Achieving unprecedented growth takes strategic planning, ongoing examination, and access to the information required to consider and pursue opportunities. There is a surge of innovations, fintech partnerships, and bold ideas occurring in the credit union movement that every leader should consider, as ignoring them could pose a risk to significant future growth.
In this episode, guest Michael Bell, partner and chair of the Financial Institutions Practices Group at Honigman, LLP, shares non-organic growth options, such as strategic acquisitions and changing charters, that may be unfamiliar to many credit unions. Beyond a conventional focus on organic growth or existing products and services, these strategies have the potential to significantly impact growth and field of membership (FOM) despite market cycles.
Strategic Acquisitions for Credit Unions
Michael shares that there is more to non-organic growth than merging with other credit unions and how different strategic approaches can better position a credit union for growth and merger and acquisition activity. In 2011, Michael pioneered a new option for credit unions to achieve rapid growth with the first purchase of a whole bank by a credit union. For the past decade, he has completed the majority of credit union purchases of banks and has become the nationwide leader and go-to legal adviser in the space.
Beyond the acquisition of banks and their assets, Michael explains credit unions can also obtain other businesses, including insurance and investment companies, trust companies, real estate brokerages, mortgage originators, and specialized lenders. Despite these businesses operating outside a credit union’s core competencies, he shares that economic and generational factors, such as impending retirements, may open them to acquisition. While each deal is unique to the credit union, business, and circumstance, certain components consistently emerge:
- Geography: Credit unions can expand their FOM.
- Scalability: Credit unions can gain assets, liabilities, non-interest income, or new business avenues.
- Talent and Capabilities: Credit unions can leverage new resources, whether people or technology, to address existing gaps and optimize service and operations.
- Revenue Positive on LD1: Credit unions can experience positive revenue on “legal day one” or the day after they close on a purchase, a distinct advantage not found in other investments, such as new branch construction.
Changing a Credit Union’s Charter Strategy
Improving scale or the ease of adding and serving new members may prompt a credit union to change its charter. Michael shares that credit unions would be remiss if they did not, at a minimum, examine their current charter choice and consider alternatives that may promote more growth. He explains this assessment can ensure peace of mind and validate if a credit union has chosen the most suitable option or if other choices exist to optimize effectiveness and scale.
Within the dual chartering system, credit unions operate under a state or a type of federal charter. Michael suggests the most optimal charter for growth may be the federal multiple common bond charter (MCB). Why? MCBs open opportunities to different employee groups, underserved areas, charitable organizations, and associations, far exceeding the reach of most community or state charters. The best part of examining charter options to determine maximum benefits is that it’s a relatively straightforward, painless, and inexpensive exercise. Further, in most cases credit unions have complete control over initiating a charter change and choosing the best time to switch—or decide otherwise.
During pre-planning and strategic alignment sessions, Michael encourages a holistic examination of the options available among leaders and board members. Notably, there’s no pressure or obligation to take immediate action; it is, however, an opportunity for thorough consideration and informed decision-making.
In this episode, Doug and Michael also discuss:
- The importance of having a designated leader steering a credit union’s charter strategy and why it’s far from a one-time, set-and-forget solution
- Why changing charters and securing a positive member vote may be easier than a credit union expects
- Which resources credit unions can leverage, such as CU Collaborate white papers, to enhance their growth efforts
Stream the episode to learn how pushing the envelope with strategic acquisitions and changing charters can help optimize your credit union’s scalability, with results beyond expectations.
Michael Bell; Honigman, LLP; and CU Collaborate are not affiliated with or endorsed by ACT Advisors, LLC.
Audio Transcription
Doug English 00:00
Welcome, everyone, to “CU on the Show.” Today, we’re honored to have Michael Bell with us. Michael is not only a partner and chair of the Financial Institutions Practices Group at Honigman but is also a driving force behind the credit union movement through mergers and acquisitions.
Michael is the go-to legal advisor for credit unions purchasing banks, making him a true leader in this space. In today’s episode, we’ll explore the bold process of credit unions acquiring banks and the importance of reviewing and potentially changing your credit union’s charter. Without further ado, let’s dive in with Michael Bell.
Michael Bell, welcome to the show. I’m delighted you’ve joined us today. I’ve been a fan of your work in the credit union movement for a long time. And I’m excited for our discussion today on charter strategies and non-organic growth.
Michael Bell 00:58
I am too. I’m glad to be here, Doug. And I look forward to maybe talking about some things that folks maybe haven’t given much thought to or weren’t aware existed. I hope to cut some new ground today.
Doug English 01:09
So let’s start out finding out how you got to work in this wonderful movement. You know, a lot of people have an emotional connection to the way this movement takes care of families. So tell me your story.
