In this episode of Grow Your Credit Union, host Joshua Barclay and co-host Becky Reed welcome Michael Goad, President and CEO of Dow Credit Union, to discuss why credit unions are acquiring banks, the potential threat to their tax-exempt status, and whether industry optimism for 2025 is warranted.
Why Are Credit Unions Buying Banks?
The trend of credit unions acquiring banks is accelerating, but why? Michael Goad explains that it’s not just credit unions seeking growth. Many smaller banks are actively looking for buyers due to limited acquisition opportunities from larger regional banks. In states like Michigan, small community banks no longer have the same merger pathways they once did, making credit unions a logical choice.
Becky Reed highlights the backlash from the banking industry, noting that while banks criticize credit unions for their tax-exempt status, they have the option to convert to a financial cooperative themselves, yet they choose not to. Ultimately, these acquisitions are happening because bank shareholders approve them, not because credit unions are forcing the issue.
Could Credit Unions Lose Their Tax-Exempt Status?
Recent discussions among policymakers have reignited debates over whether credit unions should retain their federal tax exemption. While some in the industry fear this could be catastrophic, Michael Goad breaks it down with real numbers.
He explains that while losing the tax exemption would have an impact, it wouldn’t be the end of credit unions. About one-third of their pricing advantage over banks comes from the exemption, while the other two-thirds come from their mutual ownership model, which eliminates the need to pay external shareholders.
Becky Reed agrees, arguing that the true strength of credit unions isn’t in their tax-exempt status but in their mission-driven financial cooperative structure. She emphasizes that credit unions have always existed as a consumer alternative to for-profit banks, much like nonprofit hospitals in the healthcare industry.
Industry Optimism for 2025
More than 80% of banking leaders expect 2025 to be a strong year, citing economic stability, regulatory optimism, and advancements in financial technology. But are there warning signs that could disrupt this positive outlook?
Michael points to global economic trends, particularly in China and Europe, where deflation and economic slowdowns could ripple into the U.S. economy. While he doesn’t predict a recession, he anticipates a cooling economy by late 2025 or early 2026.
Becky brings the conversation back to local credit union challenges, particularly asset quality and loan delinquencies. Credit unions that stretched their investment portfolios too far before interest rates rose are now seeing lower returns, while auto loans made during the used car price spike of 2022 are showing higher losses. She warns that these trends could weigh on financial stability if not managed carefully.
Top Takeaways from This Episode
- Bank acquisitions are being driven by small banks looking to sell—not just by credit unions seeking expansion.
- Losing tax-exempt status would impact credit unions, but it wouldn’t be their downfall. The mutual ownership model is a bigger financial advantage than the exemption itself.
- Global economic trends could slow growth in late 2025, particularly deflationary pressures from China and Europe.
- Credit unions must carefully manage asset quality and loan delinquencies, as rising charge-offs could become a challenge in 2025.
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Full Transcript
[Joshua Barclay] Credit union community, here are your three topics for today’s episode. First up, credit unions buying banks. It’s happening more than ever, but why are these acquisitions gaining momentum and what does it mean for the industry? Next up, could credit unions lose their long-standing tax-exempt status?
Policymakers are talking, and the impact on members could be huge. And finally, optimism is on the rise among banking leaders this year, but are there serious risks that could rain on their parade of optimism?
[Music]
[Joshua Barclay] Welcome to Grow Your Credit Union. This is the podcast where credit union leaders gather, learn, and grow. I am your host, Joshua Barclay, and with me, the talk of Texas, the DeFi queen, I’m talking about Becky Reed.
[Becky Reed] Howdy, y’all.
[Joshua Barclay] Becky, I just returned back home from Connecticut, and there’s always one or two things that will remind you that you’re back home. You know that hometown sort of thing, whether it’s food, whether it’s the weather. And you know what dawned on me? The winters in New England are really, really depressing.
It got dark at like four o’clock, and although I did miss my family and I was happy to be with them, I am glad, and don’t kill me, people from Connecticut because I’m still a big UConn Huskies fan, but I am glad that I do not live in Connecticut anymore. I do not miss the winters. So, my question for you, Becky, is what is it about Texas that reminds you that you are definitely in Texas?
What is that hometown ingredient?
