Low-Key Acquisitions: Credit Unions Restart Community Bank M&A Wave

In August 2020, Crane Credit Union, with assets of $635 million, announced the acquisition of Our Community Bank in Spencer, Indiana, intensifying the growing debate between community bankers and their nonprofit counterparts, credit unions.

The trend of credit unions acquiring community banks has been a thorn in the side of some community bankers and industry groups, including the Independent Community Bankers of America (ICBA). They argue that the purchasing power of nonprofit institutions shows they have strayed from their mission of serving low- and moderate-income families.

Crane Credit Union's acquisition of Our Community Bank, with $74 million in assets, for $13 million in cash, was its second such deal in two months. The credit union announced in June plans to acquire Southwest Community State Bank of Indiana, with $89 million in assets, for an undisclosed amount.

The planned acquisition of Our Community Bank marked the sixth credit union-bank merger of 2020 and the third in Indiana.

This trend has raised concerns for Lucas White, president of the Indiana Bankers Association. White also serves as president of The Fountain Trust Company, a community bank in Covington, Indiana. He said, "I think if credit unions want to buy banks, they should become banks." He added, "Indiana has been particularly affected. Over the past year, we've announced eight acquisitions, five of which were credit unions buying banks. In just the past year, credit union acquisitions of banks have outnumbered bank acquisitions of banks."

Merger motivations

The ICBA says this trend highlights an uneven playing field that allows tax-exempt credit unions to offer higher prices to banks that must answer to shareholders. Our Community Bank was in this situation when it first approached Crane Credit Union. The bank did not actively seek a sale, but its president and CEO, Kurt Rosenberger, said the board had discussed the possibility of a strategic acquisition.

Rosenberger cited a series of reasons why the bank needed to sell: increased competition from nonbank lenders, the high cost of technology upgrades, the growing need for "unaffordable specialized talent," and "oppressive regulatory pressure" that limited bank staff and their capabilities. He said, "While we kept up with regulatory requirements and had good relationships with regulators, paying for experts and staying current eroded profits. Spending money on non-revenue-generating activities with a small staff made it difficult for us."

Maintaining a full-service, locally focused financial institution became increasingly difficult, Rosenberger said, and in a low-interest-rate environment, the bank expected these factors not to change for several years. Additionally, shareholders found it difficult to sell their shares. He said, "We have a fiduciary duty to our shareholders to act in their best interests and enhance the value of their investment."

A return to trend?

The ICBA has been one of the strongest critics of credit unions acquiring banks. Last year, the organization launched a campaign called "Wake Up," proposing legislative and regulatory recommendations and conducting grassroots advocacy to help community banks urge policymakers to review credit union practices. The group has been blunt in opposing what it sees as credit unions' "risky practices, costly tax subsidies, and irresponsible lax regulation."

Paul Merski, ICBA's group executive vice president for congressional relations and strategy, said, "Credit unions buying banks is basically an abuse of subsidies. Taxpayers subsidize the credit union industry by more than $2 billion annually, and it's been going on for decades. Credit unions can grow tax-free and then use that tax advantage to replace taxable entities, driving taxpaying banks out of the market and converting them into nontaxable entities. That's a perverse use of the credit union tax exemption."

Ryan Donovan, chief advocacy officer for the Credit Union National Association (CUNA), argues that the ICBA's opposition to credit union-bank mergers is a membership retention strategy. He said, "I think the ICBA's strong opposition to these deals is because when a bank sells to a credit union, they might lose an association member. If you talk to bankers, they'll tell you they want all options available because they have a responsibility to evaluate all options for shareholders. Banks and trade associations say different things because their interests differ."

Credit unions have maintained their tax-exempt status since the Federal Credit Union Act was passed in 1934. Under the law, these nonprofits were established to "promote thrift among their members and create a source of credit for provident or productive purposes."

Rodney Hood, chairman of the National Credit Union Administration (NCUA), which regulates nonprofits, told lawmakers at a House Financial Services Committee hearing on financial regulation in December: "Credit unions now serve one-third of the American public." According to a September trends report from CUNA Mutual Group, total credit union membership reached 124.6 million in July.

