Credit Unions Are Buying Community Banks: Here’s Why

  • A Michigan-based credit union becomes the seventh this year to seek to acquire a community bank.
  • Community bankers say credit unions are abusing their tax-exempt status to outbid banks in takeovers and gain an unfair competitive advantage.
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The news: Michigan-based credit union DFCU Financial said it plans to acquire First Citrus Bank of Tampa, Fla., in a deal estimated at about $105 million.

competitive threats to banks

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More on the deal: The combined entity will have approximately $7.1 billion in assets, nearly $800 million in equity and 33 branches in Michigan and Florida.

Ryan Goldberg, president and CEO of DFCU, said the agreement “represents DFCU’s initial expansion into Florida and a significant increase in commercial lending presence and expertise.”

It is expected to close during the fourth quarter of 2022.

Trendspotting: DFCU is the seventh credit union this year to announce its intention to acquire a bank.

Michael Bell, co-chairman of the financial institutions practice at Detroit-based law firm Honigman, told Financial Brand that he expects some 25 or more such deals to be announced in 2022. Bell has represented

credit unions

in about 40 complete bank transactions, in addition to bank branch purchases, since 2011.

S&P Global spoke to two deal advisors working on bank and credit union takeovers, who said they “anticipate around 20 such announcements in 2022.”

In 2021 there were 13 cases of credit unions buying banks, but the all-time record of 19 such deals was set in 2019, according to American Banker.

What is the opportunity? Credit unions are using their acquisitions of community banks to enter new markets in other geographic areas, add experience and diversify their balance sheet, add members, drive economies of scale, and expand their business lending.

Agreements can also be a defensive move: the credit union could buy a neighboring community bank to prevent a competitor from entering or expanding its presence in the credit union market. Or credit unions might be looking for the most advanced digital capabilities of a bank.

In other words, credit unions do these deals for much the same reason that one community or regional bank would buy another.

What is the problem? Community bankers say credit unions are abusing their tax-exempt status to outbid banks in takeovers and gain an unfair competitive advantage. And they claim that these acquisitions have a negative impact on communities:

They result in lost tax revenue when a bank is acquired by a tax-exempt credit union.

Credit unions are not required to comply with the Community Reinvestment Act (CRA) and have no regulatory incentive to provide financing to low-income communities.

Analysis by the Government Accountability Office showed that credit unions now serve more middle- and upper-income customers, rather than “low-income” customers, the Congressional mandate behind the credit union tax exemption. Cooperatives of saving and credit. That adds to the banks’ objection to very liberal interpretations of membership rules for credit unions.

Legal Pushback and Lobbying Efforts: Colorado and Iowa have prohibited state-chartered banks from selling to credit unions. And the Independent Community Bankers of America (ICBA) and other community banking groups have pushed federal and state lawmakers to scale back dealings between banks and credit unions.

The ICBA proposed a 10% exit fee on a bank’s assets or liabilities when selling to credit unions.

Under another proposal, a tax-exempt entity such as a credit union that purchases a for-profit entity would lose its nonprofit status and assume the tax position of the acquired entity.

Will the trend intensify? When a credit union buys a bank, multiple regulators are involved. The legal process is more complex and the costs associated with the transaction are higher. So, as anomalous and alarming as they may seem, these acquisitions, relatively small in number, are unlikely to become an existential threat to community banks. Bank-to-bank deals will continue to dominate M&A activity in financial services. Bell told Bankbeat that he doesn’t expect more than 15 to 20 such transactions a year: “These will always be a minority and that won’t change,” he said.

Longer term, Biden’s executive order regarding consolidation could be a sign that the executive branch may eventually consider credit union acquisitions of banks.

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