Cross-Industry mergers are not a one-way street
Cross-industry transactions between different types of regulated depository institutions have been an integral part of the evolving framework of consolidation and delivery of financial services in the modern era. I remember early in my career when it was unique for a bank and thrift/savings bank to merge. Recently, the emergence of credit unions buying banks has garnered all the headlines and is now established as an acceptable cross-industry transaction. Could it be that lurking on the horizon are banks buying credit unions?
On Feb 6, Thrivent Credit Union announced that its membership (79% of those members who voted) had voted to approve its proposed merger with Thrivent Bank (a newly chartered Industrial Loan Company with FDIC insurance). In connection with the merger, Thrivent Credit Union members will receive a distribution equal to 12.1% of their deposit balances as of June 28, 2024. This amount equates to a total merger value of $76,000,000, or 110%x Equity in 2021 or ~140%x Equity based on year-end 2024. (Note : Thrivent Credit Union determined its entity valuation utilizing a third party valuation firm in 2021).
This is the first major instance of a bank buying a credit union since the National Credit Union Administration adopted (in 2010) updated regulations addressing in detail the process of a bank buying a credit union. The regulatory hurdles may seem high, but there are a handful of attorneys that are well-equipped to navigate the challenges and nuances of the delineated process.
Prior to the Thrivent deal, there have been a handful of banks buying small credit unions deals in the past, with the last major transaction being the Nationwide Bank’s acquisition of Nationwide Credit Union in 2007. In the Nationwide deal, members received a distribution of $79,000,000 which equated to 15.26% of members deposits and ~120%x equity.
These transactions highlight a few key points: (i) a bank buying credit union can be a benefit to both the bank and credit union members and (ii) credit union equity is valuable and members deserve fair value for their ownership interest in a merger transaction. In credit union to credit union mergers, the members of the target credit union typically receive little to no value for their ownership interest in the institution’s equity.
If a credit union board has reached the conclusion that a merger is in the best interest of the credit union and its members, considering a merger with a commercial bank might be the best available option. While substantial financial, operational and philosophical differences exist between credit unions and banks, in many cases credit unions operate much like their community bank peers. Namely, serving the individuals, families and businesses in their communities.
So, why might a credit union merge with a bank?
A few thoughts:
- Financial returns to members. In a bank acquiring a credit union transaction, credit union members must receive “fair value” for their ownership interest as determined by a third party appraisal or a broad auction (a less desirable route). In the case of Thrivent, a member with a deposit of $10,000 at the calculation date, will receive a distribution of $1,200
- Available (or, lack thereof) number of suitable merger partners. In some cases,the most logical merger partner from a market and size standpoint may only be a community bank in the same local market
- Access to capital / larger capital base
- Broader service & product offerings
Why might a bank be interested in merging/acquiring a credit union?
- Financial returns to shareholders
- Expanded market share / entry into new markets
- Diversified consumer deposit base
- Loan mix addition of mortgage & consumer loans
- To lesser degree, but growing, commercial and CRE customers
- Product cross-sell opportunities
I can hear it now – “We will never sell to a bank!” Ok, that’s a reasonable position for a credit union to take. I heard basically the same thing ten or so years ago, “We will never sell to a credit union!” Many of the bank’s that held that position happily ate those words years later with a financially and strategically attractive deal with a credit union.
I do not expect that a wave of banks buying credit unions will threaten the credit union industry or its mission. However, this type of cross-industry merger should be considered a viable alternative as depository institutions enter what is expected to be accelerated consolidation over the next few years. At the very least, members of a target institution should receive fair value for their ownership interest whether the institution is merging with another credit union or a bank.
The M&A Advisory group at Skyway Capital Markets has expertise that includes identifying potential transaction partners, developing creative deal structures, providing in-depth financial analysis and negotiating complex transaction terms.
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