Why credit unions are buying banks
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Illustration: Sarah Grillo/Axios
Nonprofit credit unions are buying record numbers of for-profit banks.
Why it matters: Until recently, a nonprofit couldn't own a for-profit — it seems to defeat the whole point — but in recent years the walls between these two worlds have been breaking down. (Think of the Chan Zuckerberg Initiative or Patagonia.)
The big picture: Credit unions have many advantages over banks. They pay less in taxes and don't need to deliver profits to shareholders.
- They also have less of a regulatory burden — they aren't subject to Community Reinvestment Act requirements, for instance, and their National Credit Union Share Insurance Fund is in healthier shape than the FDIC's Deposit Insurance Fund.
By the numbers: By June 4 of this year, credit unions had acquired $7.2 billion of bank assets, per S&P Global. That's larger than any previous full-year total.
- What's driving the uptick? "Regulatory arbitrage feels likely here given the historical leniency of credit union regulators," Brookings' Aaron Klein tells Axios.
- In other words: It's just easier to be a credit union than a bank, so that's the natural choice for bank CEOs to make. (It's worth noting that credit unions, unlike most other nonprofits, don't have to report their senior executives' compensation.)
Between the lines: The key question here is whether growing via acquisition means that a credit union has lost sight of its nonprofit mission — or whether such acquisitions are a sign it's pursuing that mission, of providing high-quality banking services to as many members as possible, as aggressively as it can.
The intrigue: Credit unions aren't allowed to buy banks outright. Instead, they have to pay a premium for the bank's assets.
- That means sellers effectively pay tax twice when they're bought by a credit union — first when the bank books a gain on the sale of the assets, and then when the shareholders get cashed out.
- The unfavorable tax treatment of these takeovers means that credit unions are at a disadvantage in any bidding war — yet they're still winning more than ever.
Where it stands: Credit Unions are officially constrained insofar as they can only offer banking services to specific fields of membership, but sometimes those fields of membership can be ridiculously large.
- Global Credit Union, for instance, accepts as members "people who live, work, worship, or attend school in Alaska, Washington, California's San Bernardino County, Arizona's Maricopa County, and Idaho's Kootenai County," just for starters.
- For some reason Michigan credit unions seem very keen on buying Florida banks, including two credit unions (ELGA and Dort) just from tiny Grand Blanc, population 7,800.
- Curt Long, deputy chief economist at America's Credit Unions, tells Axios that the expansion is taking place partly because "credit unions place a higher priority on having face-to-face interactions with their members," and are happy to expand into areas that banks are retreating from.
Zoom in: There is little if any consumer harm to credit unions buying banks. When a bank customer becomes a credit union member, their satisfaction rarely goes down.
- Credit unions buying banks also generally keep on the vast majority of the staffers of the acquired banks.
The other side: "Credit unions are limited in terms of how much commercial lending they can do," says Rebeca Romero Rainey, the CEO of Independent Community Bankers of America. As a result, credit unions might grow their small business book more slowly than a bank would.
- That said, if the bank is in a position to be acquired, its small business book probably wasn't growing very fast to begin with.
The bottom line: Community banks and credit unions are now similar enough that one can become the other relatively frequently.
