In this episode of With Flying Colors Mark Treichel chats with Michael Bell of Honigman LLP. Mike pioneered credit union bank purchases in 2008/09, handling a major percentage of all credit union bank purchases. In this episode, they discuss bank acquisition trends, politics, branch acquisitions, credit union mergers, and more. Mike also offers advice on how best approach these acquisitions and how he has been helping clients throughout the years. Join this conversation to learn more!
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Credit Union Bank Acquisitions With Expert Mike Bell
I'm excited that I've got Mike Bell with me today. Mike is a Partner at the Honigman Law Firm. Mike, how are you doing?
I'm very good, Mark. Thank you.
Mike is a pioneer of credit union bank purchases because he has been doing this for quite some time. I saw a years-old article that mentioned that you had done 35-plus. I'm sure that number is even larger today. Maybe you could go into a little bit of that. Mike is very well versed in the arena of credit unions acquiring banks. He has played a role in many acquisitions of banks by credit unions. That's a hot topic. That's a growing industry. Mike, I'm excited to have you here so we can talk through what's going on inthe arena of credit unions buying banks.
By accident, this idea of credit unions buying banks has largely become my life over the years. I don't have the exact math but I've done 9 out of 10 of every transaction that has happened, whether it's 90%, 95% or 89%. It depends. It has truly become my life. In 2022, I don't remember exactly how many we have announced but it's double digits and extremely relevant.
The last thing I'll add is interestingly enough, over the years, this has run the gamut, such that I've done it in over eighteen states and nationally, meaning national banks, state-chartered banks and every type of bank whether publicly traded or privately held has been purchased. We have precedent for that. It truly spans from Florida to Washington state, Michigan and Maryland. It crisscrosses down to Arizona and our entire country. It's quite relevant.
By accident, you got into it. For the first one, what was that accident? Did a credit union client come to you and say, "This is something I want to do," and then you became an expert in it? Is that where it started?
In the very beginning, it was around 2009, I was having a conversation with a client. We were, to be honest, complaining about non-organic growth and how difficult it is in the nonprofit sector. When two credit unions want to get married, there's nothing wrong with this but it's different. The same thing happens in the hospital world when it comes to nonprofit hospitals or other co-ops.
It's a different animal when it comes to combinations. It's something that can't necessarily be one-sided. We're forced by one side or initiated. You can't go on offense in a way. The client wanted to grow non-organically. This idea came up, "Can we buy things? What's out there that we can buy? We can go on offense. "
I was a little bit younger then and naive. I looked at the Federal Credit Union Act. There was not one thing in there that said you could do this necessarily but there was also nothing in there that said you couldn't do this. I said, "It's gray. Let's try." We did. I believe at the time, that was in your region(editorial note, Treichel ran the Eastern Region from 2003-2012). It was at United Federal Credit Union - Griffith savings bank deal in Northwest Indiana.
Oddly enough, this is why it was fate. There was a great credit union GFA in Massachusetts with about $500 million in assets. They called me up because they saw a news story about my first transaction and said, "We want to do this with this bank in New Hampshire." I said, "Let's go." We did it. A few months later, MECU of Baltimore had an opportunity with an old thrift in Maryland and called me up. We did it. Next thing you know, three of these happened rather in a row. That became my life. It fell that way.
It's almost as if in every conversation where the banker at a chamber of commerce in one town was talking to the credit union CEO, credit union mergers are sometimes born. They see an article on it having worked on such an acquisition. The snowball was rolling down the hill.
It's so true. It's humanity. It's us. Truly, this has been my life for years. It happened maybe 48 times on my watch. I'll occasionally still get a phone call and someone says, "Can you do this? We heard about this. This seems new. I love it." I'm like, "You can."
It's interesting you referenced the Federal Credit Union Act because as I knew we were going to be chatting, I pulled out some documents to refresh my mind. The delegations of authority that give the regional directors the authority to approve these make reference to a section of the act on how they're going to do it but it's in references to credit unions. I can see that they have taken that part of the act and retrofitted it into how they would evaluate it. It's how they would evaluate a credit union merger. They set up the same parameters for the bank mergers, which makes sense.
