Credit unions acquired a record number of banks last year to expand into commercial banking while growing their member bases. While bank lobbyists continue to portray such deals as an example of credit unions abandoning their original mission and misusing their tax-exempt status, CUs say the deals benefit the same communities banks serve.
Pushback on such deals comes as credit unions continue to grow. Loans at credit unions have increased 8.8 percent on an annualized basis, higher than the 8.0 percent average growth for banks, according to McKinsey & Co. The number of CU members increased 44 percent to more than 135 million in 2022 from 94 million in 2012.
One example of a credit union expanding is Dearborn, Mich.-based DFCU Financial, which in late 2022 entered Florida by acquiring Tampa-based First Citrus Bank. DFCU has since also acquired MidWestOne Bank’s Florida operations in the Naples-Marco Island and Cape Coral-Fort Myers regions. DFCU Financial also is acquiring Florida-based Winter Park National Bank, a deal which is expected to be completed this year.
DFCU Financial President and CEO Ryan Goldberg attributed the growth of his credit union to its focus on consumer deposits. The state of Florida also fits DFCU’s need for a higher growth market: The credit union identified five of the top seven metro areas in the Sunshine State as potential areas for expansion. A significant number of Michigan DFCU members were already doing business in the state, either through having a second home or as a vacation spot.
DFCU approaches M&A as part of a three-pronged growth strategy — organic expansion through adding individual bankers; community engagement and marketing; and opening branches in underserved areas. The credit union also is looking for value accretion by acquiring like-minded financial companies.
The expansion has exceeded DFCU’s income expectations while being met with extensive customer support, Goldberg said. “While there is a fair number of miles between Michigan and Florida, there is a lot more connectivity than maybe people would see at the initial scan of a transaction like this,” Goldberg said.
A record pace
Twenty-two CU-bank M&A deals were announced last year, surpassing the previous record of 16 in 2022. Several were announced last year in the Upper Midwest:
- Oshtemo, Mich.-based Advia Credit Union continued its expansion by acquiring Chicagoland-based NorthSide Bank. The credit union had already acquired Janesville, Wis.-based Mid America Bank in 2016 and Peoples Bank in Elkhorn, Wis., in 2017.
- Wabash, Ind.-based Beacon Credit Union acquired Salem, Ind.-based Mid-Southern Savings Bank. The acquisition was Beacon’s first of a community bank.
- Moline, Ill.-based Empeople Credit Union announced its pending acquisition of Lomira, Wis.-based TSB Bank.
- Sioux Falls, S.D.-based Levo Credit Union acquired a branch from Spicer, Minn.-based Heritage Bank.
CU-bank buys will be a “small but viable piece” of the broader M&A environment in the years to come as an option for banks lacking other opportunities, predicted Michael Bell, partner and chair of the Financial Institutions Practice Group at Honigman LLP.
Bell sees small banks as continuing to sell because of a lack of succession planning, challenges finding employees, and the costs of fraud and digital banking. The equity of closely-held banks has been tied up, leaving them unprepared for an emergency.
“That’s forcing this consolidation that’s present up and down the food chain, not just at the smaller end of the market,” Bell said. “I am seeing it as more intense, or the most intense it’s ever been.
“I expect 2025 to be the same,” he added. “Does that mean a few more, or a few less? I can’t predict that, but activity levels remain at an all-time high … I am as busy as I have ever been.”
Assets involved in CU-bank acquisitions were five to six times higher than in 2023, said Cornerstone Advisors Managing Director Ryan Brogan. He expects the overall number of such deals will fall this year as banks feel less pressure to sell amid relatively stable interest rates and a more business-friendly regulatory environment during President Donald Trump’s second term.
TruStar Advisors Partner Craig Mueller also expects the pace of CU-bank deals to increase. Relatively large credit unions such as Apple Valley, Minn.-based Wings Credit Union and Eau Claire, Wis.-based Royal Credit Union are less anxious as they have deals under their belt, he said. Newer CUs are ready to jump into the market for the right deal.
‘We are being chosen’
CU subordinated debt has increased every quarter since the start of 2020 to fund organic and inorganic growth, according to S&P Global. However, CUs have recently held off on issuing subordinated debt as it became more expensive due to higher interest rates. Among the top 20 CUs with the most outstanding subordinated debt as of the second quarter of 2024, four had announced bank buys since 2021, according to S&P Global.
The growth in subordinated debt followed a rule change from the National Credit Union Administration that increased the number of credit unions that can access the funding. Credit unions had previously relied solely on retained earnings to make acquisitions.
As a sizable number of community banks are open to selling to credit unions, banking trade groups remain steadfast in their belief that credit unions are straying from their mission of serving a narrow sliver of members. The American Bankers Association and Independent Community Bankers of America have called for Congress to hold hearings on such acquisitions. Both groups support ending credit unions’ tax-exempt status.
“Credit union purchases of banks signify the credit union industry’s priorities — leveraging their tax-exempt status to dramatically increase their footprint,” according to ABA prepared testimony last spring before a House Financial Services subcommittee.
“ICBA and community banks are particularly alarmed by the recent trend of credit unions acquiring banks — effectively ‘weaponizing’ their tax subsidy and lax regulatory standards,” according to the ICBA. “Larger, out-of-market credit unions are displacing smaller, locally based community banks and other credit unions, creating an environment that is less competitive, has more systemic risk, and offers fewer choices for consumers and small businesses.”
