Although credit unions have been acquiring banks for nearly 20 years, the banking industry has recently intensified its efforts to slow the pace of activity. The pushback is partially due to the aggregate number of credit unions buying banks – roughly 100 have taken place since 2003 – and that the purchases are, on average, becoming more significant.
A case in point is Midwest Community Bank in Freeport, Illinois, which recently became the 12th bank to agree to be sold to a credit union this year. Overall, the credit union industry could eclipse the all-time high of 16 bank acquisitions announced in 2019.
The Independent Community Bankers of America (ICBA), which has objected to these transactions for years (largely citing the tax-exempt status of credit unions), sent a letter to Treasury Secretary Janet Yellen in July recommending that the federal government assess an exit fee on credit unions when they buy banks.
This proposal represents an interesting shift for the ICBA, one that we will look at more closely below.
More Sales or Heftier Buys?
To be sure, credit unions make up a small fraction of bank acquirers. However, the average bank selling to a credit union has nearly $500 million in assets now, roughly doubling the average from 2019. Earlier this year, a $1.6 billion-asset Georgia bank agreed to sell to a credit union.
More credit unions are relying on bank acquisitions to add expertise in commercial lending. This is particularly concerning for the banking industry since credit unions have been steadily increasing their dealings with small and midsize businesses.
The number of states where these deals are occurring is also expanding. It’s reasonable to assume that subsequent combinations can be finalized more smoothly once a precedent is set with a state’s regulators. However, the state regulator in Colorado blocked a credit union-bank merger in early 2020.
If You Can’t Stop Them, Tax Them
The ICBA has advocated for years that legislators should revoke credit unions’ tax-exempt status, arguing that it creates an uneven playing field. By extension, bankers have pushed for a prohibition on credit unions buying banks.
The decision to call for an exit fee to compensate for the loss of a tax-paying bank seems to acknowledge, on some level, that efforts to stop these types of acquisitions are not gaining traction.
While the ICBA could urge banks to reject overtures from credit unions (53% of bankers in a recent survey said they would reject bids from credit unions even if they were the best offer), executives and boards have legal responsibilities that encourage them to remain open to offers that make the most sense for their investors.
Credit unions, which do not have stock, pay cash, allowing a seller’s shareholders to liquidate their investment quickly. Due to their tax exemption and favorable accounting rules, credit unions can often outbid banks.
Any exit fee applied to a credit union-bank transaction could alter the math associated with the deal. Credit unions might have to find other ways to offset that expense to make the financial modeling work.
The Bottom Line
ICBA’s pivot sends two messages:
- For the banking industry: As much as bankers would prefer, it is unlikely that credit unions will be barred from buying banks. Nor is it likely that credit unions will lose their tax-exempt status. While pushing for a special assessment (the aforementioned exit fee) is a novel approach, the key for a bank’s long-term success remains executing on a forward-thinking business strategy that involves finding new revenue streams and keeping costs in check.
- For credit unions keen on buying banks: Monitor the ICBA’s initiative. The potential for a new cost associated with bank acquisitions highlights the need to reevaluate and reconcile a wide array of supplier contracts for potential acquisition targets.
Regardless of where your institution stands on the spectrum, SRM is ready to help with the time-consuming and fiscally critical task of developing a payments strategy and navigating the contractual complexities (and costs) associated with acquisitions.