In this special guest episode of the Believe in Banking podcast, Gina and Juliet welcome Michael Bell, Partner and Leader of the Financial Institutions Practice at Honigman, LLP, where he has become nationwide leader and go-to legal adviser for credit unions seeking scale. In their lively conversation on M&A in financial services, Michael discusses the growth outlook for community financial institutions and ways that mergers and acquisitions help further the credit union mission and movement. He shares his belief that credit unions and community banks are ‘kissing cousins’ – both sharing the same passion for serving customers and communities and facing similar regulatory and competitive challenges. Finally, they discuss data-driven decision making and the role of research in guiding growth strategies for community financial institutions, whether it’s for M&A, branding or branching.
Text Transcription
Intro: This is Believe in Banking, a podcast series for decision-makers, influencers, and leaders. Featuring experts taking on the financial industry’s most pressing issues with insight and empathy. The podcast features information and conversations designed to enlighten and empower.
Gina Bleedorn (00:18): Welcome to our Believe in Banking podcast. I’m Gina Bleedorn, President and CEO of Adrenaline.
Juliet D’Ambrosio (00:24): And I’m Juliet D’Ambrosio, Chief Brand Officer at Adrenaline.
Gina Bleedorn (00:29): Today, Juliet and I are quite thrilled to have a special guest with us by the name of Michael Bell. He is a Partner and a Leader of the Financial Institutions Practice at Honigman, a business law firm that practices in 60 different areas and specializes in M&A specifically for credit unions. Welcome Michael to our podcast.
Michael Bell (00:58): Thank you Gina, and thanks Juliet. I look forward to it.
Gina Bleedorn (01:02): Michael, you are the pioneer of credit unions acquiring banks, having achieved the first of such transactions in 2011. Tell us about that and about your career in general and what led you to be where you are today.
Michael Bell (01:25): Yeah, it’s my pleasure. So starting kind of just briefly today, looking backwards, today I find myself working with about 150 credit unions across the country in every state, helping them buy things, from whole banks to bank branches to all sorts of ancillary businesses like investments, insurance, specialized lending, title companies, real estate companies, you name it. And I didn’t envision that back in 2009 or 2010 when I first started to think about the idea of a credit union buying a bank, I could not have predicted what would occur.
Flash back to that time, I was a little bit younger and likely naive. And due to both of those factors, I decided to take a chance and see if a gray area could become not gray and instead black and white and find a way for credit unions to acquire banks. And I had a client at the time, United Federal Credit Union, and there was a bank at the time, Griffith Savings Bank, that were willing to take that dive to see if we could make it happen. And we did. We found a way to structure it. We worked with the regulators to get it approved. And then after that, the rest truly was history. We did another one and another one and another one, and here we stand today with 60 to 70 of those under our belt and then all sorts of other things. It’s been quite a ride.
Gina Bleedorn (02:46): Well, we’ve all been younger and naive, so can relate to that, but it led to you championing something that had never been done before. So kudos. And since then I think we’ve had about 78 other occurrences of banks selling assets to credit unions. Tell us about what that space looks like moving forward. I mean, you’ve completed the majority of those and you have become really the nation’s expert and the go-to for legal advice in the space. What does it look like moving forward?
Michael Bell (03:24): So the question’s exceptionally appropriate right now in 2024, because the answer is we’re on pace to announce a record amount of credit union acquisition of banks. Now, let me just pause a second and explain that. If there’s 200 bank mergers in a year, we’re still going to remain the sharp majority of those transactions. But in terms of credit unions buying banks, I expect without question this year, barring an act of God, that we will crush the record amount of transactions announced.
The desire of sellers to sell and buyers to buy has never been greater, not even close. So, anecdotally, I mean these are unofficial numbers, right? But anecdotally, if I talked to you about the last few years where it’s been great pace, I would maybe say that I’m in the middle of working on six or eight things at one time. Some of them come to fruition, some do not, right? That’s how deals work. But for perspective, I would tell you as I sit here right now that six to eight is in excess of 20. It’s just outrageous. The amount of deal activity, again, not everything comes to the finish line, but the flow, the amount of activity is really intense. Nothing I would ever have predicted.
Juliet D’Ambrosio (04:34): Yeah, Michael, it’s interesting to hear even your anecdotal reflections, which mirror our own anecdotal, just our business and what we are seeing at Adrenaline. We are doing a record number of rebrands and of that record number of rebrands, a record number are coming from credit unions. And for the first time ever, these are credit unions that are rebranding as a result, not of SEG change, not of a need to expand markets, but for mergers. These are big mergers of behemoths or pillars of their community coming together, ultimately for scale. So we’re feeling the effects of that volume, that intensity, that rising energy that you are describing.
