When Arizona Federal Credit Union acquired the operations of Pinnacle Bank of Arizona last year, it became part of a growing trend of credit unions buying banks in the financial services sector.
“We weren’t actively looking for an acquisition partner at the time,” says Ronald L. Westad, Arizona Federal Credit Union’s president and CEO. “We were approached by a broker, and after reviewing the opportunity, we realized the incredible potential of the partnership. As a result of the acquisition, Arizona Federal has gained access to new lines of business that will help fuel our continued growth, and Pinnacle Bank has delivered increased value and scale to their clients, employees and shareholders.”
Credit unions are buying small banks in record numbers, and while it seems to be a win-win for customers and clients, the trend is prompting pushback from the banking industry.
“It’s not in the public’s best interest to see that trend perpetuate,” said Paul Hickman, president and CEO of the Arizona Bankers Association. “It’s regular arbitrage (a practice whereby firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulations). Credit unions are tax-exempt, so they are not taxed at the federal or state levels. Allowing credit unions to buy banks is not good public policy and not fair to the community banks who have to compete with them.”
While the banking industry and its advocates say credit unions’ merger activity — and their tax-exempt status — need to be reined in, legislative reform is unlikely any time soon — especially during an election year.
But the trend is real. Consider this: Credit unions bought 16 banks in 2019, which more than doubled the seven mergers that took place in 2018, and that 2018 number more than doubled the three deals that were made in 2017.
Those in the credit union space see that as a very positive trend, particularly for its customers.
“Arizona Federal members gain access to additional residential lending options, expanded small business services, SBA financing options and commercial lending services,” Westad says. “The former Pinnacle bank clients – the newest members of Arizona Federal – gain access to a broader network of branches and ATMs, enhanced online and mobile banking solutions, and a robust menu of consumer banking services.”
While the banking industry may be frowning, consumers are not. Since they are not-for-profit and are not owned by outside stockholders, credit unions pass earnings along to consumers in the form of lower loan interest rates, higher savings yields and fewer and lower fees. Using Datatrac pricing data, the Credit Union National Association estimates that in 2018 alone, U.S. credit unions collectively delivered roughly $12 billion in direct financial benefits to their 115 million member-owners, compared with what those consumers would have experienced if they conducted their financial business at a for-profit bank.
“Everything that Arizona Federal Credit Union offered to its members, Pinnacle bank did not offer to its clients and vice versa,” says Michael J. Thorell, president of commercial and residential lending at Arizona Federal Credit Union and former CEO of Pinnacle Bank. “The convergence of the two financial institutions has created 12 consumer-based retail centers and four business and home loan centers. We have not changed what we were doing at Pinnacle Bank. We have just changed the flag on the outside of the building.”
With the acquisitions of Pinnacle Bank, Arizona Federal Credit Union now boasts nearly $2 billion in assets.
“At this moment, we are the best-kept secret in town,” Thorell says. “Nobody would associate Arizona Federal Credit Union with small-business lending, commercial real estate lending, or any type of residential lending that Pinnacle was doing previously.”
The leadership at Arizona Federal acknowledges that the credit union had a tough time establishing expertise in the commercial and small business services space.
“We looked at the acquisition of Pinnacle Bank as a way to acquire the expertise, the personnel, and existing book of business to immediately become a player in the business space,” says Jason Paprocki, executive vice president and chief operating officer at Arizona Federal. “It would have taken us 10-12 years to grow the business to where we were able to get immediately after the acquisition.”
While many banking leaders are vocally opposed to the trend see Arizona Federal’s move as a short-cut to success, the reality is that community banks like Pinnacle are struggling. The number of community banks across the nation is dwindling as the big banks get bigger and smaller, community banks find it harder to compete.
“What everyone hoped regulatorily would not happen to small community banks has happened,” Thorell says. “It’s just that nobody talks about it. The bottom line is that Dodd-Frank has crippled small community banks — particularly small community banks in large metropolitan cities. So when you really get down to brass tacks, it just made sense to join up with Arizona Federal. How else would we find scale?”
While the 125,000 member-owners of Arizona Federal will benefit from the acquisition by gaining access to additional services and the 2,600 clients of Pinnacle Bank benefit by gaining access to a full suite of consumer services, Thorell says the entire community wins from this deal.
“If you take away the taxation piece and wonder where those dollars go, they are not lining executives’ pockets,” Thorell says. “Those dollars are going back to the member-owners of Arizona Federal and those dollars are going to community investment, something we couldn’t do as a community bank because we didn’t have the scale.”
And as for the trend of credit unions buying community banks? Thorell says to expect that trend to continue.
“This is the metamorphosis of what is happening,” Thorell says. “Credit unions philosophically and culturally feel like what the community bank industry once was. So the banking industry can hope credit unions won’t keep buying banks, but it’s going to happen.”