Scenario 1: Your bank is small and struggles to afford the expertise it needs to compete. You’ve decided to cash out, maybe move someplace warm. Michael Bell thinks it’s in your best interests to consider inviting a bid from a credit union.
Scenario 2: Your bank is making a strategic shift and wants to offload some branches in exchange for cash. Michael Bell thinks it’s in your best interests to consider inviting a bid from a credit union. “Even if you have a one-branch deal with $30 million in deposits, or if you’re rural, I think in most if not all cases, a credit union would be your strongest bidder,” Bell says.
The 40-year-old lawyer from Michigan is confident as hell about his ability to bring credit union cash to just about any purchase or acquisition you can imagine that doesn’t involve stock or a large deferred tax asset. And he’s clear about what adding a credit union to the bidding field will do to the selling price. “If a bank can pay 1.5 times book value and that’s the value, a credit union can pay 1.7 times book value.”
He’s quick to qualify the differential: It’s the same, he says, because credit unions can operate more economically than banks. “It’s not overpaying,” he says. “We don’t overpay.”
The unintended specialty
By his own admission, Bell is “the guy” to bring a credit union bid to the table. He has brokered nearly all the bank-credit union deals that get announced, and there have been more than two dozen in recent years. (Three were announced in the few weeks since we spoke.) “It’s come to define my life,” he adds, musing that he probably should have been an investment banker instead of a lawyer.
Although Bell is officially attached to Howard & Howard Attorney’s Royal Oak, Mich., office, Bell works out of his southwest Michigan home located a mere 90 minutes by car from downtown Chicago. His initiation to the credit union model came through his mother, a teacher.
As a young lawyer, he had been working with a large credit union that was acquiring another when someone in the room wondered if it was possible for a credit union to buy a bank. He looked at the NCUA and FDIC statutes and said he didn’t see language that deemed they could but also didn’t see language that deemed they couldn’t.
His first deal — United Federal Credit Union’s acquisition of the $80 million Griffith Savings Bank in Griffith, Ind. — closed in 2011. “It was the perfect start because the bank was a mutual and we were like kissing cousins,” Bell says. You always remember your first. Seven years later he’s built a franchise.
The nuts and bolts
Bell works his way down a list of obstacles that concern most bankers — time and taxes being preeminent.
A credit union-bank deal takes more time to close, he admits, but not the oft-rumored extra six months. Added time is a function of the needed coordination between the NCUA and the FDIC, each of which views the other as foreign. The back-and-forth has improved in recent years, Bell says, and today he estimates the added time to close a deal is somewhere between 30 and 45 days.
There are minor complications that sometimes creep in: Certain deposits are disallowed, such as those from some municipalities or those acquired through CDARs. Also, liquidation of the charter is required upon assumption. Bell says liquidation costs are estimated ahead of time and cash is always set aside to cover these costs.
The greatest challenge, perhaps, is the double taxation facing C corp banks at the holding company level. “These transactions happen at the bank level,” he explains. When proceeds flow up to the holding company level, taxes are due again. (This is not the case with S-corp banks.) “Our problems have been reduced by the lower tax rate [21 percent down from 35 percent] and in more transactions than not, we gross up the price to cover the tax.”
If a credit union can’t cover the double tax? “We might not be the highest bidder,” he explains.
The fallacy Bell encounters most as he talks up the benefits of credit unions as buyers of banks is the perception (by bankers) that credit unions aren’t sophisticated and don’t know how to conduct due diligence. “I absolutely disagree,” he says.
Viewed with suspicion
I caught up with Bell at the Bank Holding Company Association’s 2018 Fall Seminar, where all of the sessions focused on bank mergers and acquisitions. Bell led a morning breakout session to explain why a banker looking to sell should consider inviting a credit union bid. It was an early morning session and attendance was light compared to sessions in adjoining rooms. Most of his audience clustered at the back of the room, close to the door.
Bell gets it. He knows the banking industry’s position about what he does; he’s heard all the arguments about the tax advantages that credit unions enjoy and the unfairness. He opens his session with a nod to the political nature of it all, eager to move beyond things he cannot control.
Bell said he believes it’s fair to question how these deals blur the lines between credit unions and banks. “Usually after we do three or four of these whole bank deals, there’s a press release by somebody, ICBA or ABA, that says, ‘hey, we need to tax them’ or ‘hey, they’re buying banks’; it’s connected.”
But by acquiring a bank, a credit union doesn’t alter its business model, nor does it abuse the CU charter, he argues. “I’ll tell you, I don’t see the relevance,” he says. “They just happen to be growing, which I don’t think is a crime.”
There were 5,594 credit unions in the United States as of June 30, 2018 and their industry trendline is moving in the same direction as the banking industry’s. But not all credit unions are acquiring banks. Bell estimates less than 200 credit unions are viable candidates to buy a bank. Those are his clients and they’re offering all the same products and services as banks, including commercial lending. “They’re the credit unions that are the poster children for the bankers who complain that they’re like a bank,” Bell says unapologetically. Many of the credit unions he works with are run by former bankers, he adds. “That’s why they’re good at what they’re doing.”
The reason credit unions are buying banks is simple. There’s no faster nor more efficient way for a credit union to put retained earnings to work. Bell tells me about a client that had a $10 million commercial loan portfolio that wanted growth; it got it by buying a bank with a $110 million commercial loan portfolio. “They stay-bonused everyone and bolted it into their organization,” he says. “A real success story.”