And I’m curious, I sort of self-identify now, as I imagine you might identify as a credit union nerd, I am curious about thinking about where we are today in 2024, this growth, the deal volume, really the transformation and evolution of credit unions that are becoming more growth-minded. I am curious about how you put that all together with your initial attraction to the credit union space and what that looked like and what drew you to work in credit unions of all places?
Michael Bell (06:04): Yeah, so I mean the genesis of the credit union connection for me is so corny that it’s almost not believable, but I’ll tell you it’s a hundred percent true. My mom was a school teacher in the town of 5,000 people in which I was raised in southwest Michigan, and when I was around 10 years old, we went to the local credit union where she was a member and I opened up a youth savings account and got to know that credit union. I became a brand new baby lawyer in that town and was a longtime member of the credit union, knew the people there and they gave me a little legal work. Shortly after I had started, that credit union merged with another and got some size and scale; the legal work complexity picked up, they were doing other things, they were growing and we just kind of grew together such that we got this wild idea back around 2009 and the rest is history.
Again, I had no vision, no insight, no predictability into any of that, let alone today what it’s turned into in this space and the part that I grab onto that’s really real. I love doing deals, I love doing transactions. That’s stimulating, but I love it even more because it’s with a community financial institution. I spend all day long working with credit unions and community banks. The two pillars of small town America, or even big town America, that are community-based financial institutions that make a difference, that do things differently. Look, big banks are wonderful. They have their space, too. They have the roles they fill, but they can’t fill them all or fill them all well, and there’s a clear defined role I believe for these community institutions, and I get really pumped up having a chance every day to work with them to strengthen the community financial market. That’s the way I see it and I couldn’t have written it better and I feel awfully lucky to be able to do that.
Juliet D’Ambrosio (07:52): Yeah. I’m also interested, you touch on it, this idea of community financial institutions. Sort of thinking about the elephant in the room that community banks and credit unions will often find themselves on opposing ends. What you seem to have created in your practice is a bridge, and I’m so curious about how you can reflect on what is similar about community financial institutions, whether it’s a credit union or it’s a community bank, and the ways that you have been able to bridge that gap.
Michael Bell (08:31): So, look, there are some differences and both industries highlight those differences when needed. And there’s a lot of advocacy and I see that, and I don’t dispute those facts. But I think more than those differences at their very core, I really believe they are different from all the others in the financial industry space. They’re both community institutions that from looking at them literally forensically, I get to see the inside and outside of both the buyer and the seller, and I’ve been doing that for 14 years. They are kissing cousins. They care about their customers or their members in a way I believe that is different from other institutions. They care about their employees and the community in a way that is different from other institutions. And I think that DNA, that backbone really has more power than any sort of differences that occur between the two.
And I think they’re in the same business of doing good, of taking care of their people and their communities and their customers or members. I’ve seen so much good come from these transactions. You know, these soft issues of hiring most if not all the employees, keeping most if not all of the branches open, supporting the community the same or greater than before occurs every single time. If you look back, I don’t think you can find one kind of horror story where a bunch of folks were not hired or branches were closed or services were stopped or lending ceased. I’ve not seen one example of that. Hypothetically, it gets talked about like, “Oh, we think this might…” It’s never occurred. Instead we have really good stories to tell about the community financial institution continuing versus other alternatives of closure, purchased by an investor group, or purchased by a bigger financial institution that doesn’t care as much about that community financial focus.
Gina Bleedorn (10:20): Michael, from a very different side of doing business, we have experienced the same and perhaps we’re not examining the institutions as forensically as you do, but love the kissing cousins analogy. I’ll likely use that. In our experience, especially when we’re doing brand transformation work and we’re uncovering what is your purpose and what do you stand for and how do you value community integration? All the same things that you’re talking about, strong values, do-gooding and wanting to do right by people, by their employees, by their customers, by their members. We have seen the same of both community banks and credit unions. It’s why we believe in banking as you clearly do. There is a difference though in banks as a whole, if you consider them all in totality, in scale basically. You have explained before that of the, we’ve got about 4,500-ish credit unions right now, a similar number of banks, but only about a few hundred of those have achieved what you call critical mass. Can you explain what that means, what you have seen from them as far as their appetite for scaling and growth?