Michael Bell 01:20
Yeah, Doug. So look, I was born and raised in a town of about 5,000 people in southwest Michigan; this is where it starts. My mom was a public school teacher. And when I was a young man—I don’t know if I was 10, 11, or 12—she took me to United Federal Credit Union and I opened up a youth savings account. And that’s truly where it started. Flash forward to when I’m 24 years old, graduated law school, and became a brand new baby lawyer in that very same town with my dad’s two best friends, so a firm of the three of us. The gentleman who was at the credit union when I opened my account was still at the credit union running it at the time and was kind enough to consult with me on small legal matters. And then some time went by—flash forward five or six years—and my relationship with them grew. And then we did something unique that had never been done before. In 2010, we purchased a bank, and that changed the trajectory of my career, and my life and credit unions essentially became the sole focus of my work.
Doug English 02:24
Awesome, another credit union win story; I love that. And I love the subject of credit unions buying banks, saving bank customers, that is one I’d love to talk about. And that leads us right into the non-organic growth subject. So what we’re looking for on this podcast is always bold ideas to help the credit union movement as a whole move in a nonlinear way to really kind of explosively grow. And of course, buying banks and bank branches and ancillary businesses fits right in that area. So talk to us about what the opportunities are, how to know when to pursue those things. And especially in today’s times, where deposits are expensive and hard to come by, what moves make sense in this environment?
Michael Bell 03:16
To start at the beginning, I think that you can talk about credit union growth, and there’s organic growth, just to put the term out there, which is kind of internal to the credit union, right? It’s what you’re doing year over year with your products and your already existing business machine. And then there’s this non-organic growth, which as it suggests, is growth that’s different. It’s actually growth that comes from outside of you. So I think for many, many years, and perhaps even today, many credit unions feel like non-organic growth means one thing and that is combining with another credit union. I think it’s a fine idea. I’m not negative on that in any way. But I’m here to say that actually there’s three more things on your list, right? It’s a list of four, not one. And I want to be sure people understand that strategically, you could acquire a whole bank, you could acquire bank branches full of customers, loans and deposits and employees, by the way. Or you could acquire a whole host of other things depending on your strategy, investments, insurance, title insurance, specialized lenders, real estate, you name it. Banks and credit unions are in all sorts of businesses that are next to the lending and deposit taking function right across all boards. So my point to credit unions is I’m not saying you should do this but I am being unequivocal and saying you should consider this, so the wrong answer is to ignore it. The right answer is to get the facts and consider it and then decide yes or no; no can be the correct answer all day long and I love it. Yes can be the correct answer all day long. I love it. Again, the wrong thing to do is to not pay attention, not consider it and not have the opportunity to say yes or no, that’s the risk.
Doug English 04:56
What is the starting point that causes the thought to begin to exist for the board or for the leadership of the credit union? What’s the beginning of going down the path of non-organic growth?
Michael Bell 05:07
If I’m not mistaken, most if not all credit unions conduct some form of strategic planning. And in that strategic planning, often there’s some form of that where they’ll talk about mergers and acquisitions or non-organic growth in some form or fashion. It’s at that moment—and I’m not a strategic planner, that’s not my job—but often, me or someone like me will swoop in for an hour or hour and a half and say, all right, here’s the deal, A to Z, this is what you can do. And it’s in those moments that credit unions maybe think it through and consider is this a strategy for us or not. But that’s really where it starts. It’s that preplanning. And I’ll tell you, just to be clear, an earlier point you made, these items are relevant regardless of the cycle we’re in. So we’ve been doing this for 15 years, during liquidity crunches and during when we were flush with liquidity and needed loans; this is applicable in all markets. And I’ll tell you, for the most part, it’s very relevant right now because of two main reasons. Through no fault of anybody, politics aside, it’s really hard to be a small bank today. Okay, just like it’s hard to be a small credit union. I’m not saying either of those are bad. They’re just hard to be. So there’s a lot of people there who are ready to exit but then layer into that an interesting generational fact. So if everybody looks around, and you look at the color of the hair on the owner of the bank, it’s gray or it’s gone. If you look around and look at the color of the hair at your local investment shop or your local insurer, the title insurance company, I’m going to guess it’s gray or it’s gone. So generationally at this moment, I’ve seen this happen about a year ago, and it’s really kind of firing up. Many people are retiring, many people are looking for that exit where they’ll get the equity they’ve had tied up in the business forever and move on to the cruise ship. So this is exceptionally relevant at the moment for economic and generational reasons.
