Credit unions buy 3 banks in 1 week, riling industry lobbyists

Credit unions are acquiring more and larger banks, setting the stage for a potentially record-breaking year in the number and volume of credit union-bank deals. The rush of credit union-bank deals has spurred industry groups to redouble their efforts to scuttle credit union M&A.

Financials deal activity has been robust this year as lenders face pressure to add scale to both invest in fintech and navigate a tough earnings environment. Some credit unions are responding by targeting larger banks: the average total assets of banks acquired by credit unions is $580 million year-to-date, compared to $140.7 million last year and $280.9 million in 2019. And there are more deals, too, with eight credit union-bank deals this year, already surpassing the total of six in 2020.

"The [credit union] buyers are pragmatic," Michael Bell, partner and co-leader of the financial institutions practice group at Honigman LLP, said in an interview. "They know that you can't stop and there's no magic point of wonderfulness. ... You've got to scale, you've got to grow, you've got to diversify, and that's what they're all doing."

Deal activity was muted last year due to the pandemic, creating some pent-up demand this year. Further, some deal advisers have said a potential capital gains tax increase has pulled forward some activity. Bell said he expects credit union-bank deal activity to continue through year-end such that 2021 will likely rival the record number of 14 such deals in 2019.

In just one week, there were three credit union-bank deals. Tuscaloosa, Ala.-based Alabama CU kicked off the run with its Aug. 5 announcement that it will acquire Jasper, Ala.-based Security Federal Savings Bank. Less than one week later, Memphis, Tenn.-based Orion FCU struck a deal to acquire fellow Memphis-based Financial Federal Bank in the first-ever Tennessee credit union-bank transaction. Then, Eau Claire, Wis.-based Royal CU announced on Aug. 12 its acquisition of Lindstrom, Minn.-based Lake Area Bank, marking the credit union's third bank M&A deal.

Industry groups react

The Independent Community Bankers of America, or ICBA, is hoping the size and pace of these deals will catch Congress' attention, Aaron Stetter, executive vice president of policy and political operations, said in an interview. The trade group believes President Joe Biden's recent executive order regarding consolidation could be a signal that the executive branch may eventually take a look at credit union acquisitions of banks.

Trade groups have long opposed credit union-bank deals, saying that credit unions' tax-exempt status creates an uneven playing field. In a recent development, the ICBA proposed a 10% exit fee on a bank's assets or liabilities when selling to credit unions.

"We're just going to keep raising our concerns every time a deal is announced and keep plugging away until we get that desired outcome of at least having a congressional hearing," Stetter said.

State-level industry groups that have seen recent deals are also ramping up their lobbying efforts. Two states — Colorado and Iowa — have barred state-chartered banks from selling to credit unions. After last week's first-ever credit union-bank deal in the state, the Tennessee Bankers Association has reached out to the Tennessee Department of Financial Institutions to question the legality of the transaction, Colin Barrett, president and CEO of the Tennessee Bankers Association, wrote in an email.

Bell, an adviser on the deal, said he does not anticipate any regulatory hurdles in Tennessee. Orion FCU declined to comment. Barrett wrote that the acquisition of Financial Federal is a "double loss" for the state.

"It's disappointing to see a credit union that was chartered to serve Memphis teachers use its tax-exemption to grow to the point where it is able to acquire a tax-paying financial institution," he wrote. "But the most harm will be done to the less affluent people of Memphis. With Orion Federal Credit Union not required to abide by the Community Reinvestment Act as community banks are, there is no regulatory incentive to provide financing to lower income communities."

The Minnesota Bankers Association is in touch with the Minnesota Department of Commerce and the Office of the Comptroller of the Currency regarding credit union deals generally, said Joe Witt, president and CEO of the Minnesota Bankers Association. Witt said the ICBA's 10% exit fee is just one of the solutions he supports.

"Something has to happen. One of the other options would be is if you're a tax-exempt entity like a credit union, and you buy a for-profit entity, you just lose your not-for-profit status and you take on the acquired entity's tax position," he said in an interview.

Since 2015, there have been 47 credit union acquisitions of banks announced across 16 states.

Credit unions eyeing growth

Wisconsin-based Royal CU is not a stranger to growing through M&A. The credit union acquired St. Paul, Minn.-based Capital Bank in 2016 and struck another deal later that year for one branch from Baxter, Minn.-based Deerwood Bancshares Inc. The credit union also has a pending merger with Peoples Choice CU.

The credit union is still engaging in M&A discussions but will probably integrate Lake Area Bank before pursuing another deal, President and CEO Brandon Riechers said in an interview. Lake Area Bank had $438.4 million in total assets as of June 30 and ranked 61st among the best-performing community banks of 2020 with under $3 billion in assets, according to an analysis by S&P Global Market Intelligence.

"We've made it known ... that we're always interested in opportunities such as mergers and acquisitions," Riechers said. "We anticipate, given today's environment and post pandemic, over the next couple of years, there will be a lot of opportunities on the M&A front."

Royal CU will have roughly $4.25 billion in total assets after closing both the Peoples Choice CU and Lake Area Bank deals. Bell said he advises credit unions looking to grow inorganically to explore both bank acquisitions and credit union mergers.

"My advice is be open to it all and do it all. The best plan, if you want to grow nonorganically, is to look at credit union-to-credit union transactions and look at bank options, whether it's whole bank or bank branches. That's how you cover the field," Bell said. "Royal [CU] is a fine example."