Michael Bell (11:43): Yeah, that’s a fair question. Let’s define this marketplace, right? I think it’s easily definable on the buy and the sell side and really we can put bookends on it so listeners can really grasp what we’re talking about. So, we are certainly talking about a marketplace that is in the lower end of the deal making spectrum. No question about it. I would tell you there’s probably two, maybe 300 credit unions in the country today that have, as you mentioned, the size, the scale, the sophistication to be a buyer on the other side. I think there’s probably about 3,000 banks today that are of the size and have the various attributes that would make them a proper partner for a credit union buyer. So this market we’re talking about really involves up to a few hundred buyers and up to a few thousand sellers. And the key here is to understand that these transactions are 100% voluntary.
We watch movies, we’re aware of other industries, read the newspaper, watch the news, and you can hear about things like hostile takeovers and shareholder tender offers, etc. That is not present here. This is a transaction that the buyer has to want to buy and the seller has to want to sell or it will never happen and can’t be made to happen on the credit union side. For the buy side, as you mentioned, there’s 4,500 or so credit unions, but you can just look, most of them are small. And by the way, that’s fantastic. I think the industry needs the segmentation it has. I believe in that. I just believe that the work I’m doing, the market we’re making in this instance, is appropriate for just a few hundred of those that have more size, scale, and sophisticated management.
Gina Bleedorn (13:26): Now, Michael, what does scale get you? Understanding this is not bigger is better, but there is also a threshold as we see it, of ability to compete. What does scale give you and how critical is it today?
Michael Bell (13:42): This is a tricky question because so many people will hear growth for growth’s sake and they would turn their nose up at that and you hear these things and everybody has a visceral negative reaction, so, I’m not saying that. But what I am saying is that depending on how you want to serve your members, the community, your people, scale does matter. You can choose the type of institution you want to be. Not everybody has to have scale, but if you want to be a full-service institution with robust digital banking, best of the best fraud detection technology, people, make a list… You need scale, period. Why are the biggest of the big banks so big? I’m saying because they have to be to do what they want to do. They need scale. And I believe that translates down throughout the market. You need scale depending upon your strategy.
Juliet D’Ambrosio (14:29): Michael, I love what you just said because it brings it back. You need scale not just for scale’s sake, but really it comes down to how you’re going to serve your members, how you are going to serve the community. I am also interested as we’re thinking about the benefits of scale, understanding the buyer’s side of these deals that they might be looking for scale, but also on the seller’s side, there has to be some great reasons. I’d love for you to talk a little bit about what you see from the seller’s side as the benefits of these transactions.
Michael Bell (15:10): It’s a good question. And look, I will say I can absolutely generalize in an educated way and talk about why sellers are selling and some of those reasons. There’s a disclaimer that obviously it’s unique to each institution, right? There’s exceptions to every rule, but I do believe there’s some real commonalities in different ways. Many sellers that I have seen have a really robust, great business, whatever that might be. They’re really doing well, but they are limited by their size. They’re limited by the size of their balance sheet regarding the type of loans they can make, the deposits they can take, the products they offer. These transactions, allow them to take their very good machine and attach it to a dramatically larger balance sheet, so their lenders can lend more, right? They can do different things. They can offer more products per household or more wallet share, and that’s a big deal and that’s very appealing.
Contrast that there’s plenty of sellers that also great institutions, but they’re kind of at the end of the runway when it comes to age of management or age of board or timeframe that the people that own the bank actually wanted to still own the bank. They’re ready for an equity event. Their capital’s been tied up for however long it has been, and they’re ready to move on. Those other forces to sell come into play. And then finally, unfair to everybody, I firmly believe there’s overregulation in our space. There just is both for community banks and credit unions. They talk about these thresholds where you’re over 10 billion regulated this way, over 50 billion regulated this way. Whenever you hear of the CFPB or FDIC or NCUA, well, I think that’s true. In part, I think it trickles down no matter what. It’s hard to tell a regulator to regulate somebody in one way and only partially regulate somebody in another way. I just think that’s difficult. There’s no question in my mind that overregulation is 100% real, tangible and unfortunate in the community financial space and can cause or make pressure that would bring people to the deal table on the buy side to scale up to deal with that overregulation and on the sell side to say uncle, and realize that it’s time to exit and let the legacy of your institution continue in a bigger way and in a different fashion.
Gina Bleedorn (17:23): Michael, I’d love to dig into that can of worms. When you say that both credit unions and banks are overregulated, there is certainly of course the perspective from the banking side that credit unions are not fairly regulated. What do you say to that?