I mean this sincerely. To NCUA's credit, they were open-minded here. This was not a conversation where it was like, "What do you mean no?" They were like, "Let's think about it. Is it safe and sound?" That's the question on everybody's minds. We looked at it. Luckily, the first couple of deals we did were safe and sound times infinity. There was no risk.
The conversation went, "If it's safe and sound, then how do we do this so it complies?" I worked with the general counsel's office. We decided, "What do we want to see? How do we want to review it? How do we make sure it makes sense?" We built a box and it's the same box we're using. You bring a safe and sound transaction. They review it with open minds. It has been good that way.
There's no doubt. Safety and soundness are key as you highlighted. There were some discussions and a proposed rule a couple of years ago at NCUA where they were going to flush out a little bit more about how bank packages would be looked at. I was at NCUA at the time. Part of the reason that happened was that certain regions might ask for a little bit more information.
Sometimes packages would get to the NCUA board because of the asset size of the acquisition. There was a thick book that would be provided. It might have even been board member Metzger at the time who talked about how regional directors can approve credit union mergers of bigger assets than this. They don't need as much documentation to do it. You're sending me the Encyclopedia Britannica on an acquisition that on its face, you can tell it's safe and sound.
There was this dialogue to get a little bit more consistency and better regulations out there on it. I haven't heard that's moving anytime soon. I don't know if you've heard anything through the grapevine but that would be positive relative to this. The other side of that point is the FDIC is looking at how they do bank mergers or mergers. That encompasses credit union mergers. Are there any thoughts on either of those?
The proposed rule is a fine idea. I'll be honest. It formalizes what we have been doing for years. When it came out, I was like, "I've got to stare at this." I looked at it and was like, "This is the package we built together." I like the idea so I can't speak to why it hasn't gone anywhere yet but I can tell you that I'm a fan of it. It's a good idea. We're fine without it. We keep doing the same thing but I'm hoping it makes it only because it puts some formality around exactly what we're doing.
The second interesting point is I am not a political expert in any way. You read the headlines and I'm not deep in it. I'm a credit union lawyer, not a bank lawyer but I was seeing these things about the FDIC board and politics in that. You hear from the president and some other senators, "The FDIC is rubber stamping mergers." That was happening. On my side and our little deals, I have noticed a slowdown at the FDIC. I have not noticed a question of if. I haven't had a transaction denied by the FDIC. Everything is approved but I've noticed they have taken a little longer.
It's interesting because something is happening there between FDIC regions in DC. There's this new rule. They've got to work themselves out as an agency. I'm hopeful for them because there's a communication breakdown, political slowdown and some upheaval there. I talked to these bank lawyers because they're on the other side of every deal I do. They have shared with me, "It's on anything we're doing. It's not unique to credit unions." Whether it's a bank-to-bank deal, a credit union deal or a holding company filing, we have noticed in general a slowdown at FDIC.
It's good to hear that it's happening in every type of bank merger. There are credit union trade associations and bank trades. The bank trades scream bloody murder anytime a credit union acquires a bank. I heard there may have been some slowdowns on the FDIC side. I'm glad it's on everything, not just on the credit union acquisitions. The ABA is saying that it's banks that shut down branches in low-income areas and it's typically credit unions that might open up branches in low-income areas. The argument that credit union acquisition is in some way a bad thing doesn't hold any water.
When we started to experience these delays, I got hyper-focused, "Is it a problem with credit unions? We've got to figure this out." That is not the case. It's an across-the-board slowdown. I was "relieved" to hear that. Secondarily, we have political pressure from the bank trades. They're doing their job. I don't fault them. That's what they do. The credit union trades are going right back at them. We have been back and forth.
In 2021 and 2020, politics has amped up. I have testified before more state legislatures than I have in my career because of these political pressures that have been brought to bear and different things that are being considered or different things that we're working on. I'll give an example. In 2022, I testified in South Carolina where we're trying to get some legislature relief. The statistics are compelling.
I can't quote them exactly but they have a nice study that shows in low-income areas, good or bad, banks are closing branches "on the net" significantly. On balance, credit unions are branch-positive in low-income areas. It's a fact. It's true. When I was testifying, the bank lobbyists don't argue that point to their credit. They didn't go up there and try to say, "Those numbers are wrong." They went up there and said, "Credit unions need to pay tax."