[Becky Reed] Well, I kind of gave it away with the y’all, right, at the beginning. But you know, it’s y’all, it’s hospitality, it’s yonder, it’s the language of the South and those colloquialisms that we kind of hold near and dear to our heart, kind of like, “Bless her heart.”
[Joshua Barclay] [Laughter] Well, we do not have a “bless your heart” in Connecticut, but we do have no sunlight most of the day. So, with that said, Connecticut, I love you, but I’m glad I’m back. Let’s start the show, Becky. Today, we welcome the president and CEO of Dow Credit Union, Michael Goad.
Michael, welcome to Grow Your Credit Union.
[Michael Goad] Good afternoon and greetings from Michigan, where it is gray in the winter.
[Music]
[Joshua Barclay] Credit unions buying banks, it’s a trend that’s picking up steam, but why is it happening? According to a recent LinkedIn article by Bradley Kelly, these acquisitions help credit unions expand their market share, gain assets, diversify services, and compete in a rapidly consolidating industry.
Michael, I want your take. Why do you think credit unions are increasingly looking to acquire banks rather than grow organically?
[Michael Goad] Yeah, great topic, and thank you for bringing it up and for having me today. So, yes, credit unions are open to buying banks, but I think that much more of the momentum comes from the fact that smaller banks are willing and even eager to sell to credit unions. There are fewer and fewer regional aggregators for small banks.
So, I’ll give you an example here from Michigan. So, years ago, Michigan used to have Chemical Bank, which was a regional bank, and Old National is a regional bank, too. And they were active acquirers of smaller banks, and this was a real way for these smaller banks to go ahead and monetize, to sell and to roll up.
Fast forward to today. Chemical Bank has been rolled up into Huntington Bank, and Huntington Bank is 200 billion in assets. Old National has had so many mergers, including major mergers in Chicago and Minneapolis. They’re about to be 70 billion in assets. So, these institutions just aren’t interested in buying 100 to 300 million asset community banks as fill-in strategies.
And so, to me, it makes total sense for private bank owners, small bank owners, to look to the credit union world for selling, and I think that has been a major thing that they are now eager to look to them.
[Joshua Barclay] Never even thought about that, Michael. Never thought about the fact that there are these smaller banks that are willing to be bought. It’s not necessarily that credit unions are eager to buy, although sounds like they are. It’s more that there is more for sale from a bank standpoint than there may have been in the past.
Becky, what is your take on this? Why are credit unions increasingly buying these banks instead of just growing organically? What’s up? What’s your take?
[Becky Reed] Well, it’s no different than why are credit unions looking for other credit union merger partners as opposed to growing organically? It’s the same mentality. Many credit unions have taken the approach that in order to grow, they’re going to have to acquire. And in the credit union space, that means merge because we’re a similar financial cooperative, or credit unions can certainly go and buy banks.
I think what’s interesting to me is the backlash that has happened in the banking community around credit unions buying banks. I don’t think the credit union space necessarily really is opposed to the process. I mean, heck, the more credit unions there are, the better, right? And if we can take one from a bank and make them a financial cooperative, then that’s great.
But the banking industry has just absolutely gone bananas about credit unions buying banks because, of course, the banks are very opposed to our tax status, right?
Now, I tell the banks all the time, “You guys can change your charter very easily. You can turn into a financial cooperative. So, why aren’t you doing that if it’s so great to be over here on this side?” Well, of course, they’re not doing that because there’s many, many things a financial cooperative cannot do that a bank can do, and they kind of like doing bank things.
So, they don’t want to be a financial cooperative. So, our tax status at the end of the day must really not be that special. But the bankers are the ones who are really having a cow about credit unions buying banks. But at the end of the day, they’re shareholders, whoever they are, if it’s privately held, whatever the case may be.
They’re voting to have the credit unions buy them, so it’s not like we’re taking them by force.
[Joshua Barclay] Michael, I like your perspective around the fact that there are these opportunities for credit unions that may not have existed in the past. There are these smaller banks that are willing to be acquired. But now I want to flip the script a little bit with you and ask you, that’s great that these opportunities exist, but are a lot of the reasons credit unions acquiring these institutions, is it because there really isn’t that much more room for organic growth?
Do you think our industry is sort of hitting a ceiling, if you will, where growth is just not easy to come by, and now we’re moving into a zone of acquiring because the organic growth opportunities just don’t exist the way they once did?
