Credit Unions' Acquisitions of Banks and Thrifts

Executive Summary

As credit union mergers expand horizontally, they have an opportunity to reduce costs and increase fields of membership. These enterprises typically succeed well for the newly merged organizations and their members. But rarely do we hear of credit unions acquiring commercial banks and thrift institutions. Over the past six years 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?

What is the research about?

Following US 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 acquisitions are in progress. This study 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. These institutions have 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 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. The executives expect to pursue additional acquisitions. 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 National Credit Union Administration’s Share Insurance Fund or the credit union environment.

What are the credit union implications?

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.

• 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.
• 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.
• 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.

In association with this report, Filene created a podcast that features report author David Walker, Michael Bell, the legal council for almost every bank acquisition by US credit unions, and credit union CEO Gary Regoli, who has experienced several bank acquisitions. Listen to the podcast here:

Episode 40: Credit Unions' Acquisitions of Banks and Thrifts. 

Sponsors

Filene thanks its sponsors for helping to make this research possible.