Michael Bell (17:42): Yeah, so I respectfully disagree. Are there differences? Sure. Are they, in my mind, are they tangible? Do they make the day-to-day actually different? I respectfully say no. I believe each industry is regulated, again, but in different ways to the detriment of both institutions. You could point out certain things that only apply to community banks, as an example, and that’s true. I’m not arguing with that fact. But I would say to you that despite that fact, the regulations for a credit union are the same or similar. And I recently have had the chance to talk to plenty of community bankers about this very issue, and we may agree to disagree in part on certain things, but I feel like there’s in the end overall agreement regarding this conclusion that I believe in when it comes to the overregulation.
Gina Bleedorn (18:35): You recently even had a discussion with the ICBA who’s a shared colleague of ours, as well. They’re a client of ours. And as you know, of course we believe in banks and we believe in credit unions. But you had mentioned that there were more points of parity with the ICBA’s perspective than differences. What are those points of parity? Where do you think there is a shared common ground?
Michael Bell (19:01): I did. I was able to have a really, a conversation I’ve been wanting to have for a long time with someone from the ICBA. Though there might be some technical differences, again, which I respect, I really felt like there was more in common that we perhaps would be better together to push back against various overregulation. I’ll give you an example. So CRA, the Community Reinvestment Act, applies to banks, right? Community banks included. It does not apply to credit unions. The legislature determined that it didn’t need to, just based on credit union’s very nature and what they were created for and how they operate today. And it’s remained that way forever. I think there’s two ways to look at that. You could sit in a seat as a banker and say, not fair, CRA should apply to credit unions, as well. Or you could sit in the seat as a banker and say, not fair, CRA shouldn’t apply to me, right?
If it doesn’t make it any better for me if it just gets worse for others, why don’t we work together to get rid of CRA in total? And that’s my opinion. That’s my position is CRA needs to disappear for community financial institutions because it’s supposed to regulate community-based activities for banks. And if you’re a community financial institution, you don’t need that regulation. You by your very essence are banking the community and it’s a little silly. So I think rather than fight to have it added as a burden to credit unions, I think we ought to work together and get it out of community banks. That’s the best solution for community financial institutions.
Juliet D’Ambrosio (20:25): Michael, that’s so interesting. And a little bit outside looking in, I’m not sure how radical that viewpoint is that CRA is actually not good either for community banks or for credit unions. It’s a sort of unnecessary burden. But it brings me to the question of just how deals, like the ones that we’ve been talking about, how do these kinds of deals ultimately help communities? How does it help to fuel the engine of the credit union movement overall?
Michael Bell (21:01): Yeah, so I think there’s a series of ways to describe this. I think there’s a fact though that’s important to note just as a baseline. Branches – bank or credit union branches – branches matter. No matter how you pull the statistic, if you look at the credit union industry, that industry is a net branch opener – has been, is, and I believe will remain that way. So, if we’re talking about bricks and mortar and we’re talking about communities just based on that very fact, the bricks and mortar will remain. There are many, many instances where I believe a banking desert or an underserved community had a branch or branches preserved in these transactions over the last 13 years.
And I’ll tell you that branch strategy, I know that’s something that Adrenaline is deep in. We have mutual clients, right? It’s something that sometimes people can think is antiquated or it’s an old-fashioned art form. I think we could talk a lot about what a branch is, what it used to be, maybe what it needs to be. But I’ll tell you from my seat, in the credit union space, I never hear conversations about no branches. It’s more about the type of branch or the kind of branch. And so branching remains. Branching is alive. These deals bring bricks and mortar, often bring geographic diversity, and those branches stay open, which then keep folks in the community employed, keep business, keep economic activity, and it can’t be overlooked.
Gina Bleedorn (22:26): Michael, as these community focused organizations get together and have strategic planning, what are the questions they need to be asking themselves about these growth options? Whether grow through a merger with another credit union, grow through an acquisition of a credit union or a bank? What are the considerations and what data points and research can they look to to help guide their own thinking around planning their growth options?
Michael Bell (23:03): Yes, a great question. I think that there are multiple things that really transcend all organizations. Number one, I think the organization has to examine and dissect geography. And with geography, there are a lot of things to explore. I know you guys do great work there to really help an institution make a smart decision when they’re thinking about where they want to be or perhaps where they should be. In addition to geography, I also believe an organization should look at a second item, and that is where they are in terms of talent and capabilities. Are they in the lines of business that they want to be in or are there more to add? And if there’re more to add, is that something they want to build or buy? And I’ll tell you, many if not all of these transactions involve that buy component where we’re gaining talent and capabilities, whether it’s through people and technology or both. And then finally, I think every organization can look at its current situation and determine, are we looking for loans and/or do we need liquidity or are we looking at deposits? And that decision along with the other two can really drive or help focus this growth conversation and make our decisions a lot more efficient as we move forward.