[Michael Goad] I’m going to say kind of. Look at the credit unions that are growing fast, though. They’re doing just fine. Okay? I really think that there’s more of a flurry and kind of a FOMO, fear of missing out, that, oh, it’s time to get more and more heft to have a stronger market position, and maybe that’s driving it.
And then I want to circle back to another reason that I think that the community banks are more open to selling, and that’s because when a bank buys a bank, in general, they’re paying a pretty good premium on the stock price, and they have to come in, they absolutely have to come in and cut 30 to 40 percent of costs.
In the credit union world, when we absorb a bank, when we buy a bank, we can take longer. We don’t have to maximize the cost savings day one. We’ll get it over time, but we can take longer, and it’s just a different atmosphere. There’s definitely more of a melding of the minds as two community institutions.
So, I just think that that is another big driver of the bank and credit union merger.
[Music]
[Joshua Barclay] The tax-exempt status of credit unions has been a cornerstone of their business model for nearly a century, but that could change. A recent Credit Union Times article by Jim Duplassis highlights renewed discussions among policymakers about ending credit unions’ federal tax exemption, a move that could significantly impact their financial stability, especially for smaller credit unions.
Michael, if the tax-exempt status of credit unions was revoked, how do you think it would impact credit union members directly?
[Michael Goad] So, when I read about this or hear people talk, I don’t hear people use actual numbers. So, we’re bankers here, right? So, I’m going to use some numbers, and if you guys don’t agree with how I’m painting this, you let me know, okay? So, here we go. If we lost the tax status, there would be some impact, but it would not be fatal, okay?
In my understanding, the tax exemption is only about one-third of the strategic advantage that credit unions have over for-profit banks in pricing. So, I thought a lot about this because I used to be the CFO of a community bank that paid taxes, paid dividends to shareholders, and competed with credit unions.
So, here’s the math, okay? The typical for-profit bank makes a pre-tax return on assets, ROA, of about 1.25%, okay? After a 20% federal income tax, it makes an after-tax ROA of 1%, but then they also pay out dividends of about 50% of earnings to the external shareholders, leaving 0.5% ROA in retained earnings to support asset growth.
So, for credit unions, not only do we not pay taxes, 0.25 of the ROA, we also don’t pay dividends to external shareholders. Since our members are our owners, all of the benefits stay with them. So, I see our strategic pricing advantage as 0.75% of ROA, 25 due to the tax exemption, 50 due to our mutual ownership structure.
If the tax exemption goes away, that’s unfortunate, and I disagree with it, but it only removes one-third of our structural advantage. Now, have you ever heard the math like that?
[Joshua Barclay] No, I have not. And Becky, now we got to pass the microphone over to you here and get your insights. Michael just laid down the math. Do you agree with that math, though? Let’s talk math, or do you disagree with Michael? Let’s add some controversy to this. I love controversy. Let’s do it.
[Becky Reed] [Laughter] Well, the controversy’s not going to be with Michael because I don’t disagree with him, and being a former credit union CEO, of course, those numbers are very meaningful to me and make perfect sense, by the way. I have always said that the tax exemption, and by the way, the Congress and CUNA, or America’s Credit Unions now, have done the numbers on really the impact to the federal government by taxing credit unions, which it’s not that great of a benefit, by the way.
They don’t get that many more tax dollars by taxing credit unions. But you can become a mutual savings bank, or you can become a for-profit bank, and you can be a subchapter S corporation. I mean, there’s a lot of things you can do to mitigate your tax obligation, like every company, and credit unions turning into banks would fare just fine.
It’s really, at the end of the day, not about the tax status difference, right? It’s about what we’re providing to the community because of our not-for-profit financial cooperative status. All of our earnings go right back to benefiting our member owners. At a bank, their owners are not necessarily their customers, two completely different things.
So, to me, the whole tax status argument is kind of a moot point. We really need to be doubling down on our differentiating factors, which is that financial cooperative factor because the whole reason we are in business, it’s a philosophical thing, right? It’s not a tax thing. We are there, just like any other non-profit.
One of the things I learned when I went on Capitol Hill was, I had a senator actually tell me, “Look, we get lobbyists in here all the time, and there are lots of industries that have for-profit options and not-for-profit options, not just banking.” So, in healthcare, you can go to a Methodist hospital, right?
