Credit union-bank M&A wave stokes community bankers' animus

Community bankers' long-standing animosity toward credit unions may be growing amid an uptick in credit union-bank M&A.

A new survey from IntraFi Network LLC reported that 53% of community bank respondents in its survey would refuse to sell to a credit union, even if it was the best offer. The pushback adds to evidence of growing resentment about how credit unions are snapping up community banks at a record pace.

Historically, banks might have expressed animosity toward credit unions but, when deciding to sell, have ultimately taken the highest offer even if it came from a credit union.

Michael Bell, partner and co-leader of the financial institutions practice group at law firm Honigman LLP who has worked on more than 40 credit union acquisitions of banks, said it is "very rare" that a bank would automatically rule out credit union buyers. Still, he said it is not unheard of.

"I would say that about 10% of the time I am aware of a situation that a community bank seller is not willing to entertain credit unions or will specifically exclude them because they're a credit union," Bell said.

When working on credit union-bank deals, Bell has found that price is "top of mind" for bank sellers because of their fiduciary obligation to shareholders, he said.

Attention-grabbing trend

While Bell's estimate of 10% is far below the IntraFi survey suggesting 53% of bankers would refuse to sell to a credit union, Bell said the banking industry trade groups' recent focus on credit unions could have more banks "riled up" on the issue.

Banking industry groups argue that credit unions' tax-exempt status gives them an unfair advantage in M&A. There have been 12 credit union purchases of banks so far this year, nearly matching the record high of 14 deal reported in 2019. This year's activity included the largest-ever deal when a credit union agreed to buy a $1.6 billion bank. In July, the Independent Community Bankers of America proposed a 10% exit fee be imposed on banks that sell to credit unions.

"They've attracted attention," said Paul Weinstein, a senior policy adviser at IntraFi, a firm formerly known as Promontory Interfinancial Network that offers deposit services to banks. "[Banks] may feel more threatened by it."

In IntraFi's survey, Midwestern banks were most averse to credit unions, with 64% of respondents saying they would refuse to sell to a credit union. On the other hand, the majority of banks in the other three regions, the Northeast, South and West, said they would agree to sell to whoever makes the best offer, even if it was a credit union.

North Liberty, Iowa-based GreenState CU has found it easier to strike bank deals than credit union mergers because "in some but not all cases, the highest bid wins. It's not terribly more complicated than that," President and CEO Jeffrey Disterhoft told S&P Global Market Intelligence. GreenState CU announced three bank acquisitions within five months this year.

But other "soft factors," such as retaining employees and branches, are also important to banks when considering credit union offers, Bell said.

"A credit union buyer, more often than not, wins on those issues, too," he said. "They will hire most, if not all, of the employees in every transaction. ... And they keep the branches."

For banks that refuse to entertain credit union offers, keeping an open dialogue with shareholders is important, according to Paul Davis, director of market intelligence for advisory firm Strategic Resource Management.

"Investors would like to feel like banks and boards at least look at every offer," he said. "Investors generally want to make the most of their investment, so if you're going to take a position that maybe is antithetical to that, the biggest thing is to have that dialogue with your investor base, make sure they know what your convictions are and why you're doing it."