The last two years have seen a significant uptick in the number of transactions involving credit union acquisitions of banks with 26 deals announced and two transactions already announced in 2024. Yet, the law around these transactions remains somewhat unsettled and the path to regulatory approval is often not clear. These transactions are sometimes structured as an acquisition of the bank’s assets and the assumption of specified liabilities to avoid conflict with possible regulatory issues arising out of the merger of a bank into a credit union.

A recent Tennessee appellate court decision illustrates the roadblocks that may get in the way of regulatory approval of a credit union-bank transaction. In August 2021, Memphis-based Orion Federal Credit Union announced a purchase-and-assumption agreement with a Memphis-based community bank, Financial Federal Bank. The combination would create a credit union with over $2 billion in assets. In an apparent response to pressure from a local bank trade group, the Tennessee banking commissioner sued Orion, claiming that the transaction violated a Tennessee law that blocked the acquisition of a bank by a company that is not a bank holding company. However, in Gonzales v. Orion Federal Credit Union, the intermediate level Court of Appeals of Tennessee rejected the commissioner’s position, finding that the Tennessee statute did not prevent a credit union’s acquisition of a bank’s assets. The banking commissioner had argued that the reference to “acquire a bank” in the statute encompassed the acquisition of a bank’s assets. The commissioner contended that the purchase of all of a bank’s assets necessarily provided the acquiror with control of the bank’s operations and, for purposes of the statute, should be regarded as an acquisition of the bank However, the court determined that the bank was a legal entity distinct from its assets and, therefore, the statutory limitation was not triggered by the Orion transaction. The court found further support for this conclusion in Tennessee banking laws that placed no restrictions on a bank’s sale of assets.

As of this writing, it is not clear whether the Tennessee regulator will appeal the decision to the Tennessee Supreme Court. The parties have announced their intention to proceed with the transaction, but the timing remains uncertain. Nevertheless, the appellate court’s statutory interpretation in Gonzales provides helpful support to credit union-bank transactions that face similar issues.