Alabama deal adds grist to debate over bank-credit union mergers

In a bid for scale and greater geographic reach in its home state, Alabama Credit Union in Tuscaloosa is acquiring Security Federal Savings Bank in Jasper, Alabama.

Alabama Credit Union said the cash deal, expected to close by early 2022, would expand its footprint in north Alabama and increase its total assets to $1.3 billion. Financial terms were not disclosed. Security Federal, a unit of Se-Fed Bancshares, had about $12.6 million of loans and $31.7 million of deposits at the close of the second quarter, according to S&P Global data.

It's the sixth deal this year featuring a credit union acquiring a bank, putting 2021 on pace to far exceed the seven such deals announced in 2020, according to American Banker tallies. A record 16 such transactions were announced in 2019.

Small credit unions are increasingly hungry for scale and business line diversity to compete with banks and online lenders. Acquiring a bank not only adds heft, but also provides expansion into business lending. Credit unions historically have focused on consumer loans to their members, whereas most community banks are active commercial real estate lenders. More than 80% of Security Federal’s loans are CRE credits, according to S&P Global data.

“The diversification opportunity is often the driving force behind these deals,” said Jacob Thompson, a managing director of investment banking at SAMCO Capital Markets.

Small banks, meanwhile, are being sold to both larger banks and credit unions because many banks are struggling to generate the revenue needed to invest in the digital services that are increasingly in demand, Thompson said.

The acquisition would be Alabama Credit Union’s third overall but its first bank buyout. It bought fellow credit unions in 2013 and 2018.

“This is another step in our plan to enhance the member value and experience for our many existing members,” Steve Swofford, the credit union's president and CEO, said in a press release Thursday. Spokespersons for the credit union and Security Federal did not immediately respond to requests for more detail.

After a pandemic-induced lull in 2020, sales of banks are on pace to approach 2019 levels, with 97 such deals announced so far this year. There were 257 deals announced in 2019, making it among the most active for bank M&A since the 2008 financial crisis, according to S&P Global.

However, the practice of tax-exempt credit unions buying taxpaying banks elicits sharp criticism from community bank advocates. “It always draws the ire of bankers,” Thompson said.

The Independent Community Bankers of America this year called on Congress to hold hearings into credit unions’ acquisitions of banks. The ICBA says that when credit unions take out banks, they deprive communities of tax revenue and weaken Community Reinvestment Act lending. Unlike banks, credit unions are not required to comply with the federal CRA law.

“The current rash of taxpayer-funded credit union acquisitions exacerbates industry consolidation, shrinks state and local tax revenues, limits the reach of the Community Reinvestment Act and again shows that tax-exempt credit unions have become virtually indistinguishable from taxpaying commercial banks,” ICBA President and CEO Rebeca Romero Rainey said in a recent statement.

Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, argues that such criticism is off target. In a guest column this year for American Banker, he said credit unions fuel economic growth that, in turn, generates tax revenue.

“That’s because credit unions channel their tax exemption to their members in the form of better rates on deposits and lower fees,” he wrote. “Credit union members then use those additional funds and savings to generate commerce, growing the economy and creating job opportunities in the process.”