Juliet D’Ambrosio (24:16): Michael, you just touched on so many of the big audacious questions that have to be asked and considered through strategic planning. And as we work at Adrenaline both on the brand side and branch side and the connections between them both, data really drives so much of our decision-making. If we know anything about bankers and about the banking industry and credit unions, data drives their decisions also. I am interested in your perspective on the role of research and data-driven decision making to address those sort of big considerations for credit unions. And how are you seeing credit unions today deploy data, deploy insights, deploy research to help identify those opportunities and answer those strategic questions well?
Michael Bell (25:15): Yeah, so you’re spot on. Again, the credit union population, we’re talking about those 200- 300 that are out there that could be in this space or in this space I believe are today more than ever, data-driven institutions. They can, if properly operating, really leverage data to make all the decisions that we just talked about. Where do they want to be? Well, that’s a data question in my mind, similar with the type of products they want or perhaps want to grow into.
But more than that, I also would say that when you look at a possible transaction, the first thing I’m going to say once we get into something is look, put on blinders to everything else and solely concentrate on the math, data regarding valuation, and pricing. Because if that doesn’t work, if that’s bad, nothing else matters. And we don’t want to waste time. We don’t want to do all the things if the math is broken because the math will never get unbroken. So, it’s really a data-driven process to get started if you want to get started properly when you make the geographic product and other decisions. And then the first thing we’re going to do is land on and dial in the mathematical data to see if we can pass that part of the test before we do anything else.
Juliet D’Ambrosio (26:37): So much of what you described is really driven by strong belief, and that is a belief in a better future. You have to have strong convictions to go through the act of transaction and M&A and imagining something different. Which leads us to our final question that we ask all of our guests who come onto the Believe in Banking Podcast. Why do you, Michael, believe in banking?
Michael Bell (27:06): Good question. I shared I think my love in my history, and that’s really the genesis of it. I had an experience very early on while I was growing up, of being a part of and experiencing a community financial institution. And then banking in itself combined with that honestly fascinate me. I admit maybe I’m a bit of a banking nerd, but if you just think about what is a bank and why does it do what it does and how does it do it, that’s so interesting to me. It didn’t necessarily need to be this way. It’s what we’ve created. And I think it’s fascinating. I think people don’t give banking enough credit. They think about Silicon Valley and tech and all these things that feel and seem a lot more sexy and interesting. I guess that’s fine, but I feel like community-based banking is exceptionally interesting because it’s a bit of a good story.
There are win-wins across the board. There are institutions that are profitable in giving back to their shareholders or profitable in giving back to their members while at the same time making differences, tangible differences in people’s lives and in the community. I think if you talk to any community banker or any credit union person, every one of them has a story about someone that came in and needed their first car loan or needed a signature loan to go on a college trip. It’s real and it’s people’s lives, and it makes a difference.
Just the other day, I was on a field trip. I have an 8-year-old daughter, and we were on a field trip and I was talking with one of the parents. We were talking about the parent finding out what I do was sharing a story about a time they went into a credit union that happened to be get a car loan, and how amazed they were. The credit union was essentially advocating for them and talking to them about, we’re not just going to give you a loan, but let us help you figure out how much of a loan you want, how you plan to buy this car, what a fair price for the car would be. And they said they had no concept that a bank or a credit union would care so much about them that they would bring all those other pieces to the table, and that’s real for them and everybody else, whether it’s a community bank or credit union, and I love that.
Gina Bleedorn (29:06): Michael, we love all you’ve contributed to the thought sharing effort here today for all of our listeners. Incredible insights. You have supported the industry in really an unparalleled way, and we love that you believe in banking.
Michael Bell (29:26): Yeah, thank you. It is my pleasure and I appreciate you having me. I’m a big Adrenaline fan. I’ve seen your work. Like I said, we have many mutual clients that I know that we both love, and it’s a pleasure to keep talking about what we all love to do so much. I’ll do it anytime.
Gina Bleedorn (29:41): Lucky to love what we do.
Outro: You’ve been listening to Believe in Banking, a podcast series created to empower decision makers, influencers, and industry leaders in financial services. Be sure to also join us on our flagship site, believeinbanking.com.