I mentioned earlier the delegations of authority at NCUA. They increase that threshold. It's at $500 million. The regional directors can deny anything but approval over $500 million needs to go to the board. That was a change in 2019. Did you notice that it sped something that was $450 million in assets? Is that helping things move a little quicker at NCUA?
I spent time in 2018 and 2019 advocating for that change and getting that change done because anything that goes to the board adds 1 month to 1.5 months on a timeline. It's interesting. In my conversations with the regions, I don't think anybody liked the fact that something that was $200 million had to go to the board. It didn't make good sense. Everybody agreed. That was a welcome change in 2019.
I'll be honest with you. As I sit here, it might need to go up. I had talked about it at the time. It didn't quite happen but maybe there's a way to capture it not so much on the ultimate asset size of the bank only but by looking at it as a percentage of assets of a credit union. If you have a $10 billion credit union buying a $750 million bank, that's different from a $2 billion credit union buying a $750 million bank.
Exactly, the question is how material is it on the balance sheet?
There's maybe some more work to do there at some point in the near future but it was a very welcome change in '19. It has been helpful.
I'm putting my former regional director hat on. If it's a package that had come to me that I knew I had the authority to approve, I can have a conversation with the people in my office, get somebody on the phone and ask them a question. If it's $10 million more and it's going to go to the NCUA board, I start anticipating the NCUA board might ask these 15 questions or they might not but because of that, the size of the documentation that I'm going to need for my administrative record is going to be substantially bigger if I have to take it to the board as opposed to relying on what I know after a 30-year career. I can have some conversations with my staff and have a leaner package. That in and of itself can help speed it up.
I can't speak for board members or anything but everybody agrees. There's a safety and soundness threshold that can be met in the region. Everybody can live with it and be fine with it. There's something that needs to come to the board. The question is where. We could do some work there at some point to make it better but it's okay now.
You talk about this not being big metropolitan areas where the banks end up seeking out credit unions. It's more suburban and things like that. What's the normal way that you've seen where a credit union discovers that? Let's say a credit union is interested in going out and courting banks. Are banks courting the credit unions as buyers? I'm sure credit unions come to you and say, "If somebody comes up in my area that's interested, let me know." Perhaps even bankers do the same thing for you and your firm. How does that all work?
For years, if we flashback way to the beginning, I was standing on street corners with a megaphone yelling to everybody I knew in the bank land, "We can buy. We're buyers." That took a while but that has been done. It's interesting. Starting a couple of years ago, there has been a real flip here. The industry is small, meaning there are probably 30 or 40 people, men and women, that are going to sell a vast majority of the smaller banks for their profession. I have gotten to know those folks or they have sought me out to get to know me.
Interestingly, in the last few years, they had a small bank client because the bank buyers for that client have shrunk. The industry is shrinking. They couldn't sell themselves like in the early '90s. They had 30 people in line bidding against each other. That's not what now is. They seek us out. It is regular when I'll get a phone call, "I've got this profile of the bank in this area. Do you have a vetted, strong, safe and sound credit union that would be interested?"
Every time there's a deal that gets done, it gets announced. If a deal doesn't happen, no one announces it.
Remember that as a seller, two things matter. 1 is price and 2 is getting that price. You can have someone bid all day long but if they can't close or get regulatory approval and if they're risky, it does you no good and hurts you as a seller. They're looking for someone that can get it done that is not an execution risk, plus someone that would be interested.
In the last couple of years, I've seen a trend where these sellers are not necessarily more often than not putting together a book and splashing it to the market at large. They're hiring these professionals, their lawyers or somebody to say, "Can you go out to 2 or 3 people? Can you call one bank or credit union? Let's see what happens." We're getting way more opportunities that are exclusive or one-on-one type opportunities that if we're interested, they will give us a minute and see if we can't put a deal together. That's happening far more often now than it did years ago.
What do you think is driving the lag? There's less credit union and fewer banks around. They know that you're out there and can be a matchmaker.
As a seller, there are risks if you don't go to the marketplace and get a fair price. You have to manage that duty. There are so many risks when going to the marketplace. In this time of talent shortage or talent war, a lot of them are scared to go to the market and say, "We're for sale," because then they're exposed. You could lose people and customers. You name it. They're nervous about doing that.
