By Ray Birch
WASHINGTON—Twenty credit unions have now acquired 22 banks, and the moves—says one expert who has written a paper on the growing trend—have proven to be sound as long as the credit union does its homework.
“For the credit union that is careful and analytical and has creative management, they can really make this a big positive for their CU,” said David Walker who wrote the report “Credit Unions’ Acquisitions of Banks and Thrifts.” Walker is a business professor at Georgetown University.
The credit unions that have acquired banks since 2012 all had higher capital ratios, greater returns on both assets and equity and lower loan net charge-off ratios than peer group credit unions by the end of 2017, according to the analysis that was released by the Filene Research Institute.
Walker told CUToday.info that what he learned when he visited several of the credit unions that have purchased banks is they have been very calculated in their acquisitions.
“I came to understand when I visited with these CEOs that they are being extremely careful in terms of their bank acquisitions,” said Walker. “They were not just taking a weak institution, they only made the move if they saw a unique opportunity.”
Those CUs that were interviewed for the Filene report include Avadian CU in Alabama, Achieva CU in Florida, Advia CU in Michigan, Royal CU in Wisconsin, Five Star CU in Alabama and GFA FCU in Massachusetts.
‘Blew My Socks Off’
Walker said he was impressed with the attention credit union executives have given to their bank buys, especially Avadian Credit Union in Birmingham, Ala., which purchased American Bank of Huntsville.
“They blew my socks off,” said Walker. “The Huntsville area is the fastest-growing in the state. The credit union, before the bank buy, was not heavily into mortgage lending and they picked off a great bank whose specialty was mortgage lending—again, located in the fastest growing area of the state. The credit union kept the bank’s chief mortgage lending officer and got rid of all the bureaucracy that was holding the bank back, and ran with that acquisition. They have done a great job.”
Walker said that GFA FCU in Gardner, Mass., which acquired Monadnock Savings Bank, also made a wise and calculated move to expand its reach.
“They were sort of stuck in the middle of Massachusetts and with the bank buy were able to cross into New Hampshire,” explained Walker. “They opened up a whole new market for the credit union. These are just two examples, but they clearly illustrate the detail behind the moves these credit unions are making.”
While one factor that leads to the strong post-acquisition performance is that the acquiring CUs had to be better performers prior to the acquisition in order to make the purchase, Walker said that is only a contributing factor to the ongoing, and often improved success of these credit unions.
“These are not credit unions that are struggling,” said Walker. “But one thing that has been consistent across the credit unions I spoke with is that the CEOs are energetic, creative, and are looking for unique opportunities.”
Turning Customers into Members
Michael Bell
What the acquiring credit unions all do, as well, noted Walker, is a great job of converting bank customers into CU members—and often members with deeper relationships than the CU typically has with its existing account holders.
“When a financial institution acquires another financial institution you have to expect they may lose a lot of the depositors from the acquired organization,” said Walker. “But the loss of accounts during these acquisitions has been miniscule.”
Michael Bell, attorney and counselor at Royal-Oak, Mich.-based Howard & Howard, said that the lowest conversion rate from the CUs he has worked with is in the mid 90% range.
Bell has been part of 22 CU/bank deals, including three mergers of a bank into a credit union.
“Credit unions that are buying banks are getting wallet share gain,” said Bell. “These bank customers typically have deeper relationships with the bank than credit union members have with their CU. Plus, these bank customers have likely never been served by a credit union. So they come over to the credit union, get better service, get better rates … why would they move?”
What is largely occurring with these bank buys is the credit union is not just improving economies of scale, but its scope, explained Walker.
A ‘Relevant’ Strategy
“These credit unions, with the services and skills these banks have, are getting much further into mortgage lending and business lending, for a large part. They are extending their reach into new areas and expanding their product offerings,” he said. “If I were advising CEOs that are looking to expand the credit union, I would encourage them to go after banks for a number of reasons, despite the fact these deals are a little more complicated in terms of accounting than acquiring another credit union.”
Bell said credit unions buying banks is a “relevant” strategy today.
“We are at a high-water mark now,” said Bell. “There are more deals ready to trickle in soon. This is a tool for credit unions to grow.”