Hood's remarks at the end of 2019 capped a year that saw a record 16 credit union announcements of bank acquisitions, breaking the previous high of 9 in 2018. This growth caught the attention of some lawmakers, including Rep. Blaine Luetkemeyer, R-Mo., who said he was "concerned that a war is starting to break out between credit unions and community banks."

Hood defended the trend, telling the committee that 32 credit unions had acquired bank assets over the past seven years, while "in just the past year, there were about 250 bank-to-bank acquisitions." He said in some cases, if credit unions had not decided to acquire community banks, some areas would have lost banking services, leaving residents "vulnerable to predatory payday lenders."

Is Congress paying attention?

The COVID-19 pandemic slowed the pace of credit union-bank deals. However, Michael Bell, co-leader of Honigman's financial institutions practice group, told Banking Dive in May that merger talks might be temporarily on hold. He said, "Depending on when the pandemic ends, I expect everything that's paused will heat up quickly. So either it will be very busy at the end of this year, or 2021 will be busier than originally planned."

Florida-based Suncoast Credit Union's planned acquisition of Apollo Bank in Miami, which would have been the largest credit union acquisition of a bank since 2012, fell through in May. Suncoast CEO Kevin Johnson attributed the termination to COVID-19-related issues. He said, "The coronavirus changed the value of our agreement and left us facing an unpredictable future." He added that the two institutions might reconsider the merger after the pandemic ends.

But recent growth in Indiana has led some to question whether lawmakers will refocus on these deals. White said, "I hope buying banks is the straw that breaks the camel's back, making Congress realize 'enough is enough, they've gone too far, and action must be taken.'" Merski believes Congress should have long ago reviewed credit unions' tax-exempt status and their growing interest in acquiring community banks. He said, "There needs to be hearings on credit union tax exemptions and the acquisition of taxpaying banks. Hearings of this nature haven't been held in over 15 years."

However, Donovan believes the pandemic has shifted lawmakers' attention elsewhere. He said, "We don't think it's a priority for them, and I don't see any evidence that it is." Rosenberger said, "Trade associations have opposed the credit union tax exemption for years, but I haven't seen any change or progress. I don't know which direction the industry will go, but clearly it's not a priority for those in power."

Same competition

Credit unions seek mergers for the same reasons other financial institutions seek growth: increased competition. Despite the conflict between credit unions and community banks, both say they face greater competition from larger institutions with bigger technology budgets and increasingly agile fintech companies.

White said, "Big banks don't care, or at least not as much as banks our size, because they're no longer considering acquiring these small community banks. They're focused on bigger deals." Kirk Hovde, managing director and head of investment banking at Hovde Group, told S&P Global that credit unions provide an additional pool of buyers for small banks overlooked by large financial institutions. He said that given industry consolidation, small banks might be less attractive to big banks. "Large, serial bank acquirers are getting so big that a $100 million or $200 million bank for sale won't make much of a difference." He added that credit unions have no shareholders to answer to, so they can often pay higher prices for such deals. "Credit union cash is equivalent to bank cash. For banks looking for liquidity and immediate cash-out, this is becoming a viable option."

Rosenberger said there is "no doubt" this trend will continue, noting that community banks have been consolidating for the past two decades. "Recently, credit unions have also gotten involved, partly because there aren't many small banks left." But for community bankers like White, this trend further highlights what he calls the unfair advantage credit unions enjoy. He said, "When a community bank wants to grow through acquisition and has to compete with a credit union to make a competitive offer, the fact that they don't pay taxes makes it nearly impossible for us to compete at a similar price. It's frustrating."

But given the state of the industry, Rosenberger said selling to Crane Credit Union was the best option for the community bank. He said, "I think trade associations have a responsibility to consider all members, whether large or small banks or other institutions. While I understand their arguments, individual banks must make decisions based on what is best for stakeholders, shareholders, community members, and employees." Rosenberger said changes in industry dynamics won't only affect small institutions like Our Community Bank. "Change is coming. Fintech will have a profound impact on the industry, and people currently underestimate that. It won't be small community banks, but mid-sized banks that will merge."