There are few things within the financial services industry that will spark a heated debate like discussing credit unions buying banks.
Depending on who you talk to, these deals are either essential mergers that keep local branches open and bank workers employed or unfair transactions that prove how far credit unions have drifted from their original mission.
But putting aside the longstanding animosity between the two industries, are the buyers and sellers involved in these transactions ultimately finding what they are looking for?
One thing is certain. These deals have never been more popular.
What started with a single deal in 2011 — United Federal Credit Union buying Griffith Savings Bank — has grown to a record-tying 16 deals announced last year.
This has continued into 2023. The first credit union-bank deal announced this year was 4Front Credit Union in Traverse City, Michigan, agreeing to buy Old Mission Bank in Sault Sainte Marie, Michigan. And that's certainly unlikely to be the last of these in 2023, although it is unclear what impact the recent failures of Silicon Valley Bank and Signature Bank could have on M&A.
Michael Bell, an attorney at Honigman who estimates he has advised on more than 90% of credit union-buying-bank deals over the years, said the bank failures could be "a neutral at worst and a positive at best" for credit union-bank deals this year.
"This could spur more banks to consider selling, and it could also affect certain competing bidders to lose purchasing power," Bell said. "If the economic factors can calm, I absolutely expect a record year."
Cries of foul play
No credit union has been more active in this space than GreenState Credit Union in North Liberty, Iowa. The $10.6 billion-asset credit union has closed three bank buys in the past few years, acquiring two institutions in Illinois and one in its home state of Iowa.
CEO Jeff Disterhoft said there were various reasons for those deals, but all have been successful. The acquisition of the $730 million-asset Oxford Bank & Trust in Oakbrook, Illinois, for example, came at a time when GreenState had set some very aggressive deposit gathering targets for itself. Its shares and deposits jumped from $6.3 billion as of June 30, 2021, to $9.1 billion at the end of 2022, according to call report data from the National Credit Union Administration. That is a roughly 44% increase.
"And so I would just say there's no way that we hit our deposit growth targets without the bank acquisition," he said. "They were very instrumental in attracting a lot of new money in the western Chicago area. And so that part has really exceeded our expectations."
GreenState has looked at merging with other credit unions, but Disterhoft said those deals tend to be a "longer dance" that require a number of factors to fall into place. "So it's not for a lack of conversations and interest. It's really just that the sun, moon and stars haven't aligned for us," he said.
At the same time, Disterhoft said the surge in Chicagoland deposits was driven in large part by the attractive loan and savings rates GreenState was offering in those markets. He said it's a good example of the ways credit unions are giving back to the communities they enter through these bank deals.
"We have been successful in giving some of those advantages back to consumers and certainly with charitable support as well," he said. GreenState also struck a fourth bank acquisition — a deal to buy Premier Bank in Nebraska. But the transaction fell apart because Nebraska state law prohibits such deals, said Kelly Lammers, director of the Nebraska Department of Banking and Finance. He said there have been no other instances of credit unions attempting to buy Nebraska banks.
"It's the law of the land," Lammers said. "If Premier wishes to try to change the law, they most certainly could do that."
Running into regulatory issues is not unheard of with these types of transactions. There are other states besides Nebraska that either prohibit these transactions or limit credit unions' ability to buy banks.
For example, Colorado banking regulators in 2020 blocked a bid by Elevations Credit Union to buy the assets of Cache Bank & Trust. In contrast, states such as Florida and Illinois have more friendly laws toward credit unions acquiring banks and that helps drive the number of these transactions there.
In 2020, the $16.3 billion-asset.Suncoast Credit Union in Tampa called off its deal to buy the $747 million-asset Apollo Bank in Miami due to regulatory delays tied to COVID-19. Then in 2022, the deal between the $13.7 billion-asset VyStar Credit Union in Jacksonville and the $1.6 billion-asset Heritage Southeast Bank in Jonesboro, Georgia, was canceled when regulatory approvals could not be obtained in "timely manner," the boards for both institutions said. Those were the two largest credit union-bank deals ever announced.
