The Scale Imperative: Banks Can Acquire Credit Unions

The traditional financial industry is facing a quiet, steady drain of its lifeblood. While the "unbanked" population is shrinking, the "loyalty" of the modern consumer is fragmenting. Millennials and Gen Z—the oldest of whom are now 45—are systematically moving their balances away from traditional institutions toward "cool" digital tools and high-yield platforms like Rocket or SoFi. Even loyal Gen X customers are increasingly treating their primary bank accounts as "paycheck motels", a term coined by Ron Shevlin, quickly routing funds to wherever they earn the most.

To survive this shift, banks don't just need better apps; they need scale.

The Untapped Reservoir of Retail Funding

Many banks have pivoted toward business banking to find higher balances and margins, but the foundation of a community bank’s funding remains retail deposits. Interestingly, the most robust retail deposit bases are currently locked inside credit unions—institutions that are struggling with their own scale issues and merging at a similar clip to banks.

While credit unions buying banks have dominated the headlines and trade group lobbying, it is time for the industry to flip the script. Banks can—and should—buy credit unions.

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Industry Interest

I recently sat on an ABA panel at the recent ABA Washington Summit about this very issue. Joining me were industry experts on such transactions from law firm Luse Gorman and the ABA, moderated by Dave Daraio of Maspeth Federal Savings and Loan Association in Queens. The message: let’s pivot from lobbying against CU-bank deals to executing our own. It can be done.

Debunking the Myths of the "Impossible" Deal

The industry has long viewed bank-on-CU acquisitions as a regulatory and accounting nightmare. And recent history is no help. But the landscape has shifted:

• The Legal Path Exists: Federal law (12 U.S.C. §1785) and NCUA regulations (12 CFR Part 708a, Subpart C) explicitly provide the roadmap for a bank to acquire the net assets of a credit union.
• Regulatory Winds are Changing: The NCUA is currently rewriting its rules to make charter conversions to mutual banks easier, and is potentially "defanging" the poison pills of the past that they have wielded to thwart bank-CU deals.
• The Efficiency Edge: Despite their tax-exempt status, credit unions are often less efficient than banks. For similarly sized institutions, banks have historically delivered better financial performance, even after paying taxes.

Overcoming the Capital Hurdle

The primary challenge is accounting. These deals are structured as asset purchases where the credit union’s value must be distributed to its members. While this can strain a buyer’s capital, it creates a unique opportunity for:

• Stock Banks: Their ability to raise fresh capital gives them an advantage in absorbing these assets.
• Larger Banks Buying Smaller CUs: When a larger bank acquires a smaller credit union, the capital contingencies become negligible, making the deal "cleaner" and faster to execute.
• Member-to-Mutual Deals: The NCUA would likely be friendlier toward deals where credit union members gain depositor rights in a mutual bank.

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Call to Action: Who Will Step Up?

We are currently in a favorable regulatory environment for deal-making. And I will confess that my firm would welcome the opportunity to be at the forefront of this deal-making. More important to readers, we cannot continue to ignore the fact that our retail funding base needs a massive infusion of scale to compete with non-traditional providers while doing so profitably.

Credit unions have the deposits banks need, and many are looking for an exit due to scale or succession issues or a way to provide more flexibility to their members.

The tools are in the manual. The law is on the books. The market demand is clear.

It is time for bank leadership to stop complaining about credit union expansion and start executing their own. Who is going to step up and lead the first major "reverse" merger of this new era?

~ Jeff

Guest Post: Financial Markets and Economic Update for First Quarter 2026

 A Wild and Cold Quarter

I can only remember one other winter that was as cold as what we just experienced.  A snowstorm hit the Northeast on January 25^th, followed by a period of ice and freezing rain and days and days of a polar vortex, with brutally cold temperatures and wind chills.  Many days did not make it out of the single digits and roads were icy and winds fierce.  It reminded me of January, 1994, when we had a similar storm of snow and freezing rain.  Temperatures didn’t get above freezing for two weeks then, at which time the ice on the roads finally melted.  Every bone in your body felt frozen.  We escaped to Florida at the end of February and basked in the warmth.  We even got one moment of fame, when the Golf Channel filmed us live as we were getting our picture taken at the infamous Bear Trap at PGA National during the Cognizant Classic on February 27^th.

The quarter will also be remembered for volatile markets and a lot of events that moved markets.  Rallies on stocks, bonds, gold, silver, cryptocurrencies, and energy prices were soon met with selloffs and volatility.  The quarter started with the surprise of the US Military entering Venezuela on January 3^rd, arresting Nicolas Maduro and his wife, and bringing them to the US.  Venezuela surprisingly cooperated with the Trump Administration afterwards in opening their oil markets; the benefits to the people there will hopefully be an economy that grows and a life with freedom.