We're an interesting safety valve. You can go to us but probably not your direct competitor. You lower some of those risks. On the good side, we (credit unions) have become a proven friendly buyer, meaning we're going to hire most of the folks and keep the branches open because we want to. Our business models differ such that they're sitting here thinking, "I'm going to get a pretty good price."
"We never overpaid." That's what the banker said. "Our folks are going to be taken care of. That's neat. Our branches are going to stay open." We're not the guys that close the branch. "They support the community too. They're a credit union and we're supposed to like them but the story ends up being pretty good. It's a win for all constituencies." That has become realized such that we're being sought after as a buyer.
One thing you hear out there is that credit unions to get into the game are paying prices that are either higher than banks or too high. I've read that in a couple of articles. That's categorically not the case.
This is a part of the testimony I've given in Iowa, South Carolina and some other states. This is why it's skewed. Every time there's a deal that gets done, it gets announced. When it's announced, no one ever announces who loses and who comes in 2nd, 3rd, 4th or 5th place. If a deal doesn't happen, no one announces that a deal doesn't happen.
On my end when I look at this, let's say I've done 48 of these. I've tried to do over 800 of these. You look at my credit union clients that have purchased 3 or 4 banks that have been successful. They have lost 30 times. We bid all the time and either we decide not to do it. We're the losing bidder. A bank beats us. It happens all the time but it doesn't get reported because it shouldn't. It's confidential.
It's a skewed perception. I was explaining this to some senators. I said, "You've got to understand how this works. Even in bank-to-bank deals if you look at the 250 bank mergers a year, 5,000 losers have occurred in all those deals." You've got to keep your perspective. Once you understand that, we don't overpay. We can't walk in and make a bank sell to us. We can't force a transaction. We don't wildly overpay because we can't. It wouldn't be safe and sound.
That's a great perspective. I hadn't known that. That gives me a great perspective relative to that claim by banks.
Let me assure you that if we were as successful as they said even though I'm in my early 40s, I would have retired years ago. If we won every bid we made, I'm not working. When I was preparing to testify, we lose 89% or 91% of the time if I look at all the math for every bid we have made and every time we have won. 8 or 9 out of 10 times, we don't win. That's a statistic for a normal bank buyer too. This is an industry statistic.
It's competitive but you go in knowing what your top price is. You won't go over that because you're bidding at a fair price.
In a credit union, we have to be safe and sound and responsible for our members' money. If we truly overpaid or pay more, we would have this material slug of goodwill that hits our books. The regulator would start getting mad, "It's one thing for a $2 billion credit union to have $30 million at goodwill." No needles move. Turn that into $100 million or $200 million in goodwill. People start saying, "What's happening?"
You mentioned testifying in Iowa. I read somewhere that it is one of the states that does not allow credit unions to buy banks.
If I gave you my naughty list if that sounds professional enough, as far as I know, this is important to explain. There has never been a state nationally that has made a decision that a credit union didn't have the power to buy. That is undisputed. The disputes have always been the bank's power to sell, which seems so weird but that's what the disputes are. In Colorado, due to some peculiar Colorado legislation, Colorado state-chartered banks don't have the power to sell to a credit union.
That happened a few years ago. The legislation hasn't been changed. They're on the naughty list but hear me out. It's the bank not having the power to sell to the credit union because I've done transactions in Colorado where credit unions have purchased bank branches. They could buy a nationally-chartered bank in Colorado. The issue is the state-chartered bank.
In Iowa, after we closed a deal there, the Iowa regulator issued a letter saying, "Bank, you didn't have the power to do this." It was very odd. It happened after we closed. Is the law of the land in Iowa that a state-chartered Iowa bank cannot sell to a credit union? Probably. I'm not going to give it to them 100% but I'm going to say probably. It's enough that it has chilled activity.
What Iowa needs to think about is this. Since they made that decision, what has happened? GreenState is a wonderful credit union from Iowa. It's a client of mine. It has bought a bank in Illinois. We're about to close on their second bank in Illinois. We announced buying a bank in Nebraska. Look at the unintended consequences of what's happening there. That's something for them to keep in mind.
In South Carolina, I believe there's an issue with their legislation. Can a state-chartered South Carolina bank sell? We were close to getting that fixed in 2022. I give credit to the Credit Union League there and Dan Schline, the league in the Carolinas has done good work here. I'll be honest that the senate committee I testified before was exceptionally gracious. It was the best experience I had. They were very close to fixing it. I wonder if in 2023 we don't get it fixed. It's about economic freedom, truthfully. It's about banks' power to choose. They get that in South Carolina, to their credit. We could get it done. We fell victim to calendars and procedures.
