Should Credit Unions Acquire Banks?

OBSERVATIONS FROM THE FINTECH SNARK TANK

The question of whether or not credit unions should buy banks is a pond of scum that one should be careful to wade into. S&P Global jumped right in. It recently published an analysis comparing credit unions (CUs) who have acquired banks to other CUs. The analysis is flawed.

Wanna Start an Argument?

The topic of credit unions acquiring banks is a contentious issue in the industry.

The Independent Community Bankers of America (ICBA) asserts that these acquisitions can “materially damage local communities,” displace critical providers of capital in local communities, and expand the portion of the industry exempt from Community Reinvestment Act requirements.

The reality, however, is that, in many cases, it’s the community banks themselves that initiate the deals.

A November 2023 Federal Reserve memo noted that credit unions were “receiving an increase in inquiries from banks seeking to sell, primarily because other banks are unable to make acquisitions in the current environment.”

The memo added that credit unions with “ample liquidity and capital” hold a distinct advantage, positioned as desirable buyers of banks.

The Credit Union/Bank Acquisition Track Record

Arguments for or against credit union acquisitions of banks aside, let’s look at the facts. Or, more accurately, the data. S&P Global concluded from an analysis that:

“Credit unions that have acquired banks outperform their credit union peers in areas such as deposit and member growth, as the deals provide the primarily consumer-focused institutions with geographic, customer and product diversity.”

S&P Global lists some pros and cons of credit unions acquiring banks, including:

Pros: Higher quarterly deposit and member growth rates among bank acquirers than credit unions that have not struck bank deals, and ability to bring on more members with geographic and product expansion as “more of the community realizes they are eligible for membership at a credit union following the bank acquisition.”

Cons: Credit unions that have not struck bank deals have better net interest margins than their bank-buying, as well as community bank, peers.

S&P Global also quotes some M&A advisor experts as saying:

• “You’re always going to do better when you take two institutions with different specialties and put them together correctly. That is definitely going to propel faster than others.”
• “These credit unions, before they ever bought a bank, were in the growth business organically. Doing bank deals feeds organic growth even more, which then feeds doing the next deal. It’s like a bit of a circle. They’re humming along, and they’re outpacing their peers.”

A Flawed Analysis

My take: The quantitative analysis is flawed and the quotes from the advisors are way off the mark. The analysis is flawed because:

• There’s no established baseline. To establish a view of the impact of a bank acquisition on a credit union’s deposit and member growth requires a starting point metric. How well or poorly was the acquiring credit union doing before the acquisition?
• The comparison set is flawed. A valid comparison would compare the 44 acquirers to a set of credit unions that demonstrated similar performance metrics before the acquiring credit unions made their acquisitions.

As for the advisors’ quotes, I’d accuse them of “smoking something” but that’s not quite the indictment it once was. Here are my disagreements:

• No, you’re not “always going to do better when you take two institutions with different specialties and put them together.” Qualifying that statement with “…put together correctly” begs the question: What does correctly mean? A strong argument can be made that the culture and strategic fit between the two institutions are stronger determinants of future success than just slapping together “different specialties.”
• Assuming the acquiring credit unions “were in the growth business organically” before they bought a bank is far-fetched. Maybe the reason a credit union acquired a bank was because it wasn’t “in the growth business.” And asserting that “doing bank deals feeds organic growth even more, which then feeds doing the next deal” is way off the mark. Only three or four bank-acquiring credit unions—out of a total of 44—have acquired more than one bank.

Bottom line: Simply looking at the numbers doesn’t provide enough insight to assess credit unions’ bank acquisitions. It has to be evaluated on a case-by-case basis. Hyperbole concerning “community damage” and misinterpretations of performance data doesn’t help determine if credit unions should acquire banks or not.