Doug English 07:09
But what’s behind it is usually strategy. It’s an overall part of your strategic plan for growth to add these ancillary businesses if you’re talking about a new business, or it’s part of your expansion of your footprint, right, if you are buying a bank.
Michael Bell 07:27
So look, I think there’s maybe 10 or 20 different components that could kind of drive these if I look at all the credit union clients I have, and the reasons they did these things. I think there’s maybe 10 or 20 reasons but I’ll tell you what, there’s four that I think are present in every transaction. The big four. So look, we’re in a geographic business, you even said the word because you know what you’re talking about. Geography always matters, right? FOM matters, geography matters. So regardless of what we’re buying, there’s always a geographic component in there somewhere. Okay. Second, it’s certainly about scale, whether it’s for assets or liabilities, loans or deposits, or non-interest income, right? Put that in a bucket. This absolutely has a scale component and is very much about gaining pieces or portions of additional business. Third, it’s always about talent and capabilities, whether that’s people or technology. So we’re often whatever we’re buying, we’re gonna get a gain somewhere in there. A lot of times, it’s both spots where we’re going to gain some capabilities we didn’t have, and we’re going to gain some people, some great bank or business trained talent we can use. And then the fourth thing really is more of an accounting thing but it’s relevant. So in these transactions, the way the accounting works with purchase and acquisition marks to market fair value, those are the words you’re going to hear. They are revenue positive on something called LD1. What is LD1? That’s legal day one, that’s the day after we close. So whatever we buy here, the next day it’s revenue positive, and I raised that. And credit unions have noticed because a lot of things in your business are not revenue positive on LD1, I’m not selling you anything here. There’s just a difference to what you’re normally used to doing. If you go out, buy a piece of real estate and build a branch I guarantee you it is not revenue positive on day one. This is different. So you take those four main things, you add in other individualized things for each credit union. And there you have it, but those are the big four.
Doug English 09:38
The ones I see the most from your LinkedIn posts, as well as others, tend to be the ones closest to the credit union’s core operations, right, which is buying banks, buying bank branches but then these ancillary ideas, buying investment insurance firms, reminds me of what I’ve heard in fintech, right? And partnering with a fintech, you can either buy the technology or try to develop it yourself. And for most credit unions without massive scale, the core competency is just not there. So it makes me wonder if what’s behind buying an investment firm or buying an insurance company is that you’re immediately acquiring those core competencies. But then is there a track record of credit unions being able to run those things as effectively as they run their core business?
Michael Bell 10:30
Yes. So more often than not, the purchasers are in that business in some form or fashion; this is considered an add on or a bolt on. But I will give you a different example. They’re not in the title insurance business, and we buy title insurance companies all the time. But when you buy these things, you obviously retain the talent, otherwise you’re not going to buy it. And so there are ways to ensure we’re going to be able to optimize and maximize and run the thing. That’s the truth. The people and the capabilities are always very important. They’re one of the big four.
Doug English 11:03
Especially in today’s world. So let’s shift directions and talk about charter strategy. This is an area I think is really, really interesting, as far as state versus federal, and what type of federal charter. So can you go back to the beginning of when does a credit union begin to think about that kind of an issue? Is that another thing that comes out of the strategic planning session? Or does it come from somewhere else?
Michael Bell 11:29
I think that charter choice or charter examination really needs to be a part of a strategic planning session, even if it’s just looking at the options and reaffirming you have the best one for you. What peace of mind’s that? There’s no risk in it. People I see are sometimes nervous, like, well, I don’t want to change my charter. That’s not what I’m saying. What I’m saying is a part of the planning process, just examine it. And the answer you may get back over half the time is you’re in the right spot. Good job. And that’s not a bad answer. But yes, Doug, it’s definitely a front end, strategic consideration. And then once we dive into charters, and we can do that, whenever you want, I will tell you I have a very strong bias. And I admit it.
Doug English 12:12
I want to hear all about it. I want to hear what is going to make the biggest difference for the credit union movement. So let’s hear about the ultimate ideas for how you might evaluate your charter. And then what is the place that positions a credit union for the most potential growth?
Michael Bell 12:30
So we have what’s called a dual chartering system, right? We have state charters and we have federal charters. And then within the federal space, we have a few different types of charters. That’s kind of our menu. I will tell you I think there are many states, many, that have excellent, strong, lovely charters. So I’m not anti-state charter in any way. There are many that have some pretty good ones. But I will tell you I think the best, the optimal for growth, for scale, for effectiveness charter that exists today is the federal multiple common bond charter. And if it’s possible to pair that with a low income designation, maybe even do a little CDFI if you’re allowed to open yourself up for some other benefits, you kind of have it completed at that point. I think that’s the greatest, the biggest, and the best tool for growth and scale. And it’s interesting, because I think people have this idea that well, federal community, it’s easy. You get counties and anybody who lives there, they’re your member.
