not sell to a credit union.

But it must be recognized that a bank’s board of directors has a fiduciary responsibility to the stockholders to get the best deal when they decide to sell assets and/or deposits. No doubt they would prefer to sell to another bank; however, if the best deal comes from a credit union, bank boards will continue to make the free market business decision that best fits their fiduciary responsibility to their stockholders.

If that means the best deal for the assets and/or deposits comes from a credit union, these transactions will continue as the bank investors are concerned more about the return on their investment than taking less dollars just to make a point that they think credit unions should be taxed.

If banks want to slow down the number of their own brethren selling their assets or deposits to a credit union, those same banks need to step up their offers to buy the assets and deposits of other banks in their entirety.

And How About the Role of Regulators?

Regulators need to be careful about overreaching into the free market by getting involved in telling those that they regulate or insure who they can sell their assets or deposits to, and that they should have to accept less than the best price for those assets simply to protect one type of financial institution over another on an asset sale.

The market should be allowed to work, as long as all GAAP, laws and regulations (including the requirement that bank customers must be able to be qualified as credit union members and join the credit union) that are applicable to any federally-insured institution are followed in order to ensure that deposit insurance is maintained with no interruption.

Again, no matter how the headlines may read, the fact is that credit unions are not purchasing banks. That is factually incorrect. A misnomer.

Banks are selling their assets and/or deposits to a credit union, when and only when the credit union offers the best deal in the eyes of the bank board as fiduciaries for the stockholders, in a purchase and assumption transaction.

Whether that activity increases or decreases year to year will be driven by how many banks are selling, how good the offers to purchase are from their fellow banks, and whether the credit union purchase and assumption option works for both parties.

That is the free market.

Dennis Dollar is a former NCUA Chairman and Principal Partner at Dollar Associates, LLC in Birmingham, Ala.