Dive Brief:

• The Tennessee Department of Financial Institutions (TDFI) is appealing a judge’s decision to allow Orion Credit Union to purchase Financial Federal Bank, American Banker reported Monday.
• A judge in November issued an injunction temporarily halting the deal between the two Memphis-based firms after the state financial regulator claimed the tie-up was prohibited under the Tennessee Banking Act.
• Davidson County Chancery Court Judge Patricia Moskal lifted that injunction last month, ruling that the Tennessee Banking Act allows the transaction because Orion would be acquiring Financial Federal’s assets, not its charter or stock.

Dive Insight:

The legal challenge to Orion’s purchase of Financial Federal Bank, announced in August 2021, highlights the continued opposition community banking groups are mounting against credit union-bank deals.

“It’s surprising that the commissioner is so set against economic freedom for community banks and their right to choose when it comes to selling,” Michael Bell, an attorney with Honigman who advised Orion on the transaction, told American Banker on Monday. “The result they are seeking — that the trial court flatly and clearly denied — will harm banks' value, shareholders, bank employees and communities.”

A hearing for an injunction is scheduled for July 8.

The TDFI had until June 27 to file an appeal. TDFI Commissioner Greg Gonzales, in his June 14 appeal, said Financial Federal account holders would be “irreparably harmed and disrupted” — as would the state’s interest in maintaining a safe and sound banking system — if the deal is allowed to close. 

If the deal closes and is then nullified by an appeals court, “it would likely create confusion and uncertainty among Financial Federal’s customers regarding the security of their accounts and what entity actually has custody and control of their accounts,” Gonzales added, according to American Banker.

Bank trade groups have long taken issue with what they consider an unfair playing field that allows tax-exempt credit unions to offer a higher purchase price in acquisitions than banks can.

Credit unions bought a record 16 banks in 2019. But the pace of those transactions has fallen off since the COVID-19 pandemic started. 

Bell in January predicted a record “25-plus” deals between credit unions and banks in 2022, according to American Banker. Nine such transactions have been proposed thus far this year. If that pace continues, 2022 could see 18 deals — a record but far short of 25.

Opposition to the Orion deal was nearly immediate.

“This isn’t just about losing loans due to unfair competition. It is about losing the community banking model,” Tennessee Bankers Association CEO Colin Barrett wrote in a blog post the day Orion announced the proposed transaction. Barrett added that the industry is “reaching an inflection point in the debate about credit unions.” 

Not all planned credit union takeovers of community banks have seen success, though.

Jacksonville, Florida-based VyStar Credit Union’s deal to buy Georgia’s Heritage Southeast Bank was called off this month, after both parties said the deal lacked a clear path forward to obtaining the necessary regulatory approvals.

That deal, which would have made VyStar the 13th-largest credit union in the U.S., garnered strong pushback from the Independent Community Bankers of America (ICBA) and the Community Bankers Association of Georgia, which called out the institution’s record of consolidation following a 2019 bank acquisition.