Credit unions (CUs) acquiring banks has become a hot topic across the financial industry on both a national and statewide level, including in New Mexico, and for good reason. The past year has seen an unprecedented increase in bank acquisitions by CUs, closing in on 2022’s record number of 16 transactions just halfway through 2024. Not only has 2024 seen a marked increase in CUs acquiring banks, but the banks being purchased are larger.
In 2023, the largest bank involved in a credit union acquisition was Western Heritage Bank here in New Mexico. It was valued at $338 million in assets and was purchased by Nusenda Credit Union. In 2024, however, several purchased banks exceeded Western Heritage Bank in assets, with First Financial Bank, purchased by Alaska-based Global Federal Credit Union, counting the most in assets at $1.5 billion. Additionally, in 2024, the total bank assets acquired by CUs stood at $7.21 billion as of June, surpassing the annual record of $5.15 billion set in 2022.
Following the Heritage acquisition, U.S. Eagle Credit Union announced in August 2024 that it had entered into a definitive agreement to acquire Southwest Capital Bank. The acquisition is to be completed in the second quarter of 2025. U.S. Eagle indicated that the acquisition would allow it to tap into Southwest Capital’s knowledge of the Las Vegas market, including Mora and Pecos, and leverage the bank’s expertise in business and cannabis banking deposit services and lending. U.S. Eagle, founded in 1985, has $1.5 billion in assets, with approximately 95,000 members and 318 employees. Southwest Capital, founded in 1890 in Las Vegas, New Mexico, has total assets of $475 million and deposits of $434 million as of June 2024.
If two of the last three years are any indication, the trend of banks being acquired by CUs is steadily increasing. However, this trend is certainly not without controversy, as opponents have articulated numerous potential issues with these acquisitions. One of the most compelling arguments against the trend is that CUs are taxed differently than banks, with CUs carrying both nonprofit and tax-free status. Many opponents of these mergers see CUs essentially acting like banks but being treated completely differently, enjoying the perks of tax-free and nonprofit status. In addition, CUs aren’t obligated to deliver profits to shareholders, nor are they subjected to the same level of regulatory burden that banks are. For instance, CUs aren’t subject to the Community Reinvestment Act (CRA), which requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities where they do business, including low- and moderate-income neighborhoods.
It’s also important to note that CUs have a competitive pricing advantage over banks by virtue of their tax advantages. Moreover, CUs have an appetite to pay greater sums for banks, knowing that when they convert a bank to a credit union, the credit union will automatically have a built-in earnings lift by not having to pay taxes as the bank previously had to do. Additionally, CUs, unlike other nonprofits, don’t have to report the compensation of their senior executives. The bottom line is that it’s much easier to exist as a CU than as a bank. Given this, it is fair to ask if CUs are even remotely wedded to their nonprofit status anymore. Proponents of CUs purchasing banks say that they’re simply filling a vacuum that banks refuse to fill. Curt Long, deputy chief economist at America’s Credit Unions, says, “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.”
Proponents are comparing CUs to bigger banks, not community banks, and want the best of both worlds. CUs want to offer the same services as banks and act like banks but don’t want to have the taxation and regulation that come with being a bank. It’s an ideal situation, and they’re taking full advantage of it. Credit union representatives claim that these bank-CU mergers are occurring because banks are closing branches rapidly around the country, and CUs are coming in to fill the void.
Critics of CU-bank purchases have a litany of concerns, but one that repeatedly comes up is the CU exemption from the Community Reinvestment Act. Additionally, there are restrictions on credit union lending to small businesses that can pose serious problems for rural communities. Also, the mission of CUs, in theory, is to serve a specific, clearly defined membership, usually in a particular occupation or field. CUs buying banks in other areas, such as Michigan CUs buying Florida banks in recent years, can easily dilute CU membership. Aaron Klein, a senior fellow at the Brookings Institute focused on financial regulation, claims CUs are straying far afield from their on-paper mission. “Credit unions are buying banks that seemingly have no relationship to their field of membership, and many CUs have turned their field of membership that anyone can join,” he said.
According to polling conducted by Morning Consult, 68% of adults said credit union customers should have the same CRA protections that banks provide, while 54% said Congress should investigate whether the credit union tax exemption is still warranted. Many rural communities still don’t have any CUs, but have a community bank, which experts believe is a result of CUs not having to abide by the Community Reinvestment Act. Because of the tendency for CUs to serve the most profitable parts of a state, some states are enacting state CRA laws for state-chartered CUs, such as New York and Illinois.
Unlike many nonprofits, some CUs pay their board members high salaries and provide luxury trips and retreats. Importantly, this is being subsidized by taxpayers. For example, Northwest Federal Credit Union recently used tax-payer subsidized profits to sign a $7.5-million-a-year contract for the naming rights to the Washington Commanders football stadium. It begs the question of how a tax-exempt entity that is supposed to serve customers of modest means can afford such a pricey contract. Also, unlike most other nonprofits, CUs are exempt from filing an IRS form 990, meaning they have no obligation to prove that they are on a mission.
In September, the FDIC said it may, for the first time, require CUs to provide more information on proposed bank deals so the agency can assess whether they serve community needs. The FDIC claims that if it sees that a CU-bank purchase would slash small business or commercial real estate lending, it can either put conditions on the purchase or block it altogether. However, banking trade groups want the FDIC and other regulators to be tougher on these mergers. One major commitment bankers’ associations want is written explanations and plans on how a proposed merger would benefit a relevant community. Also, banking trade groups are pushing Congress to put an “exit fee” in place that would allow the federal government to recoup lost tax revenue when a credit union purchases a bank.
During a recent U.S. House Financial Services Committee oversight hearing, Rep. Emanuel Cleaver (D-Missouri) pressed NCUA Chairman Todd Harper on his agency’s oversight of large CUs. One of the things that concerned Rep. Cleaver is that large CUs are not involved with the CRA, and he discussed that they should, perhaps, be subject to the same requirements as banks. Harper noted that if Congress were to move forward on CRA and apply it to CUs, he would request flexibility, given that there are many different types of credit union charters overall. I found this to be an interesting comment.
Ultimately, the core issue is that CUs are acting more and more like banks but aren’t subject to the myriad of rules and regulations that banks are subject to. It seems that subjecting CUs to the same rules and regulations that banks receive is only fair, given that CUs have strayed from their original mission. It’s okay if CUs want to play in the same sandbox as banks, but they should also be subjected to the same scrutiny. Perhaps this same level of scrutiny could improve both CUs and their banking counterparts, leading to a closer examination of the system overall. States can rein in these acquisitions somewhat, but for now, we’re caught in somewhat of a limbo where credit union acquisitions of banks will likely increase without any serious action by the federal government.
