The next frontier for credit union mergers

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Until relatively recently, growth option ideas for credit unions were seemingly limited to geographical expansion or merger. However, once reforms were made to the Dodd-Frank Act, regulatory burdens placed on all financial institutions resulted in a more creative and aggressive growth stance at many credit unions.

Let’s address the credit union merger mayhem aspect first. It’s no secret that the Dodd-Frank Act put a regulation choke hold on credit unions. Rising compliance costs put pressures on institutions to pay for either staff training or additional employees. These two factors obliterated many credit union budgets, putting them on the ropes. Many credit unions found themselves in desperation mode. Mergers were seen as more of a lifeline than a growth strategy.

Thankfully, recent changes to legislation will offer new growth opportunities for credit unions. As a result, mergers will revert back to being used as more of a growth strategy, and it is a good one. When credit unions merge, several benefits occur. Field of membership can potentially be expanded, resources such as forms can be shared and some staff responsibilities can be centralized.

Yet, one question must always be answered when any merger takes place: Is this in the best interest of the membership? The usual answer is “yes,” simply because credit unions have like-minded customer service missions and overall industry goals. Therefore, it is rare for merger requests to be denied. And while the number of credit unions nationwide continues to shrink each year, the industry has hit a record $1.4 trillion in assets. In other words, mergers still have great value for industry growth and stability.

So why would a credit union want to acquire a bank? Twenty years ago, this question never would have been approached – bank acquisitions were not on the radar. That’s not the case today, however. Ultimately, CUs acquire banks for the same reason traditional mergers occur: Growth.

Yet, the road to acquisition is often not always paved with good intentions. At least this is true as far as banks are concerned. Most large banks will not seek to acquire smaller banks, because the same amount of effort is required to strike an acquisition deal regardless of asset value.

Therefore, banks are much more interested in acquiring institutions of similar size and scope. Smaller banks do not make sense when you run the numbers. However, for credit unions, these make a lot of sense. While a $70-$150 million-asset bank may not be appealing to a large bank for acquisition, credit unions will entertain the request if it marries well to their mission and growth metrics.

For instance, acquiring a bank can substantially increase market share in desirable communities. Also, an acquisition is a chance for credit unions to substantially increase their product offerings. So where large banks are not interested in the crumbs offered by small bank acquisitions, credit unions can take advantage and reap the benefits.

And it seems like they are. Each of the last few years has seen credit union acquisitions of banks becoming increasingly common, and for all the deals finalized thus far, there are more in deals under negotiation. And if those go through, 2019 could outpace previous years.

Many in the credit union movement have long viewed banks as the enemy, but it’s increasingly clear that in some cases they are also certain institutions’ best chances for growth.

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