That generally is going to be a not-for-profit hospital. So, see, they have a different philosophical stance. You can go to the YMCA instead of going to Lifetime Fitness, right? You have a not-for-profit option. And so, there are options out there for consumers. So, to me, it’s more important to provide that philosophical option to consumers than it is about tax status.
[Joshua Barclay] Then Michael, I want to ask you then, is this an emotional response? Because what I mean by that is I talk to a lot of folks in the credit union realm, and they’re so upset by this, then they speak of it as though it is the doomsday of credit unions, that this is going to destroy credit unions.
Do you feel like this could be more of an emotional reaction than a logical reaction?
[Michael Goad] I think clearly, it’s emotional. And let me just say a few more numbers for you. If we are subject to the federal income tax and it’s 20%, then a typical credit union today that makes a 1% ROA would make 0.8 ROA. Does that sound like the end of the world? A credit union that makes a 0.5 ROA would make 0.4.
That’s not the end of the world. It’s a negative. It’s an impact. But we’re all grown-ups, and we would run our institutions to balance our budgets and provide great services to our members. Again, I believe the bigger advantage that we have structurally is our mutual ownership, the fact that we don’t have to take earnings out and send them to third parties.
We keep all the value here. And I’m just afraid of everyone saying, “Oh, if we’re taxable, I’m just going to become a bank. We’re just going to become a…” Well, where does the mission go? Where does our mutual ownership go? Come on. This is about the members. So, I don’t want the tax to be revoked.
I think it would be a huge mistake, but it is not a game changer. It’s not going to be the death of our business model, let me put it that way.
[Music]
[Joshua Barclay] For the first time in years, credit union executives are feeling more optimistic about the future. According to an article by Natasha Chilingerian, more than 80% of banking leaders expect 2025 to be a strong year, citing economic confidence, regulatory optimism, and new technology investments.
Michael, if you had to challenge the optimism we’re seeing in 2025, what’s a factor, whether economic, regulatory, or internal, that could stifle growth as the year progresses?
[Michael Goad] So, first of all, I want to say, wow, okay? How many of us expected that after raising rates higher and faster than any rate cycle in the last 40 years, we would still see GDP at about 3% and unemployment hovering only at 4%. Clearly, higher rates and higher prices for goods and services are impacting borrowers and consumers, and also many citizens are feeling the pinch, especially middle- and lower-income citizens, but still the economy’s in super strong shape.
So, while I don’t see a recession in 2025, I definitely do see lower prices, lower inflation, and a slower economy by late 2025 and into 2026 for two reasons – Asia and Europe.
So, if you’ve been following what’s going on, especially over in China, China crammed 120 years of the industrial revolution and the digital revolution into the last 40 years, okay? They also made many of the mistakes that Western countries did, most notably providing artificial support for above-trend growth, so that now they are well overbuilt in real estate, and they have manufacturing overcapacity, which has resulted in a real estate pricing problem.
They’re being in a freefall right now in extreme competition in manufacturing, both of which have resulted, get this, in 26 consecutive months of falling prices or deflation. So, have you read that much in the news? It’s kind of quietly out there. They’ve had over two years of deflationary prices in China, and I just got to believe that even though we’ve been kind of insulated from that, that’s going to work its way around the globe, and those prices are going to affect us, and we’re going to see prices come down.
We’re going to see lower inflation and a slightly lower strength in our economy. I’m not looking for a big recession, but I do see weakness around the globe in China and even in Europe coming to the US.
[Joshua Barclay] Michael, I want to give you kudos because I would say that you are the first guest to come on and speak of global economic conditions, which I’ve always been very critical of credit union leaders because sometimes I feel like they just look down at the soil that they happen to be upon, and they’re not looking at the global picture.
So, I do want to applaud you for that insight of bringing in the global picture. Becky, you can either tag on to what he said, or we can go back to the original question, which was if we have to be pessimistic and rain on the optimism parade this year, what are those factors that you think could turn this year sour?
[Becky Reed] Well, I am going to take it back local, but I have to say that Michael is right. The global economic factors absolutely impact us here in the United States, and that is not something that we can ignore. There are some interesting things happening in Asia and the EU that are going to impact us and certainly have impacted us.
So, what I’m going to say is I was just in a credit union that we were working with yesterday, and there are two things that are impacting credit unions right now and will continue throughout this year, and that is the decline of asset quality. Now, some of that has to do with lending our assets, but also in the investments that credit unions chose to make over the last five years or so.