On January 30^th, President Trump nominated Kevin Warsh for Federal Reserve Chairman to replace Jerome Powell when his term expires on May 15th.  (In my mind, May cannot come soon enough).  The markets fell from their lofty highs, especially gold and silver, when they realized Warsh’s actions might actually support and defend the dollar.  Warsh believes that interest rates can be lower and the economy can grow strongly without inflation, with something called productivity.  Warsh also believes in targeting money supply to control inflation, which would make Milton Friedman proud.  Enough of the Phillips curve.  Enough of the ridiculous economic projections and the even more ridiculous Dot Plots.  Enough of thinking it’s okay to meet your inflation target two years out (i.e. do your job), as nearly every recent projection has shown.  Enough of the bloated Fed with its 3,000 economists and staff.

I’m not alone in my disgust for Powell.  On March 18^th at his press conference (which I heard about later since I avoided watching him), Powell said he would stay on as Chairman Emeritus if Warsh was not confirmed by the Senate by May and would, in any event, stay on the FOMC until the DOJ’s criminal investigation is concluded.  The markets hated to hear this.  Stocks sold off immediately and ended the day with losses.  The man who I once called a hero at the beginning of the Covid pandemic (what is wrong with me?) has overstayed his welcome.  He does not have any answers.  “We just don’t know” is his favorite phrase.  Enough!

A partial government shutdown occurred on January 31^st, with DHS as the only Department not funded.  Democrats did not want ICE funded.  Hello…ICE was already funded into 2029 in the OBBB passed last summer.  But still DHS is unfunded today and TSA is in the headlines, with airport security lines in many cases taking three to four hours due to short staffing and resignations.  Ironically, ICE was sent in to help TSA.  I’m so glad we traveled in late February.  FEMA, the Secret Service, the Coast Guard, cybersecurity analysis, and other operations are also unfunded and held hostage still.

Speaking of late February, on the 28^th, the US and Israel began a bombing campaign on Iran.  The decision was made urgently when the Iranian foreign minister bragged to US negotiators that Iran had 440-460 kilograms of 60% enriched uranium, sufficient, with more refinement, to make eleven nuclear warheads within a short time.  The Iranian people had tried peacefully protesting the regime in January, only to have an estimated 30,000 citizens shot/killed by Iranian “security.”  Trump promised that “Help was on the way” and it arrived.  One of the first bombs killed the Ayatollah and 40 senior leaders.  Since then, the bombing has been non-stop, but Iran has lashed out with drones and missiles fired at its Middle East neighbors, especially Israel, and has been threatening ships in the Strait of Hormuz.  This matters because crude oil is trading at $96 per barrel today and Brent crude is at $108, with an unusually wide spread between the two.  Gas prices have risen from $2.90 per gallon at the end of February to $3.98 today.  Once a tipping point is reached, consumers will cut back on spending on other goods and services.  The conflict with Iran and uncertainty about oil and gas prices took stocks and commodities off their recent highs, set early in the quarter.  (DJIA 50,000; S&P 7,000; Nasdaq 23,000; gold 5,500; and silver 120).  But figure this one out- the dollar index, DXY, is back close to Par at 99.24, up from 96.45, which was the recent low in January.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- The Conference Board indicator was down again in January by -.1%, following December at -.2%, and November at -.3%.  The index has been negative for 40 of the past 44 months (no change in July 2025, May 2025, November 2024, and March 2024), signaling a recession that never came.  It’s not the only once reliable indicator to “fail” as no recession followed.  The inverted yield curves of 2022 to 2024 pointed to recession, too.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.0% for 1Q26, following a weak 4Q25 reading of +.7%, and full year 2025 of +2.2%.  Major world economies are also weak.  China just lowered its GDP projection to 4%-5% this year, which is the lowest since 1991, due to weak consumer demand, high debt, real estate crisis, tariffs, and an aging population.  It all sounds so familiar.  The economies in Japan, Germany, and the UK are no better.

Moody’s Beige Book Index-  An improvement in the districts occurred in March’s report, with the index at 16.7, following January 5.6, December 11.1, October 13.9, and September 0.

M2 Money Supply- February saw a mini-surge in M2 at +4.9% year-over-year, probably due to the Fed’s cognitive dissonance of not lowering interest rates.  January was +4.3%, December was +4.2%, and November was +3.9%.  The velocity of money ticked up to 1.41 in 4Q25 and 3Q25 from 1.39 in 2Q25 and 1Q25, boding well for GDP growth.  (Remember GDP=M x V).

