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When a Credit Union Purchases a Bank - considerations for a structured purchase.

Credit unions have recently acquired local banks to strategically grow membership and scale financial product offerings. These transactions have significant differences and are much more complex than a merger between two credit unions. Structurally, mergers between credit unions result in the continuing credit union assuming all of the assets and liabilities of the merging credit union, and the two credit unions and their members fold together as one. In a bank purchase transaction, a federally chartered credit union and most State credit unions are prohibited from owning the stock of a bank.  Consequently, the purchase must be structured as a taxable purchase of assets (not stock) that assumes all of the bank’s liabilities.  This requires that each asset and each liability be separately transferred or assigned, as opposed to occurring as a matter of law in a merger of credit unions.  It also means that the due diligence requires a higher degree of scrutiny.  It also demands that the representations and warranties made by the bank in regard to its assets and liabilities becomes much more important.

The purchase price paid by the credit union for the bank’s assets, which is paid in cash, is a multiple of the Bank’s tangible book value of shares. The premium paid for the shares is subject to taxation at the corporate rate.  The money received is then distributed to the Bank’s shareholders where it will likely be taxed again to the individual as a capital gain on investment. Upon consummation of the purchase and sale, the credit union owns the bank assets; the shareholders of the bank receive a distribution representing the value of their shares; and the bank is left as an empty shell, holding only its state or federal charter.  The regulating authority then requires that the “shell” be dissolved or in some cases merged into another bank.

Gaining regulatory approval for the acquisition of a bank involves more hurdles (such as field of membership issues, divestment of prohibited investments, etc.), and generally more complex accounting issues.  The definitive asset purchase and assumption of liabilities agreement is more complicated and more detailed than the typical merger agreement between credit unions.

At Bowen, Radabaugh & Milton, P.C., we offer a wide range of legal services to credit unions and have the experience and knowledge necessary to advise on a wide scope of issues ranging from day-to-day operations to regulatory compliance and employment matters.

For more information about credit union bank purchases, call or email Mike Burwell at 248.641.8099 | [email protected]