So, the credit union I was talking to is feeling some pain because in an effort to buy interest rates, their investment portfolio before the interest rates went up, so pre-2020, went out 10 or longer years. And so, they still have two or three years left on a big chunk of investments that are yielding sub-2%, and that is having a huge drag on their revenue.
That’s number one. So, there are lots of investment portfolios where people had to go out really long term to get the best rate possible because pre-2020, getting a 50 basis point CD was the best you were going to get. And so, people had to go out 7 and 10 years in order to get better yield. So, that is hurting them now.
Also, the interest rates, not just the interest rates, but the loan, the collateral LTV because during COVID, car prices went ridiculously crazy, especially used car prices. And so, in order to get somebody in a car in 2022, you are having to lend at 180 or 200% LTV. And obviously now we’re coming into 2025, and they’re not holding those rates.
The car dealerships right now have plenty of inventory, right? So, they’re not paying top dollar for used cars. And so, if this happened in 2008, 2009 with real estate, if I’m looking at a car that just broke down, that I owe $10,000 on, that I can only get six for, I’m going to walk away from that loan.
And so, we’re starting to see delinquency increase, and right along with delinquency, we’re talking about ratios. You see that delinquency rate goes up, your charge-off rate is going to go up, and that’s going to come right through to the P&L in the provision for loan loss allocation. So, those are some headwinds that credit unions are facing right now.
[Joshua Barclay] What do you think about those, Michael? Moving away from the global picture and just honing in on what Becky said, do you also agree with her assessment?
[Michael Goad] So, yeah, clearly there is a pipeline of repossessions of higher-priced collateral when the loans were booked a few years ago. And especially, I’m sure you all have seen the numbers, that the credit unions dialed up their lending in 2022 instead of dialing it back, and there are still a number of organizations that are working through that.
And so yes, delinquencies are rising, and yes, there are some collateral issues, but each institution has their own underwriting and their own collections and member solutions groups, and we’re all working through it. And also because of where we are in the rate cycle, many institutions are finally seeing their net interest margins widen again.
And so, they’re going to have enough revenue to put money into the loan loss reserve to pay for those higher credit costs.
[Music]
[Joshua Barclay] That brings us to the end of the show. Michael, thank you for joining us. Do you have any final plugs or final thoughts for our audience?
[Michael Goad] The final plug is that I am more bullish than ever about the credit union industry in America, whether we have the tax exemption or not. This is an amazing business model. It’s an amazing way to serve over 140 million Americans now. So, let’s go get them.
[Joshua Barclay] Are you hiring right now?
[Michael Goad] Yes, we are hiring. And so dowcreditunion.org, looking for our Careers. We do have some open jobs and happy to consider anyone and everyone.
[Joshua Barclay] If somebody wants to get in touch with you, let’s say they’re listening to this and they like what you’re putting down, what is the best way someone can contact you?
[Michael Goad] The best way is my direct email, which is mgoad@dowcreditunion.org. That’s mgoad@dowcreditunion.org.
[Joshua Barclay] Thank you, Michael. Becky, final thoughts, plugs, anything you want to lay down?
[Becky Reed] I absolutely agree with Michael that I am very bullish on not only this industry, but I’m also bullish on the economy. All of those headwinds that we talked about previously, I don’t believe dampen at all the enthusiasm that we have and the optimism that is obviously being articulated in polls and such in the entire banking community, actually.
I think there’s a lot for us to look forward to. And frankly, the headwinds that I talked about, guys, if you’ve been in the credit union space for more than 20 years, you’ve seen it before. Okay? This is not anything new. We know how to deal with this. It’s going to be okay. And so, I’m really excited about what’s going to be happening this year and as we move forward, and of course, as you know, I feel like credit unions are going to increase and be more popular in the future, not less.
[Joshua Barclay] Thank you both for the optimism when I sort of had been feeling more pessimistic about the economy lately. I will do this for you, Becky. If you want to get in touch with Becky Reed, the best way to do that is LinkedIn, of course. Just hit her up, connect with her, send her a message.
She would be happy to communicate with you and take the conversation further. Look, I want to thank our guest today, Michael Goad. He was great. I want to thank my co-host, Becky Reed. She’s always great. And I want to send a special thanks to you, our listeners, for continuing to support and listen to another episode of Grow Your Credit Union.
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Thank you for listening. We will see you next time. Take care and bye-bye.