You ran out of runway for 2022 but maybe 2023 will be the time.
If we're going to keep going on the naughty list, there's a question in Tennessee. We were unequivocally successful, to be honest. The attorney general on behalf of the banking commissioner appealed that. I believe we're going to be successful in that appeal. The lower court opinion was fantastic. They will come off the naughty list in the near future. There's a question in Nebraska that was litigated. We expect a ruling any day. That's it.
Unequivocally, in Colorado, we have a legislative problem. Iowa is questionable. South Carolina gets solved soon. Tennessee and Nebraska should be solved. Stated a different way, there are eighteen beautiful states in America where you can do this. We have done it 100 times. They have no problem with it. Nationally, FDIC, OCC, the Fed and NCUA have no issues. Everybody recognizes that this is safe and sound. Everybody has the power to do it.
Is there anything you want to add to the sub-debt arena? In some research that a gentleman who works with me did that's related to sub-debt, a lot of the times, banks issue sub-debt so they can buy other banks. Coincidentally, there are credit unions that go into acquiring sub-debt for that same reason because they can get the economies of scale and use that newfound equity to go out and do a bank acquisition. Are there any thoughts on that whole topic?
It's the year of sub-debt for credit unions; everybody should issue it. It's an excellent strategy.
Years ago, I interacted with the NCUA's closed-door meeting they have for their regulators. I went in. I was talking about this. I brought up sub-debt because, at the time, it wasn't out there. Sub-debt back then was something that small troubled credit unions do to stay alive. That was the wisdom at the time. Interestingly, without conveying anything secret, there was a good response from those state regulators saying, "We think this is a safe and sound use in the issuance of sub-debt."
It is but I left that a few years ago and talked to some of the vendors in the space. It's true. We have a track record. In the NCUA, I believe every region agrees that it is one good use for sub-debt. In 2021 and 2020, I have seen a paradigm shift where the credit unions I work with, and not necessarily the largest but sophisticated, larger and wanting to grow are issuing sub-debt.
Sub debt is no longer what you do for a small trouble credit union. It's what you do if you're a strategic credit union. As an example, I do a lot of work with the guys at Olden Lane. They're top-of-class in this space. We talk every week because it's constant. Years ago, they were still my friends. I talked to them all the time but we were talking once every three months.
I was telling a group of credit union CEOs, "2022 is the year of sub-debt for credit unions." What I didn't say is, "Everybody should issue it. It's a great strategy for everybody." It's something for you at least to look at because your peers are deciding to do it more often than not. Here's the last thing I'll add. Even though we have rising rates, I defer to the smart people like Olden Lane on this but it's something I've noticed. The rates for sub-debt though are still staying down or aren't rising as quick.
You could issue sub-debt at very attractive rates. I do believe it's a supply and demand piece where there are buyers for this that are out there more than it is available. I know a lot of community bankers from the space I'm in. Multiple community bankers have called me, "Who do we talk to? We want to buy some credit union sub-debt." They're getting aggressive about it. They need to know how they get in line for it. That's still there. There are still a lot of buyers. It's helping to keep those rates very competitive. It is a good time to issue.
NCUA's perspective on a secondary capital/sub-debt has grown substantially over the years. It is a tool that they are comfortable approving in the right situation. It's not just for that small troubled credit union, which is what it had been before. Olden Lane will be on a future episode here coming up. They do it right and well. Like you, it's a market leader in bank acquisitions and sub-debt.
It's going to keep becoming a bigger and better tool. It's something that you have the capabilities of doing either as risk-based net worth or because you're designated as a low-income credit union. Either way, it's something that a credit union should take a look at. It's an option that's out there that can help them in many ways.
Honestly, my conclusion there is I'm not saying it's an issue. What I'm saying though is there are responsible management and boards of credit unions. You at least have to look at it and then make a decision, yes or no. To be blunt, it's a mistake to not give it some time and then decide on a strategy.
That's the same as buying banks or bank branches.
