Why Credit Unions Are Buying Community Banks Faster Than Ever

More than a quarter of the bank acquisitions in the U.S. this year were led by credit unions. While it seems a win-win for the banking public, these transactions come with steep challenges post-merger, like culture, customer retention and compliance. Critics — including some prominent voices on Capitol Hill — say the deals create unhealthy competition.

Credit unions are beginning to look a lot like your corner bank.

The member-owned financial institutions, known for their local focus and pledges to help underserved communities, are snapping up community banks and branches at a faster clip than ever before. The deals are expanding credit unions’ footprints geographically, while boosting deposits and allowing them to offer a wider array of products. The trend is also turning them into competition for retail banks.

More than a quarter of the acquisitions in the U.S. this year were led by credit unions, according to S&P Global Market Intelligence data through March. That’s up from just 5% between 2019 and 2021. Three out of nine of the most recent branch sales also involved credit unions.

Hudson Valley snapped up eight bank branches in upstate New York last month, marking its second banking acquisition so far this year. Attorney Michael Bell of Honigman, who advised Hudson Valley on the deal, said he has potential buyers ready to make deals in all 50 states.

“I have seen an absolute explosion on the sell-side,” he says. For Bell — who has been a part of the vast majority of these transactions in recent years — credit unions make attractive buyers because, without equity to offer, the deals are all-cash. In fact, the credit union industry is a net branch opener year-over-year, while the banking industry is a net closer.

“Credit unions have a deep consumer focus,” Bell says. “They use their branches in innovative ways — almost like billboards. I have clients with branches that don’t have any tellers in them at all.”

“Credit unions have a deep consumer focus. They use their branches in innovative ways — almost like billboards.

— Michael Bell

While it seems a win-win for the banking public, the deals come with steep challenges post-merger, including concerns over culture, customer retention and compliance. Critics — including some prominent voices on Capitol Hill — are even arguing the deals aren’t in the best interest of the communities the non-profit credit unions were designed to serve.

Credit unions can typically offer broader products and services to customers after an acquisition, including better technology to help with security and personalization, and often more desirable deposit and loan rates. Over the past 15 years of credit union deals, Bell says he has yet to see a “horror story.” The credit unions generally hire the bank’s employees, who often stay on board post-acquisition, and the customers aren’t bothered by the transition, he says.

“Credit unions are kissing cousins to community banks,” Bell says.

Banks are Rethinking Branches

The trend also highlights a strategic shift for community banks that are now being forced to think critically about location, says Peter Longo, vice president of digital banking at Finastra.

“The ‘Starbucks moment’ of having a branch on every corner is no longer viable,” Longo says. Instead, the opportunity for banks is to place branches strategically, where they become community hubs or can help address specific needs of the area they serve. It requires a quality-over-quantity approach with careful consideration about where and why, he says.

On the other hand, branches have been central to the business strategy of credit unions, and the acquisitions can help expand into new areas, like small business and commercial lending, and drive economies of scale, Longo says. Credit unions also aren’t beholden to shareholders and turning a profit like traditional banks. As long as they maintain good service, credit unions are free to explore possible acquisitions.

“Credit unions [are] increasingly competing directly with traditional banks by expanding their service offerings and market reach,” he says.

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Three Pillars Post-Acquisition

Acquisitions can be difficult undertaking for any financial institution and that’s no different for credit unions. For Sanjay Sharma, global head of private banking at SEI, post-merger transitions become a critical time for credit unions that can determine the success of the deal. Important areas to focus on are compliance, taxation and culture, he says.

Banks, unlike credit unions, are regulated by the Federal Deposit Insurance Corporation, meaning compliance becomes critical. Some of the accounts transferred over from the banking side will have to be transitioned accordingly, he says. “Step one is purely from a governance standpoint of how you’re transitioning the business to your side,” Sharma says.

“Credit unions [are] increasingly competing directly with traditional banks by expanding their service offerings and market reach.”
— Sanjay Sharma, SEI

Because credit unions are not taxed the same way as banks, the tax implications in any given year are not always clear cut. By their very charter, credit unions are often tax-exempt — meaning they are not required to pay federal taxes. Their non-profit designation also comes with significant tax implications. Taxation can turn into a “broken pyramid” after an acquisition with bank deposits being taxed only part of a fiscal year, he says.

For Sharma, everything depends on culture. A major part of the post-merger equation is ensuring that employees from both organizations are communicating and interacting efficiently. This process can take at least three months, he says. It may sound simplistic, but Sharma recommends the “buddy system” for employees. Assign each employee a person they can call with questions or suggestions, or mandate employees meet face-to-face.

“If you don’t integrate people, it’s highly likely that those entities will continue to operate as if they are separate entities,” Sharma says.

Banking Pushback

Some states are fighting the credit unions in court filing lawsuits to block or ban buyouts altogether. Without having to pay federal taxes or meet requirements to serve low-income communities, critics argue credit unions compete unfairly with banks and are not helping the underbanked — the very reason some credit unions were created.

Mississippi became the first state to pass legislation banning bank purchases by credit unions in 2022, claiming they have unfair advantages because they do not pay taxes. Instead, state-chartered banks in Mississippi will only be allowed to sell to FDIC-insured corporations.

Credit union deals have been shot down in Tennessee, Minnesota and Nebraska, which join a laundry list of other states who have opposed the transactions, according to data from S&P Global.

Each credit union buyout means less taxable revenue and more competition for banks.

“They’re pushing back and some have even banned them altogether,” Sharma says. “Credit unions are in a position to offer better service or better products — and that creates real competition.”

Sean Allocca is an award-winning journalist with more than 15 years of experience. Most recently, he was Editor-in-Chief of ETF.com, overseeing the company’s content strategy and long-term editorial goals. He was also deputy managing editor at InvestmentNews, an editor for the wealth management publication Financial Planning, and editor of CFO magazine. He has a M.A. in business communication from Fordham University and a B.A. in writing from Loyola University, Maryland.

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