By Ray Birch
ROYAL OAK, Mich.—What will the decision by a regulator in Colorado to block a credit union’s planned acquisition of a bank mean moving forward? Several analysts are weighing in.
As CUToday.info reported, the Colorado Banking Board has blocked the purchase of Cache Bank and Trust by Elevations Credit Union. Sources told CUToday.info it appears that move will likely remain an isolated decision, but the same experts are cautioning the move will likely encourage other bank groups to attempt to stop similar acquisitions across the country.
In fact, as CUToday.info also reported, the Independent Community bankers of America (ICBA) just hailed the decision by the Colorado board, and is calling on other states to do the same.
The Colorado State Banking Board denied the sale of Cache Bank in Greeley, Colo. to Boulder, Colo.-based Elevations, saying the agreement did not meet the requirements of state law.
“I have been getting a lot of calls about this, and what I am telling people is that in my opinion this is in no way a precedent,” said Michael Bell, attorney with Royal-Oak Mich.-based Howard & Howard and a pioneer of these deals. “It's a very limited situation, applicable only to Colorado state chartered banks and based on a provision in the Colorado banking code. And, it was decided by a banking board that's made up by a majority of bankers.”
Bell, who represents Elevations Credit Union, emphasized the ruling was not a determination on credit unions and instead a limitation on Colorado state-chartered
Michael Bell
banks.
“The determination is the bank didn't have the power to sell to a credit union or to anyone that's not a bank. This has nothing to do with the credit union. A Colorado state-chartered credit union has the power to buy a bank,” he said. “We respectfully believe that the determination was wrong and that there is a clear pathway in the existing law for a Colorado bank to sell to a credit union.”
Purely a Legal Issue
Another lawyer who is familiar with such agreements and has represented both banks and credit unions, contends the law is favorable in Colorado to blocking such deals, but believes that’s likely not the case in other states.
“This is apparently a case where there is no legal basis for a Colorado bank to merge into a credit union,” said Richard Garabedian, counsel with Hunton Andrews Kurth LLP. “The legal authority to merge is a threshold question and if it was not cleared before the parties negotiated an agreement that is very puzzling. This is a Colorado state law issue…I think for the moment it is an isolated case, but expect other banking trade groups to be focused on the issue.”
Garabedian noted the banking industry trade groups are attempting to frame the issue as one in which tax-paying institutions are being removed as revenue sources for government.
Raising Questions
“Turning a tax-paying franchise into a tax-exempt franchise is clearly a major policy question that is now getting focus and will continue to do so,” he said. “I really do not know of any other kind of commercial transaction with a similar result. Furthermore, should that be supported by our banking laws?”
In the case of the Independent Community Bankers of America (ICBA), it is unambiguous when it comes to answering the questions posed by Garabedian.
"ICBA and the nation's community banks commend the Colorado Banking Board for blocking the purchase of a tax-paying community bank by a tax-exempt credit union. In a nearly unanimous vote, the board found that the transaction would have violated Colorado statutory requirements,” said ICBA CEO Rebeca Romero Rainey in a statement. “Following this landmark decision, ICBA calls on other state agencies to examine their banking statutes to determine whether it is legal and in the best interest of their state to allow state credit unions to buy the assets of state-chartered banks. The recent surge in credit union acquisitions of community banks worsens banking industry consolidation, reduces tax revenues for local communities, and furthers the credit union industry's unbridled encroachment into full-service banking.”
CUNA’s Response
Richard Garabedian
But CUNA Chief Advocacy Officer Ryan Donovan said all that bankers are doing in blocking the acquisitions is hurting banks and the communities they serve.
“This is a head scratcher,” said Donovan. “I have worked for CUNA for 15 years and I can't ever recall us taking a position to limit the ability of credit unions to do X, Y or Z. So, both on the national level and Colorado state level the bank trade associations are trying to limit their members’ ability to sell the assets of the bank and take the profits they've learned over the years. I don’t understand it.”
A Loss For Shareholders
Glenn Christensen agreed.
“I think the regulator’s perspective on this issue is a loss for bank shareholders, consumers, employees and the communities served,” said CEO Advisory Services’ Christensen. “The financial services sector is in the midst of a hyper-evolution, with fintechs rapidly transforming our industry. Yet, as is often the case, regulators have an inherent bias towards protecting the past rather than empowering the banks to transform for the best of the industry. As a result of regulatory interpretation, shareholders lose. Colorado banks now have a smaller pool of potential buyers. I do not see how this is beneficial for bank owners.”
Christensen said he hopes state and national credit union associations elevate the importance of advocating for credit union powers to acquire banks, and that bank trade groups look at these deals with open eyes.
“Banks associations also need to have a constructive dialog among their members on the importance of increasing the pool of potential buyers to include credit unions and fintechs,” he said. “The last I heard increasing demand increases price. I would think bank shareholders would be advocating for increasing the quantity of qualified buyers.”
What Bankers Have Said
Ryan Donovan
Citing a CUNA study, Donovan said nearly 90% of bankers who sold to a credit union indicated they chose a CU because they felt there was a greater likelihood that employees would be retained, and more than 60% said the deal was a better cultural fit.
“For about half, they saw the transaction as an opportunity to preserve their legacy of service to the community. A similar number indicated they felt that there was a greater likelihood that branches would remain open,” Donovan said. “Most of these transactions are being conducted by credit unions that are designated low-income credit unions. They’re keeping branches open, keeping the bank employees and working to retain the bank customers as credit union members…I'm sorry that the banking trade associations get their nose out of joint on these deals, but these transactions are happening because they're good for everyone.”
Nevertheless, Donovan acknowledged the animosity bankers hold toward credit unions, and their willingness here to “cut off their nose to spite their face.”
“They do whatever they can do to limit credit union powers, and to try to get credit unions taxed…It is possible that in another state bankers might look at this and say, ‘Hey, let's try to do the same thing.’ That’s certainly in the realm of possibility,” Donovan said.
‘Raise a Red Flag’
As CUToday.info reported, ICBA’s Romero Rainey emphasized the organization “will continue to raise a red flag on the disturbing trend of larger credit unions increasing their taxpayer-subsidized footprint by buying up smaller, tax-paying community banks.”
NCUA Proposal
On a related note, at its most recent meeting, the NCUA board proposed a rule related to credit unions acquisitions of banks. The proposal, the agency said, focuses on clarifying the process.