Doug English 13:35
That was my perception until this call, that was my perception.
Michael Bell 13:39
And that’s true but that’s a limited charter that limits you to a certain population area to a certain area of counties and you will forever be limited. There are no exceptions to that for the most part. The federal multiple common bond on the surface you think well, wait, what I have to have like a sag. What’s that? I have to sign up businesses. I don’t know. But what I will tell you is a properly done federal multiple common bond charter involves a multitude of items, certainly select employee groups. But it also involves something called underserved areas, which, by the way, are pieces of geography. It also involves associations, charitable type things, depending on the details. Combine that soup and you will far exceed a possible pool of members of any community charter I’ve ever seen before, right? It’s not even close. If you have a proper and effective federal multiple common bond charter, and let me tell you what, I think some people once they see what you can really have almost feel guilty about it and they’re like, wait, is this legal? Is this okay? I thought we’re supposed to have a restricted FOM. And the answer is you do and it is okay. It’s just a heck of a lot bigger than any sort of community FOM you would ever get. That’s the truth.
Doug English 14:59
It’s ringing my too good to be true bell that it’s possible to do that. So I know you have taken many credit unions through this evaluation and down this path. So talk to me about what are the characteristics the leadership is looking for that causes them to end up in this direction? And then let’s talk a little bit about the path to get there.
Michael Bell 15:21
I will tell you, it is about growth in scale and ease of adding new members and serving new members. I mean, I’ll give you an example. I’m not gonna name names or give any secrets away. There’s a credit union I represent that is federal multiple common bond, and they’re in five different states. None of those states are contiguous, right? You could never do that with a community charter. Just it’s absolutely impossible. And they went to those states for many reasons, some historical, some through merger, some through other opportunities but they had the freedom to do that. And it’s been successful for that credit union, without question, because they’ve had the federal multiple common bond charter. Now here’s the good news. In my opinion, looking at the charter options for you is not like precalculus, it doesn’t cost millions of dollars, it’s not painful, nobody’s making you do anything. It’s a pretty easy science to say, all right, here’s what you have. And here’s the maximum amount you can do there. And here’s what you could get. And the maximum amount you could do there. It’s not a painful exercise. And it is rather factual. There’s many vendors out there that do such things, multiple vendors that I think do a great job, I’ve seen their work product in this very regard. Let’s say there’s two messages from the podcast today, they have a theme here, Doug. I’m not suggesting you must do this or that. But I am suggesting you will be remiss and not doing your job if you don’t do, one, just simply examine your charter and what your options are, and two, simply examine what non-organic growth is open to you and what your options are, then it’s up to you to decide. The key here is to examine it and get the facts, period. I have been in front of plenty of wonderful, lovely successful credit unions where we’ve examined one of these things or the other, I felt compelled that it was a great idea and they didn’t, and they told me why. And I said actually, you’re right, good. And we’d love to do that. There’s no harm in that. In fact, that’s a win. I’ve also been in front of plenty of lovely successful credit unions where we’ve done it, they’re like, yeah, this is right for us. We’re going to do it. We did it and the course of their existence changed dramatically and materially, and they’re far more successful today than they were before, period. It breaks both ways.
Doug English 17:26
How long does it take to go through that process? And assuming you decide you want to make a change, talk to me about that process.
Michael Bell 17:35
I think the process to analyze your options, it’s 30 to 60 days. This is not laborious. Oh, no, no,, it’s pretty quick to look at what you can do under various different charters. This does not take long. Second, it’s going to depend on the details of your situation, meaning if you’re state chartered states have processes and procedures for you to flip to federal, and the federal piece has a process and procedure to accept you. It involves a member vote, right? Everybody just got nervous, Doug, but it’s okay. Member votes aren’t evil. You can do them successfully. So let’s stay calm.
Doug English 18:09
I think everyone just hung up. We just lost all our listeners.
Michael Bell 18:12
I will tell you most of the time the charter change process would happen quicker then you necessarily wanted to. And you will have to control the timing just to make it work for your organization. Another thing to understand is, this is not a runaway train, you can go through the process, be released by your state, be accepted by the feds, and then pick when you’re going to push the button. This is not something that’s like you let it loose like a leviathan. Next thing you know, you’re federal and you weren’t ready for it. No, no. You can go through the whole thing and then ultimately decide to push the button or by the way, ultimately decide not to and stay where you are. Yeah, so let’s relax that fear. Let’s just focus on the scary member vote thing that’s going to make everybody’s hair fall out.