Inflation- I was very excited by the February CPI report, which was +2.4% y-o-y and the core was +2.5%, both at the implied Fed target.  But the subsequent releases dampened my enthusiasm.  PPI came in very hot and very nasty at +3.4% y-o-y and the core was +3.9%.  PCE (upon which the Fed targets are based) for January was +2.8% and the core was +3.1%.  What gives?  PCE is greater than CPI?

CPI vs PCE- What’s Going On?

When February’s CPI was released, many business writers and talking heads complained that inflation was above target.  Well, for the first time since May, 2025, CPI did hit its implied target versus PCE.  Treasuries celebrated when no one else would, with the 2-year yield down to 3.41% and the 10-year yield down to 4.05%.  As I have written ad nauseum, Fed policy targets are set using PCE, which generally runs 50 basis points less than CPI because of the inclusion in PCE of substitution effects.  Since 2010, CPI has averaged 3.0% per year and PCE averaged 2.48%.  The spread between them showed about 50 basis points, as expected.  CPI hitting target in February probably won’t matter now as energy prices have risen substantially with the Iran conflict.

January’s PCE report came out with the y-o-y changes above 3%, higher than CPI.  The indices are constructed differently, with price effects of goods and services at different proportions.  CPI is down due to housing costs and rents dropping a lot over the past six months.  Rents are now at a 4-year low of $1,353 per month and are down -1.4% y-o-y.  PCE has a lower percentage of housing costs and also a higher percentage of other service costs rather than goods.  It may take some time for CPI and PCE to revert to their average relationship.

Private Credit Crisis Brewing?

Jamie Dimon sounded the alarm months ago when JPM Chase took charge-offs of private credit company (non-bank) loans and restricted new lending to them.  The $1.8 trillion market is comprised of many loans to private credit companies to make their loans; the loans are contained in funds managed by Blackrock, Goldman Sachs, T Rowe Price, Blue Owl Capital, Morgan Stanley, KKR, Apollo, and others.  They have restricted withdrawals from funds to no more than 5% in many cases as investors unsuccessfully scrambled to pull their money.  Liquidity crisis anyone?  It certainly bears watching.

Ending a Wild Quarter

Venezuela, Iran, and Cuba were not anticipated before this year began.  It shows how quickly things can change.  Other notables in the first quarter:

-          Independent journalist, Nick Shirley, exposed massive fraud in Minnesota regarding shell day care and healthcare companies throughout Minneapolis to the tune of $9 billion.  This led to probes expanding from Minnesota to California, Ohio, Maine, and New York.

-          The polar vortex finally ended!  March had some warm days.

-          The Cinderella story of the 16-0 Indiana Hoosiers had a happy ending with their NCAA championship victory over Miami  27-21.  I thought it was more exciting than the Super Bowl.

-          The Supreme Court ruled that the tariffs imposed by President Trump were not legal using the 1977 IEPPA law.  But tariffs can be placed using other existing laws and these laws were detailed in the ruling.  So, the markets really didn’t care.

-          New highs were reached in stocks, gold, and silver but volatility returned with a vengeance and prices all fell back.  Just ask bonds.

-          And congratulations to Giorgia Meloni and the entire Italian team for putting on a great Winter Olympics.  Giorgia, we will see you this summer…

 

Thanks for reading!  As always, I appreciate your support!  DLJ 03/24/26

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.

Bank Board Exchange Ideas: Deposits and Liquidity

During a recent banking conference, my colleague and I led a peer exchange with community bank board members. To guide the conversation, we selected topics based on our experience and prior board surveys. The list included:

 - Liquidity and Deposits

- Credit Risk and Commercial Real Estate Stress

- Fraud

- Cybersecurity

- Economic and Geopolitical Uncertainty

- Strategic Execution

- Artificial Intelligence

- Succession Planning

- Wild Card (an open category)

 

Interestingly, no groups chose to discuss credit risk, CRE stress, geopolitical uncertainty, strategic execution, or any wild-card topics. Whether these felt too routine or too sensitive, they stayed untouched.

What captured the most attention—rightfully so—was liquidity and deposits. Since 2009, the number of U.S. bank branches has declined from nearly 100,000 to about 76,000 today, reflecting industry consolidation and branch profitability. Over the same period, the number of FDIC-insured institutions has nearly halved. Given this backdrop, branch consolidation, especially through mergers, is unsurprising.