Community banking advocates say each CU-bank acquisition increases the portion of the financial services industry exempt from Community Reinvestment Act standards for lending to local low- and moderate-income consumers and small businesses. The ABA has called for credit unions to also be required to meet CRA lending standards. Community banks contribute $15 billion in annual tax revenue, while credit unions’ income tax exemption is worth approximately $4 billion annually based on the industry’s net income, said ICBA President and CEO Rebeca Romero Rainey.
Goldberg disagrees with those arguments, seeing credit union-bank acquisitions as a natural part of the free market. Credit unions also face operational constraints, Goldberg said, as they cannot acquire capital by selling stock, nor can they make an offer with stock. Bell noted that mergers between for-profit and nonprofit groups are common in other industries.
“These are transactions where we are competing with banks to portray what the best alternative is for these companies that want to find a partner,” Goldberg said. “These banks are being sold; they are not being bought, so there has to be an initiator at the bank. And that respective ownership group, board of directors has decided that the time is right to have a partnership with whomever it is.
“We are being chosen to be the recipient of these transactions because of what these community banking organizations are finding in terms of value in a partner.”
A losing battle?
The impact of bank lobbying to end the tax exemption for credit unions is lessening despite the rising number of deals, Mueller said. “Legislators are sick and tired of hearing about this whole credit union battle, and it becomes difficult to reignite the arguments when it’s been the same old thing over decades,” Mueller said.
“We understand and support the whole notion that, on one hand, it’s unfair to have a competitor that isn’t taxed, and it doesn’t look like the legislators really care, from my experience,” he added. “On the other hand, when we are representing a seller, which is probably the majority of our business to date, we have to bring up, if it is a possibility, that credit unions could be a possibility and they may have to pay up more than a bank.”
The ICBA contends that credit unions use their tax exemption to increase their purchase offer to one-and-a-half times book value. Sellers benefit when a non-bank buyer bids up the price; competing buyers, on the other hand, find it difficult to match bids from tax-exempt credit unions making all-cash offers. “ICBA urges Congress to end the unwarranted federal tax subsidy of the credit union industry and/or promote increased tax parity between credit unions and community banks,” according to the association.
Mueller said there are disadvantages to eliminating credit unions as a potential bank buyer. Having CUs included in the list of potential buyers increases the value of a selling bank 10-30 percent, Mueller added.
Cornerstone Advisors Managing Director Ryan Brogan does not support ending the tax exemption on credit unions, saying CUs have a different business model than commercially-focused banks. Credit unions have claimed their tax exemption has allowed them to serve areas that banks would not be able to serve.
Credit unions are much more likely than bank buyers to keep employees, since they are not focused on maximizing stock prices, Goldberg said. DFCU has kept most former First Citrus Bank employees, including every branch manager and business banker. Each former bank C-suite member now has a more substantial role than before the merger. DFCU also added financial consultants and residential lenders, while offering local employees more opportunities as part of a larger organization.
“If you start with the employees and you do the things that you need to do to make sure they are happy with the new, combined organization, that is going to come through to the customers,” Goldberg said. “Then, ultimately, they know that those relationships are still intact.”
Michael Bell is considered a pioneer in CU-bank acquisitions, undertaking the first transaction of its type in 2011 when Michigan-based United Federal Credit Union acquired the $81 million, Indiana-based Griffith Savings Bank. At the time, the legality of such transactions was unclear. “Why not give it a shot,” as both parties were willing participants, was Bell’s thought.
‘I’ll be surprised to see a change’
Banking trade groups feel they must make credit unions an enemy, Bell said. “This has been made political,” he said. “I don’t disrespect those lobbying groups. They are doing their job, but the politics do not represent the facts on the ground or the actual facts of the matter.”
Bell also accused the ICBA, a tax-exempt organization, of hypocrisy for the trade group’s frequent criticism of the tax exemption. “They don’t pay any taxes, nor should they,” Bell said of the ICBA. “I’m not saying they should, but they talk about these deals slapping the American taxpayer in the face. Hmm…”
Bell sees areas for community banks and credit unions to work together: Both want to fight the concept of ‘too-big-to-fail’ banks and regulations that disproportionately impact small banks.
Credit unions are sometimes one of the only available buyers of selling banks, added TruStar Advisors Partner David Stieber. Widely-held banks have a fiduciary duty to include credit unions in their list of potential buyers, if they offer a competitive price.
The risk gap between banks and credit unions as acquirers has narrowed in recent years as regulators are now more knowledgeable of such transactions. Whereas credit unions had to offer a significantly higher price than a competing bank several years ago, that difference has since eroded.
Diverging state-by-state views on CU-bank acquisitions still complicate such deals. Some states, including Florida, overtly allow a state-chartered credit union to merge with a bank. Others ban such transactions, with the majority of state statutes not taking a stance on the matter.
While there are no restrictions on credit union acquisitions of banks in Wisconsin, CUs are not allowed to acquire state-chartered banks in Minnesota. One deal altered due to the ban was Royal Credit Union’s planned acquisition of Lindstrom, Minn.-based Lake Area Bank. In 2021, Royal sued the state of Minnesota after the Commerce Department recommended that the planned acquisition be rejected. Lake Area later slimmed down the deal to include the sale of three branches to the credit union while selling its charter to Lino Lakes, Minn.-based First Resource Bank.
TruStar’s Mueller expects such transactions will remain in a legal gray area in Minnesota until the Minnesota Legislature provides clarity. The lack of certainty — along with the potential for time-consuming litigation — is a deterrent for potential deals, even if credit unions can offer more money. “I’ll be surprised to see a change in 2025,” Mueller said of the uncertainty.