Credit Unions: The Competitive Context

Introduction

Credit unions are member-owned, not-for-profit financial cooperatives that provide many of the same services as community banks: savings and checking accounts, mortgages, auto loans, and small business lending. What makes them competitively significant (and controversial) in the FIG landscape is their federal tax exemption: credit unions do not pay corporate income tax, giving them a structural cost advantage over tax-paying banks. This advantage, combined with growing scale and sophistication, has enabled credit unions to expand aggressively, including purchasing a record number of community banks.

For FIG bankers, the credit union competitive dynamic matters for two reasons: it affects community bank franchise value and M&A pricing, and credit union acquisitions of banks represent a growing (and unique) transaction type that specialist FIG firms increasingly advise on.

Credit unions were granted federal tax-exempt status in 1934 to encourage thrift and provide affordable financial services to people of modest means. Today, the credit union industry includes over 4,500 institutions with combined assets exceeding $2.3 trillion, and many large credit unions (Navy Federal, PenFed, State Employees' Credit Union) have assets of $30-80 billion+ and offer products and services indistinguishable from commercial banks.

The tax exemption is estimated to reduce federal tax revenue by approximately $32 billion over the 2025-2034 period. For an individual credit union, the exemption translates to roughly 21% of pre-tax income that would otherwise go to federal taxes. This cost advantage allows credit unions to offer slightly higher deposit rates and slightly lower loan rates than competing banks, creating a pricing edge in local markets.

Credit Union

A member-owned, not-for-profit financial cooperative that provides banking services (deposits, loans, payments) to its members. Credit unions are governed by a volunteer board of directors elected by members, regulated by the National Credit Union Administration (NCUA), and insured by the National Credit Union Share Insurance Fund (analogous to the FDIC for banks). Unlike banks (which are owned by shareholders and seek to maximize profit), credit unions return excess earnings to members through lower loan rates, higher deposit rates, and reduced fees. Their federal tax-exempt status is the most significant structural advantage relative to banks, and the source of the most contentious competitive debate in community banking.

The tax exemption debate has intensified as credit unions have grown in size and complexity. The largest credit unions now operate commercial lending programs, offer business accounts, and pay executive compensation comparable to publicly traded banks, blurring the line between the cooperative model and for-profit banking.

The most dramatic competitive development is the surge in credit union acquisitions of community banks. Credit unions purchased a record 22 banks in 2024, double the previous annual record of 16 deals in 2022. More than 100 credit union-bank acquisition deals have been announced since 2011, with pace accelerating sharply.

The scale of deals has also increased. The two largest credit union-bank deals in history were both announced in 2024: Global Federal Credit Union's acquisition of First Financial Northwest Bank ($1.53 billion in assets) and Texas Dow Employees Credit Union's acquisition of Sabine State Bank and Trust Company ($1.31 billion in assets). These are the first credit union-bank deals with targets exceeding $1 billion in assets.

The trend reflects several dynamics: many community bank owners face succession challenges and cannot find bank acquirers willing to pay acceptable premiums; credit unions can pay 100% cash (since they have no stock to use as acquisition currency) and often offer deposit premiums that compete with or exceed bank-to-bank deals; and credit unions see bank acquisitions as a way to gain commercial lending expertise, branch networks, and geographic diversification.

The regulatory approval process for credit union acquisitions of banks involves both banking regulators (FDIC, state banking department) and the NCUA, creating a dual-track process that requires specialized advisory expertise. The political dynamics add complexity: state banking associations in several states have lobbied for legislation to restrict credit union acquisitions of banks, arguing that the tax exemption gives credit unions an unfair advantage in the bidding process.