Additionally, these transactions are vehemently opposed by banking trade groups. The Independent Community Bankers of America and the American Bankers Association have said repeatedly that the deals are a blatant example of the unfair advantage credit unions get through their tax exemption. It creates an uneven playing field where other banks simply can't compete on price with credit unions to acquire the selling banks.
The ICBA recently sent a letter to the 118th Congress in which it once again asked for a "re-examining" of the credit union tax exemption.
"Today's behemoth, growth-oriented credit unions are leveraging their tax subsidy to purchase tax-paying community banks. This trend is reducing consumer choice and eroding the tax base of states, localities and the federal government," the ICBA wrote.
Bankers believe credit unions have pursued bank acquisitions primarily to expand their geographic footprints and to gain commercial lending expertise and talent — points that credit unions would probably not argue.
But the banking trade groups also say the transactions, and the profit motives behind them, move credit unions even further from their intended, humble mission of reaching the underserved as not-for-profit organizations.
"At the end of the day, these acquisitions demonstrate that credit unions are now overtly leveraging their tax subsidy to gain a competitive advantage over community banks. That's not what Congress intended when they exempted credit unions from federal taxes, and we urge lawmakers to closely examine this troubling trend," said Robert Flock, vice president in the office of strategic engagement for the American Bankers Association.
Do these deals pay off?
However, it's important to note that small banks looking for buyers — such as Premier — have not gone kicking and screaming into these agreements with credit unions. The operating and regulatory environment can be challenging for smaller banks. And the management teams at these institutions are simply taking the best deal they can find, said Dennis Dollar, a credit union consultant and former chairman of the National Credit Union Administration board.
Dollar said despite the way the transactions are sometimes portrayed by the banking trade groups, there is no such thing as a hostile takeover or unsolicited purchase of a bank by a credit union.
"They are sales of bank assets and/or deposits to a credit union that were initiated by the bank itself," Dollar said. "There has never been a purchase by a credit union against the will of the bank involved."
Bell, the attorney at Honigman, said every buyer is different, but there are three main strategic thrusts that are driving these deals: Geographic expansion, liquidity and the addition of talent.
Most of Bell's credit union clients are repeat buyers or will be repeat buyers once the right opportunity arises. He said that fact alone shows that the transactions deliver the results sought.
"These transactions, financially and strategically, are the optimal method of non-organic growth," he said.
Perhaps the largest and most surprising takeaway has been the consistent lack of bank-customer runoff in the transactions, Bell said. He said the vast majority of bank clients become credit union members, with a maximum attrition of about 2% so far.
"Customers simply do not move," Bell said.
Luis Dopico, chief economist for the consultancy CU Collaborate, said tracking those bank customers is tricky because bank call reports don't include data on number of customers and publicly-available data on credit unions doesn't disaggregate data per branch.
"We have a list of branch addresses, but that is it," Dopico said. "Without detailed cooperation from the individual institutions, this would seem extremely difficult to assess independently."
GreenState's membership doubled in the past three years, to nearly 412,000, at the end of 2022. By comparison, the credit union industry overall experienced a 12% membership growth, to 134.3 million members, during the past three years, according to the latest data from the NCUA.
But GreenState did see a runoff of roughly 10% of the customers that it acquired through the first two bank acquisitions, said Jim Kelly, chief marketing officer.
The conversion for the most recent bank acquisition has not yet occurred, so data on those members is not yet available. Kelly said most of the bank clients who were lost were purged due to dormancy of the accounts.
"I can safely say that the number of new customers that came to us in these markets far outweighed the 10% loss. So it has been a net positive," Kelly said.
In addition, GreenState earned nearly $115 million in 2022, a 33% increase compared with three years earlier when it first acquired a bank, according to call report data from the NCUA.
Again, however, it's difficult to determine how much of that increase came from the bank purchases versus other factors, such as rising interest rates.