As branches consolidated, the average deposits per branch grew dramatically. Using profitability data gathered across hundreds of community bank branches from my firm's profitability outsourcing service, reading right to left, we found that typical branch deposit levels more than doubled over the past decade. And these were community bank branches. No Wells Fargo, no Citi.

 

A similar trend appeared in deposit accounts, using retail money market accounts as an example. Ignoring the temporary spike during COVID, average balances rose from under $50,000 to roughly $80,000. Operationally, supporting an $80,000 account requires no more effort than supporting a $50,000 one, but it generates more spread income although it comes with more liquidity risk. The loss of one larger depositor hurts more.

The larger challenge for community banks is that they are not generating many net new deposit accounts. Big banks, fintech firms, and credit unions are winning the competition for new customers, creating constant headwinds. In response, community banks have increasingly pursued larger accounts—large commercial and municipal deposits. While helpful in the short term, these relationships tend to be volatile, especially in rising-rate environments, as recent Fed tightening demonstrated.

This is why banks must strengthen their marketing, sales strategies, and messaging about the value of depositing with a local institution. Deposits at community banks fund small businesses, local homeowners, and the broader community. In fact, a community bank can lend approximately $10 into its local economy for every dollar it earns in profit. By contrast, the destination of a fintech deposit is lost in translation.

 

Community banks have done well to grow and fund their balance sheets, but the concerns expressed by directors regarding future deposit gathering are well-founded. Chasing only large accounts while neglecting retail and small business depositors is risky. Don't do it.

 

Below is a blackboard of the ideas board members shared for strengthening community bank liquidity and deposit gathering:

~ Jeff

What Really Drives Bank Value—and What To Do Next

Earlier this month, I attended Bank Director’s Acquire or Be Acquired conference. As always, the sessions were strong and the hallway conversations even stronger. But the most thought‑provoking insights I carried with me didn’t start at the conference—they started on the plane ride there.

I was listening to Street Talk by S&P Capital IQ, hosted by longtime industry colleague and friend Nathan Stovall. His guest was Jonah Marcus, a buy‑side fund manager with deep experience evaluating banks—and someone I’ve had the privilege of working with as a board member at one of our strategic planning clients.

I’ve seen Jonah operate up close. He understands what creates real value in banking—and more importantly, what doesn’t. His perspective is worth paying attention to.

Valuations: The Market Isn’t Coming to Save You

One message Jonah was unequivocal about: banks should not expect valuation multiples to rise in the near term.

Institutions trading at 10–11x earnings are unlikely to suddenly revert to historical averages of 12–14x. The same holds true for price‑to‑tangible book. In today’s market, valuation expansion is not a given—it is earned.

So what separates banks that trade at a premium?

• High‑quality, durable earnings
• Consistent profitability
• A clear specialty or niche that drives growth
• Strong core funding
• Superior, sustainable expense management that produces best‑in‑class efficiency ratios

In other words, the market rewards banks that execute exceptionally well—not those waiting for macro conditions to improve.

If your strategy depends on “multiple expansion,” it’s time to revisit the plan. Value creation today comes from disciplined execution, not market optimism.

Recession Watch: Two Perspectives Worth Weighing

Jonah also pointed to meaningful economic and credit tailwinds. Non‑performing loans remain historically low. Capital levels are far stronger than they were heading into the 2008 financial crisis. Banks have improved loan concentrations and overall risk discipline.

Nathan echoed this view at the conference, noting that there are few—if any—early warning “cockroaches” signaling an imminent recession.

I’m slightly more cautious.

We’re beginning to hear about “one‑time” or “isolated” credit events in third‑ and fourth‑quarter earnings calls, particularly from more aggressive lenders—those making larger loans or expanding outside their core markets. Historically, recessions often begin with asset bubbles bursting. Today, we still have a high‑flying stock market and residential real estate prices at elevated levels.

Reasonable people can disagree—and they do.

Whether you’re optimistic or cautious, now is the time to stress‑test assumptions, re‑examine concentrations, and ensure your balance sheet can withstand headwinds should they come. Hope is not a strategy.

Technology: Where Banks Are Falling Behind—and How to Catch Up

The most compelling part of the discussion centered on technology.

Jonah sees technology as a key differentiator today—and an even bigger one tomorrow. In his view, technology should deliver four outcomes:

1. Lower costs
2. Greater scalability
3. Delighted customers
4. Data‑driven, personalized sales and service

Here’s the reality check:

• Banks are generally doing well on cost reduction.
• They’re doing okay on scalability.
• They are largely failing at delighting customers and leveraging data.