Doug English 18:54
So do you have any data on when this kind of thing goes to member vote, does it pass all the time? Or most of the time? Or when does it get where you regret you ever brought it up?
Michael Bell 19:06
Yeah. So I can only speak about personal experience I’ve had. And I can tell you 100% of the charter changes I’m aware of, been involved in with my clients have passed. There’s a pretty high number. Now, look, some could have failed, Doug, full disclosure. I don’t know. I don’t think those things are necessarily publicized or tracked. All I can speak to is my experience over the last 15–20 years and tell you I’ve never seen one fail.
Doug English 19:29
We get into analyzing executives, split-dollar plans, and kind of how they work together with the rest of their finances. And some of those plans have change in control provisions in them. Do they trigger on a charter change?
Michael Bell 19:46
Yeah, they do not. I’m glad you asked, Doug. Operationally, I don’t think your members notice the thing. I don’t think your team necessarily notices the thing. This is really about future growth. And do we have to manage some things regarding the new federal bylaws and policies? And I mean, are there little things to deal with for the compliance folks that we help with, you bet, but operationally the day you switch no one’s gonna notice the thing. It’s just not an issue that affects that kind of thing. It’s really about future growth options, FOM expansion and other things that come down the line.
Doug English 20:17
I bet there is some emotionality with the original founders of the credit union who worked at the paper mill or worked at the telephone company. And this was the telephone company’s credit union and now it’s becoming a much larger, broader organization and losing its soul. Do things go like that?
Michael Bell 20:37
I think that question gets asked more when we talk about things like name changes and mergers, and that emotional piece is always there. I think there are tools there to help solve that; we’ve come up with a lot of strategies to honor and protect that history in mergers that I’d be happy to talk with people about. But I think it just comes up in a different way, not necessarily a charter change if we’re going to acquire anything, because that history doesn’t change based on those items.
Doug English 21:03
And is there a charter optimization beyond the change? Is there something else you do with your charter? Besides changing it? And if so, what is that?
Michael Bell 21:15
So once you change, and once you are multiple common bond, I absolutely believe somebody on your team has to own that, right? Has to own your FOM and that you are continually expanding it, it is something you babysit, you water, you fertilize, and you let grow, right? And it doesn’t happen without you, and it doesn’t happen by accident. So the best institutions I work with have a person or people who own the FOM who are constantly looking at it, finding opportunities to expand it and nurture it and make it as dynamic as possible. It’s an ongoing annual exercise, just like other parts of your business, that if you just leave alone, they’re gonna die. So there is a continuing strategy without question.
Doug English 22:02
And for a federally chartered credit union that has a community charter, how different is the multiple common bond charter than the community charter? The difference is you don’t have the geographic limitation—is that the net of the difference?
Michael Bell 22:17
I mean, that’s one of the key differences—you’re not bound by serving the population in the area that is sharply limited by a community charter. That’s for sure. But understand what I’m saying to you, in a multiple common bond charter you still can get geography in your charter through underserved areas. So there’s perceptions that need to be cleared up here; it’s different. But in the end, I believe, like I said, there’s some wonderful vendors out there that have whitepapers that kind of prove this as fact that you can have a much larger possible membership under that charter.
Doug English 22:49
So let’s say our listeners want to read some of those wonderful whitepapers. Where would they go, can you give us some resources and things that they can go and read?
Michael Bell 22:58
I don’t mind saying I think there’s two vendors in this space that really are cream of the crop, and that is CUCollaborate, they have reams and reams of whitepapers. And then I think Dollar Associates, Dennis and Chris, both of them, I believe, have the pulse of the FOM situation and very much understand federal multiple common bond charters, and have great information out there on them. I would consider those two vendors to be cream of the crop.
Doug English 23:23
Yeah, I had a great conversation on this podcast with Sam Brownell about some of the incredible creativity he is leading that organization with.
Michael Bell 23:32
Doug, we have an exceptional amount of mutual clients, right? So you’re not surprised credit unions that are working with CUCollaborate are now associates of the credit unions that are working with me. This message transcends that. And it’s clear we’re not doing anything illegal, anything untoward. But we’re definitely pushing envelopes, and growing and doing big things because you can; no one’s taking naps at these organizations.
Doug English 23:54
I love it. Awesome. Well, thank you very much for your time for your ideas, for your assistance in pushing this great movement forward. I love to see bold thinkers in the credit union movement helping this great industry to grow. Michael Bell from Honigman, LLP, thank you so much for our conversation today. I look forward to seeing you out there in the credit union movement.
Michael Bell 24:16
Thanks Doug, same.
