With turbulent economic forces piling pressure on small financial institutions, consolidation is a growing trend in the US financial services sector. This has brought many mergers between credit unions – and another outcome is the record number of purchases of banks by credit unions.
The emphasis is still on consolidation within the sector: the National Credit Union Administration (NCUA) says there have been 900 mergers from 2016 to 2020. But S&P Global figures show that 13 banks were acquired by credit unions in 2021, and industry observers such as Michael Bell, finance expert at Detroit law firm Honigman, expects at least 25 more such deals this year.
“My prediction is based on the work and deal flow I am seeing,” he told American Banker. “I spend most of my time working on these deals, and I have never seen so much activity.”
Bank purchases are a strategy highlighted by US credit union representatives at the recent Association of British Credit Unions (Abcul) conference. Eric Broome, from Georgia’s Own Credit Union, told delegates that mergers, acquisitions and private partnerships are a valuable mechanism for US credit unions to grow the scale and the raise capital they need to keep up with digitisation and increasingly competitive markets.
He said his credit union has already bought one small single-site bank and is preparing to buy another, as part of a strategy that includes developing a crypto-currency option, partnerships with fintechs, developing holding companies and sharing back office functions with other credit unions.
But it is important to plan things properly and find the right bank to buy, he warned. “You have to have a strategy. You can’t just do it willy nilly … you have to assess strengths and weaknesses to find the right partners, and make sure it’s a collaborative process.”
Other examples from the sector include acquisitions by GreenState Credit Union of North Liberty, Iowa, of four banks in 2020 and 2021, and two bank purchases by Orlando, Florida’s Fairwinds Credit Union – moves which, the credit unions say, deliver new product lines, expanded memberships, asset growth, efficiency and infrastructure such as ATM networks.
This trend has prompted howls of protest from the US banking sector – which already has its knives sharpened for credit unions over their tax-exempt status. Credit union apex bodies such as the National Association for Federally Insured Credit Unions (Nafcu) have been defending this for several years against an aggressive campaign from the banking lobby.
Banks have been bringing legal challenges to individual credit union acquisitions, with tussles in Nebraska, Colorado, Iowa and Tennessee – where a court battle is raging over a proposed purchase by Orion Federal Credit Union of Memphis-based Financial Federal Bank, which has assets of US$818m (£683m).
In November 2021, Davidson County Chancery Court Judge Patricia Moskal placed an injunction on the deal, while she assessed the implications of the Tennessee Banking Act.
At the end of May, Moskal lifted this, ruling that the act allowed the purchase because the credit union is acquiring the bank’s assets, not its charter or stock.
But the state regulator, the Tennessee Department of Financial Institutions (TDFI), which opposes the deal, has struck back, filing an appeal at the end of June to overturn the ruling.
Moskal, in her ruling, said the TDFI has approved similar transactions when the acquirer was a state-chartered or out-of-state bank. “The legislature could have included a limitation on the types of entities permitted to purchase the assets of a state-chartered bank, but it did not do so,” she wrote.
But submitting his appeal against Moskal’s ruling on 14 June, TDFI Commissioner Greg Gonzales argued that Financial Federal account holders would be “irreparably harmed and disrupted” by the deal, along with the state’s banking system.
The Tennessee Bankers Association is also hostile to the deal. In a blog post, its president/CEO Colin Barrett wrote: “Unfortunately these deals have been on the rise around the country in recent years.” He said Financial Federal is “a strong, well respected Memphis bank” while Orion, which “began as a small credit union whose mission was to serve teachers in Memphis” had used “its tax advantaged status and weak regulatory oversight to grow to a position where it can acquire a $750m bank”.
Barrett accused Orion of abandoning its “desire to serve people of modest means” with a move that would turn it into a near $2bn financial institution. “Bank acquisitions by credit unions have fuelled passionate discussions by the TBA board over recent years,” he added. “There is debate about whether these acquisitions should be prohibited in statute, even if they already are. And there is discussion around what can be done at the state and local level to rein in credit unions.
“But whatever we do on the state level will continue to pale in comparison to the work that needs to be done in Congress. Whether it is credit unions buying banks, expanding their business lending or opening their membership to anyone who can fog a mirror, the part I find most frustrating is the blind eye turned by members of Congress.”
Nafcu has been among the credit union bodies working to fend off such attacks from the banking sector. In a briefing note, it says: “Mergers between credit unions and community banks are not new and have occurred over the last decade as the rate of financial institution consolidation has increased.
“Overwhelming compliance burdens and costs since financial crisis and enactment of the Dodd-Frank Act have made it harder to survive as a community bank or credit union. This has caused financial industry consolidation, which has led to fewer and fewer merger options.”
It says regulatory relief for community institutions would help slow the consolidation trend, adding that mergers between banks and credit unions “represent a tiny percentage of overall mergers in the financial services sector”.
These mergers are “typically a win-win”, argues Nafcu: while credit unions get to expand, local people see the protection of community-focused financial services, local jobs and branches, which might be lost through a sale to a national bank. “Credit union-community bank mergers often mean employees retain jobs and branches remain open with a focus on the members in the community,” it argues.
“Big banks, on the other hand, are focused on profits and making money from a merger. A look at the financial health of community banks that have recently merged with credit unions shows that those institutions are generally less-profitable, and thus less attractive, as potential merger partners for larger for-profit banks.”
But the road to mergers remains rocky. As well as opposition from the banking sector, hurdles include the time it can take to complete a deal.
And regulator the National Credit Union Administration caps business loan rates for credit unions at 12.25% which is a bar against buying a bank with a large commercial portfolio. Credit unions also face regulatory questions over how bank customers fit into their field of membership, if carried over as members.
One example which shows the challenges that face the sector is recent attempt by Jacksonville, Florida-based VStar Credit Union to merge with Georgia community bank Heritage Southeast which was – called off in June after the boards of both organisations decided there was no “clear path forward to obtaining the regulatory approvals needed for closing”.