I'm not saying it's for everybody. I'm saying you need to at least consider it and decide yes or no. Both of them are the right answers. The problem comes if it's not in front of your face or your radar and you're missing debating that strategy or the sub-debt strategy. That's the problem or challenge of credit union CEOs and boards. You have to at least consider it.
If that opportunity happens where it's the bank down the street that says, "We would be interested in you being interested in acquiring us," and if they hadn't vetted that and talked through it in their strategic plan, they're a little bit behind the eight ball as far as being ready for that opportunity. It's always good to discuss what your options are out there. It's not for everybody but it is for a lot of people and credit unions.
I've talked to plenty of boards where the ultimate answer was, "It's not for us." I said, "Good job. That's the right answer." Check it off your list and move on to the other thing. It's the folks that haven't beat it up a little bit that I worry for because you have to make a yes or no. You're ready either way.
Are there any questions I should have asked you that I haven't or any last thoughts on this topic?
I'll leave you with one last summary here. This encapsulates it. As we sit here, Mark, I can unequivocally say that the whole bank space is exceptionally active. We don't need to get into the reasons why because there are 50 of them. To look at it, every small bank with $1 billion or under that's in America is for sale, thinking about selling or will be for sale in the near future. That's nobody's fault. There are good reasons for it but it's real. It's the same on the sub-debt side. It's not for everybody but it is the moment to make that decision. "In 2022, are we for it? Are we against it?" It's hot. Both of these ideas are talked about in all best-in-class credit union board rooms.
Third, since the pandemic, in bank branch transactions, you're not buying the whole bank but you're going to get the real estate, deposits and loans. You're a mini-bank deal. Those heated up in '17, '18 and '19. My clients needed liquidity. Those deals bring liquidity. It's an easy way to get liquidity. They disappeared during the pandemic. It shut down. Banks didn't see a reason to sell. My clients certainly didn't want to buy it. They need more deposits. That has flipped on its face. I'm going to announce a branch deal transaction for the first time in two years. Life has exploded there.
I've heard from clients, "We might use some liquidity and get back into looking at some bank branches." More than that though, for the bank branch sellers and these larger community banks or regional banks, it's advantageous for them to sell again. I got a call, "We've got some branches in the Southeast we're going to bring to market." I was like, "Here we go." It was dead. There's life coming. I would let everybody know. This is now going to turn back on. It has been rather dead.
There's one last thing I'll leave you with that always gets me excited. I have been hearing from smaller credit unions. It's something close to my heart that I love to do. They haven't said, "We need to merge. We want to merge." They're calling me saying, "How do we figure out if we need to merge or should merge?" I've been hearing more of that from smaller credit unions that want to understand, "What does it mean? Should we or shouldn't we? How do we think this through?"
I do spend time working with the management and boards on the idea. I'm not for or against them. I made no political arguments. I love small credit unions but a fair bit have realized the leverage they have. I tell them, "As a small company, you have more leverage than you realize. If we snap our fingers, I can find 4 or 5 creditors to fight over you and take care of you and your people." I don't know if that's known necessarily. I have seen more receptivity to that, understanding of that and a little more activity in that area.
All three of those are great wrap ups. We can maybe do a separate episode in a couple of things you said there. There's a lot of information there. Mike, this has been thought-provoking. The readers are going to enjoy it. If someone reads this and they go, "Mike is right. I haven't evaluated this previously," but it's something that their credit union wants to consider, how would they go about getting in touch with you?
First, on cell phone number, they could call me any time. It is (269) 591-0466. Like you, Mark, I'm very active on LinkedIn. It's easy to find me there. I do work hard to keep that updated. Every time there's a deal announcement or some trend I'm spotting, I'm sharing it there. I follow you and look at what you're doing. We're doing the same thing there in our spaces. I would encourage folks to track me down on LinkedIn.
Even if they never want to call me, that's fine but they could follow along here passively. I won't even know about them and see what's happening around them. Finally, I'm always available via email as well. It's MBell@Honigman.com. Please speak to anybody. Mark, I look forward truly to your episode with the experts from Olden Lane. You know them and I know them. I am quick to shout. I do think that they're top-of-class. It's certainly good to hear from them on sub-debt. It's a good choice bringing them on.
Thanks, Mike. This has been a great time chatting with you. I want to thank you for your time.
Thanks, Mark, very much.
Those of you out there reading, I hope you enjoy this episode and read it again soon.