The Rise of Credit Union-Bank Acquisitions

The first credit unions were established in Germany in 1864 as a way for community members to pool their resources so everyone had access to capital that could boost their standard of living. But in the United States, the first credit union wasn’t established for another 45 years, when St. Mary’s Cooperative Credit Association opened in Manchester, New Hampshire in 1909. The Federal Credit Union Division was established in 1934, which led to steady growth in the number of credit unions in the US for the next 35 years.This started to reverse course around 1970. Since then, the number of credit unions in the US has shrunk from 23K to just over 5K today. However, the total number of credit union members and assets has actually grown during this time.What explains this apparent dichotomy? Put simply: mergers and acquisitions. The credit union industry has been following the consolidation model of the banking industry, with larger credit unions gobbling up smaller (sometimes struggling) ones. This enables smaller institutions to scale up and offer more products and services and advanced digital capabilities. A New TwistIn recent years, credit unions have expanded their acquisition strategies, targeting not just other credit unions but also banks. As of late September, 16 credit union-bank acquisitions have been announced in 2024, tying the previous record of 16 acquisitions set in 2022.What’s more, credit unions are acquiring larger and larger banks. The biggest bank acquired by a credit union in 2023 was $338MM-asset Western Heritage Bank, which was acquired by Nusenda Credit Union, a $4B-asset institution in New Mexico. This trend has continued in 2024, with several proposed acquisitions of even larger institutions, including Washington-based Gesa Credit Union’s proposed acquisition of $606MM-asset Security State Bank and Alaska-based Global Federal Credit Union’s acquisition of $1.5B-asset First Financial Northwest Bank.In June, Arizona-based Pima Federal Credit Union announced plans to acquire Republic Bank of Arizona for a price that represents a 91% premium to the bank’s closing share price. This is the second-highest premium among deals in which credit unions have acquired banks over the past year, trailing only the 119% premium paid by Hudson Valley Credit Union when it purchased Catskill Hudson Bank in January. As of June 4, the total assets of banks being acquired by credit unions exceeded $7.2B. This is already higher than the annual record of $5.15B for such acquisitions, which was set in 2022. Credit unions have accounted for 21% of buyers in bank acquisitions so far in 2024 as of June 3.Reasons Behind the TrendIndustry analysts point to several reasons why banks are attractive acquisition targets for credit unions. For some credit unions, banks present an opportunity to expand into markets they haven’t been able to enter before. Acquiring a bank may also allow a credit union to add more brick-and-mortar locations, offer additional products and services, and boost small business lending efforts. Credit unions also have incentive to acquire banks for commercial banking and treasury management expertise without having to build out a new division from scratch within the credit union.Another possible reason for credit unions to seek out M&A deals is the restrictions credit unions have on their lending capacities. Credit union member business lending is capped at 1.75x their net worth, or 12.25% of their total assets. This requirement hinders credit unions’ lending unless they acquire more capital, spurring them to seek out other institutions to acquire or join forces with. Perhaps the biggest factor, however, is the tax-exempt status enjoyed by credit unions, which often enables them to bid higher for acquisition targets. Some banks and institutions, including ICBA, are pushing back against this, which they perceive to be an unfair advantage for credit unions when it comes to acquiring other banks.As the financial landscape continues to shift, credit union-bank acquisitions are becoming an increasingly important trend to watch. While credit unions expand their presence through these deals, community banks are raising valid concerns about the long-term implications. Whether this trend will accelerate or slow down as market conditions change remains to be seen, but staying informed and understanding both sides of the issue will be critical for financial institutions navigating this evolving environment.