Too many banks remain overly dependent on their core processors. Too few are using customer data to meet clients where they are—in an increasingly digital, personalized world.

Jonah’s point was simple but powerful:

If banks can leverage technology to achieve all four outcomes—even competently rather than perfectly—growth becomes easier, margins improve, customer satisfaction rises, and powerful network effects begin to take hold.

That’s how banks lift their heads above an increasingly commoditized competitive landscape.

Fintechs have already proven this model. Many are now seeking bank charters for a reason.

Jonah supports a crawl‑walk‑run approach to technology adoption—avoiding shiny objects and infrastructure strain. But in his view, given where financial technology stands today, banks should be much closer to walk‑to‑run than crawl.

If your technology strategy is still focused primarily on cost containment, you’re missing the bigger opportunity. The real upside is growth, differentiation, and customer relevance.

 

What This Means for You—and How We Can Help

For readers who know me, you’re aware that The Kafafian Group recently merged with Wolf & Company, P.C., a Boston‑based CPA and advisory firm. Together, we now bring deeper capabilities and broader execution support to financial institutions.

What does that mean in practice?

• Strategic plans that don’t just sit on shelves—but get executed
• AI and technology advisory aligned with business outcomes
• Deeper profitability analysis at the product, line‑of‑business, and center level
• Process improvement informed by internal audit and best‑practice insights
• Financial advisory that goes beyond negotiating the deal and running the numbers

Simply put: we can do more, and we can go deeper.

If these themes resonate—valuation pressure, technology differentiation, disciplined growth—I’d welcome the conversation.

You can reach me through this blog, at Jeffrey.Marsico@WolfandCo.com, or at (717) 468‑3208.

And yes—we’re continuing our This Month in Banking podcast, which celebrated its 10‑year anniversary in January 2026. Thanks for keeping us in your listening lineup.

Let’s keep the dialogue going.

~ Jeff

 

 

Note: This post was written by me, and improved by AI, which methodically is breaking my propensity for run-on sentences. Sister Mary Ryan would be pleased. 

 

Interest Rate Caps: Long History of Failure

President Trump called for a temporary, nationwide cap on credit card interest rates at 10% APR for one year, beginning January 20, 2026. He announced the proposal publicly through posts on Truth Social and reiterated it in remarks to reporters and in public speeches. His logic: it's a consumer‑protection measure aimed at reducing what he described as “excessive” credit card interest rates—often 20% to 30%, and higher for subprime borrowers.

Most bad ideas offered by government officials sound good. What's not to like? Champion the consumer that pays that level of interest rates while carrying credit card balances. To heck with the banks! I could see the pithy slogan on the protester sign. 

The problem is that in less time than it would take our hypothetical protester to grab his sharpie and scribble his sign, he could have asked his favorite AI tool to research when the US tried rate caps in its history and what was the result. You would think a reporter would do it and ask any proposer "didn't we try interest rate caps through various state usury laws and, according to a peer-reviewed New York Fed study that credit access declined sharply for high-risk borrowers and delinquency rates did not decline?"

The reporter could have entered the query as the populist, yet foolhardy proposal was coming out of the politician's mouth. In fact, going back through US history, using peer-reviewed studies to feed the summary table, it is clear that interest rate caps restrict credit, particularly for riskier borrowers. But that doesn't fit well on our protesters sign.

Period	Government Action	Result
Colonial-Early Republic	Statutory Usury Caps	Credit Shortages, off-book lending
19th Century	State Usury Ceilings	Slower growth, elite credit access
1933 - 1980s	Reg Q Deposit Caps	Bank disintermediation, loan contraction
2007 - present	Federal and State APR Caps	Reduced access for high-risk borrowers

Overarching Scholarly Consensus

Across four centuries of U.S. economic history, peer‑reviewed research consistently finds that: Interest‑rate caps reduce the supply of credit more reliably than they reduce the price of credit.

The empirical pattern—observed repeatedly in different eras, legal frameworks, and financial systems—is:

• Credit rationing

• Market exit by lenders

• Disproportionate harm to higher‑risk and lower‑income borrowers

• Minimal or no improvement in default outcomes

The evidence is clear and accessible. The question is, should policy be driven by observable facts and common sense, or by what sounds good?

~ Jeff

Sources:

Less for You, More for Me: Credit Reallocation and Rationing Under Usury Limits

THE EFFECTS OF USURY LAWS: EVIDENCE FROM THE ONLINE LOAN MARKET on JSTOR

Economic Conditions - Dallas Fed

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

What tool helped me find all of this peer-reviewed research without having to scroll through mountains of BS on a search engine? Copilot.