Tennessee ruling on credit union-bank deal sets tone for other states

A Tennessee judge lifted a temporary injunction that had blocked Orion Federal Credit Union’s acquisition of Financial Federal Bank, enabling the deal to move forward.

The $1 billion-asset Orion, of Memphis, Tennessee, announced in August that it agreed to acquire the $774 million-asset bank, which is also based in Memphis. In November, Davidson County Chancery Court Judge Patricia Moskal issued an injunction in response to concerns by Tennessee Department of Financial Institutions Commissioner Greg Gonzales that the transaction was prohibited under the Tennessee Banking Act.

Gonzales argued that the act allows only banks to buy other banks. But in a ruling issued Friday, Moskal said the state’s banking act is clear that the transaction is legal because Orion would be acquiring the bank’s assets and not its charter or stock.

“To hold otherwise, would be to expand or enlarge the meaning of the statute,” Moskal wrote.

Michael Bell, an attorney with Honigman who advised Orion on the transaction, said the law is clear and the state’s banking commission did not follow it.

“American courts are supposed to act as a check and balance to politics, and in this case they did,” Bell said. 

Colin Barrett, president and CEO of the Tennessee Bankers Association, said that the group was disappointed and surprised by the court’s decision and that no one understands Tennessee banking laws as well as the Tennessee Department of Financial Institutions. 

“We remain optimistic that the attorney general will appeal this decision. However, the ruling doesn’t change the fact that Orion should not be allowed to blatantly abandon its mission and exploit its taxpayer-subsidized status in order to acquire a tax-paying community bank,” he said.

If the deal goes through, it will harm the city of Memphis and result in a huge loss of tax revenue during the next decade, according to Barrett. “All taxpayers and those responsible for Tennessee fiscal policy should be concerned,” he said.

In an August blog post, Barrett said the deal would result in a loss of roughly $15 million in local, state and federal tax revenue over the next 10 years.

There have been seven deals announced in 2022 in which a credit union is buying a bank. Most recently, Dearborn, Michigan-based DFCU Financial said in May that it had agreed to acquire the $689 million-asset First Citrus Bank, a subsidiary of First Citrus Bancorp in Tampa, Florida.

There were 13 such deals announced last year.

Some states are pushing back, but Bell said the ruling in Tennessee could be a watershed case and give other states pause before bringing similar litigation.

In December, the Nebraska Department of Banking and Finance shot down the proposed sale of the $395 million-asset Premier Bank in Omaha to the $8 billion-asset GreenState Credit Union in North Liberty, Iowa.

Bell predicts that courts in Nebraska and Minnesota “and any other state where politics enters to hinder the free market” will follow Tennessee’s lead.  

“Nationally and in a great majority of the states, these transactions occur without issue,” he said. “In a very small minority of states, politics and lobbyists have intervened. Tennessee was one of those states, but ultimately the law was followed and the rights of banks to sell were preserved.”

The largest deal ever in which a credit union was to buy a bank — VyStar Credit Union’s agreement to acquire the $1.7 billion-asset Heritage Southeast Bank — was recently postponed for a third time.