One of the clearest trends in U.S. credit unions today is organization consolidation. CUNA Mutual Group’s most recent Credit Union Trends Report commented on this trend with the following, “As of April 2018, CUNA estimates 5,724 credit unions were in operation, three fewer than March (2018). During the first four months of 2018, approximately 76 credit unions ceased to exist because of mergers, purchase and assumptions, or liquidation. This rate is slightly faster than the 65 reported during a similar time period in 2017. Expect the annual decline in the number of credit unions to be about 250 per year over the next two years as competitive pressures rise on smaller institutions.”
As mergers become more common, we find the merged organizations generally operate on a more efficient and growth-oriented basis.
But rarely do we hear of credit unions acquiring commercial banks and thrift institutions. Over the past several years a small number of credit unions are choosing to purchase smaller banks and savings institutions. How does this work? What conditions need to be established for these types of acquisitions to be successful? And what benefits do credit unions and their members see as a result of the acquisition?
Following U.S. financial deregulation that began in 1980 and the recovery from the financial crisis, 14 credit unions have acquired 16 banks and savings institutions, and five more of such acquisitions are currently in progress. Filene’s most recent study, “Credit Unions’ Acquisitions of Banks and Thrifts” by Professor David Walker of Georgetown University, summarizes interviews and financial analysis – focusing on ratios that simulate the CAMEL system (capital adequacy, asset quality, management, earnings, liquidity) – that delineate the credit unions’ success managing the integrated institutions.
By year-end 2017, these acquiring credit unions held stronger financial characteristics after they acquired other institutions. They had higher capital ratios, greater returns on both assets and equity, and lower loan net charge-off ratios than comparable-size credit unions.
Credit union executives interviewed for this study said they are enthusiastic about their acquisitions because they may extend services to current and future members. Loans that are traditional products of the acquired banks and savings institutions became available to members, particularly in underserved economic areas. Many of these executives expect to pursue additional similar acquisitions and see them as a positive growth strategy for their credit unions.
The average total assets of the acquiring credit unions are approximately $1.4 billion –16 times the average size of the acquired institutions. There is no apparent basis to discourage credit unions from acquiring banks and savings institutions. These acquisitions are not unusually risky for the NCUA’s Share Insurance Fund or the credit union environment.
So, what are the credit union implications? We discovered a few:
- First, acquisitions of commercial banks by credit unions are comparable to vertical mergers of banks and credit unions. They hold the potential to increase both economies of scope and scale and to be profitable within a relatively short period of time.
- Second, recent low interest rates and the Federal Reserve policy blueprint since 2016 have made it easier for credit unions to acquire banks and regulatory bodies have been receptive to credit unions acquiring banks.
- Finally, often this type of merger provides a means for credit unions to move into previously underserved areas of their communities, providing benefits not only to members but further promoting financial sustainability among new and struggling populations.
As credit unions consider the various means of growth available, the acquisition of commercial banks by credit unions joins a list of possible strategies that deserve consideration.
George Hofheimer is Chief Knowledge Officer for Filene Research Institute. He can be reached at 608-852-4632 or email@example.com.