For DFCU Financial in Dearborn, Michigan, the 2022 deal to acquire the $689 million-asset First Citrus Bank in Tampa, Florida, was more about entering a booming market to supplement its Michigan footprint.
President and CEO Ryan Goldberg said Florida was attractive because it is a high growth market and DFCU already has "several thousand" Michigan members who frequent Florida, either as seasonal residents or vacationers.
DFCU also wanted to expand its commercial banking portfolio. He called the credit union's existing operation a "startup" but said First Citrus built itself through commercial banking.
"So in a very quick period of time, we have significantly increased the commercial expertise, the number of commercial clients and the size of that book of business," he said.
The ABA's economic researchers found the average member business loan ratio for credit unions that have acquired banks is 12.1%, or more than double the industry's average ratio of 5.9%. Under current law, credit unions are restricted from lending more than 12.25% of total assets to member businesses.
Besides helping the bottom line at the buying credit unions, the industry has argued that these transactions are good for the impacted communities. The Credit Union National Association said all one needs to look at is branch opening and closing activity to see the benefits of the deals.
CUNA said when banks buy other banks it often results in branch closings, employee layoffs and redirecting local resources out of state. The number of total credit union branches increased by 1,524 since 2004, while bank branches decreased by 5,938 in the same time period.
Between 2008 and 2016, banks closed branches to such an extent that it created 86 new banking deserts, with no banks within a 10-mile radius of populated areas, according to CUNA.
With this in mind, many banks are specifically choosing to sell to credit unions for what they bring to the table: local consumer and community focus, CUNA said. In fact, the promise of keeping branches open and employees on staff were some of the top reasons banks cited for selling to a credit union, according to research from CUNA.
"While bank sales to credit unions do not account for the branch growth cited, the growth itself demonstrates credit union focus on the service to areas at a time when banks are reducing access and leaving," said Jim Nussle, president and CEO of CUNA.
And credit unions that are looking to grow and expand their market footprint prefer bank purchases because they are often less expensive than going de novo into a new market with new branches, marketing and staffing, Dollar said.
Credit unions can also be good purchasers because, unlike other banks that want to buy another bank's assets with stock, they have no stock to offer. That means all of these deals are cash-only, and that may be appealing to some sellers.
"[F]rom a credit union standpoint, it is much more a transactional market expansion than are de novo entries into new markets or even mergers with existing credit unions because of membership differences, the desire for board seats, retention of institutional name and the like," he said.
Crossing the $500 million-asset mark helps credit unions improve membership numbers and loans, but regulatory data shows that many are choosing to stay small. The reason may be more emotional than practical.
Many of the credit union-bank deals struck so far have been in Florida, but that may not be the case going forward simply because there are few bank sellers left in the Sunshine State, according to Charley McQueen, president and CEO of McQueen Financial Advisors.
McQueen has advised 26 credit unions on bank deals. He said instead of Florida, credit unions will likely turn their attention to places that are seeing population declines, such as Illinois, and Chicago, specifically.
"There's a lot of institutions for sale there. And they've got a very terrible tax policy," McQueen said.
He also listed states including Texas, Tennessee and Arizona as likely future hot spots for these types of deals due to their favorable tax policy and fast-growing populations.
"We're seeing population growth in those markets, and I expect you're going to see [credit unions] wanting to get into those markets," he said.
Dollar said if banks want to slow down the number of their own brethren selling their assets or deposits to a credit union, those same banks need to step up their offers and buy the banks themselves.
Short of that, credit unions will continue to fill the void.
"I know of no credit unions that have finalized a purchase of a bank's assets that have not been pleased with the results," Dollar said. "Sometimes the positive results take a few years to materialize, but the return is there in almost all cases."
And while state and national bank trade groups continue to sound the alarm that credit unions in general and these deals in particular are a threat to the long-term viability of community banks, Dollar said they are simply proof that the economic system is functioning as intended.
"This is the free market at work," Dollar said.
