Credit Union Bank Purchases Gain Steam

In 2012, the $2.6 billion United Federal Credit Union in St. Joseph, Mich., and the $505 million GFA Federal Credit Union in Gardner, Mass., broke new ground after finalizing their deals to buy small banks.

These credit union bank acquisitions created a lot of buzz throughout the financial services industry and launched a small but steadily growing trend that has gained momentum this year.  Over the last seven years, 15 credit unions, primarily in the Southern and Midwestern states, have completed 17 bank purchases, including two deals that were finalized earlier this year. What’s more, there are an additional seven pending credit union bank acquisition deals and there may be more coming before year’s end.

A new study by the Filene Research Institute took a closer look at these acquisitions, what made them work, what bottom-line benefits they produced and why credit union CEOs are looking to buy more banks over the next year and a half.

Interestingly enough and perhaps ironically, the challenging dark days of the 2009 financial crisis and the subsequent Great Recession eventually led to the opportunity for credit unions to buy banks.

David A. Walker, a business professor at Georgetown University who authored the Filene report “Credit Unions’ Acquisitions of Banks and Thrifts,” said the financial crisis had left some small banks in such weak financial condition that “federal bank regulators seemed quite satisfied to learn that a credit union planned to acquire a particular small bank and that another federal financial regulator would assume the responsibility for supervising the acquired institution.”

Walker also said the NCUA has not had noteworthy difficulty regulating the credit unions that have acquired banks and savings institutions, but the federal agency carefully reviews all of the acquisition deals for obvious reasons.

“There are a multitude of reasons to explain why some small banks and savings institutions have been prone to merge into credit unions or have allowed themselves to be acquired since 2012,” Walker said. “The financial crisis had ended two years before and the financial performance of many banks and savings associations, especially smaller ones, had hardly improved.”

When the banks and savings institutions were acquired, they had substantially lower financial performance metrics than their bank and savings institution peer group with less than $100 million in assets.

According to Walker, the acquired institutions had substantially lower net worth ratios of 10.10% versus 13.01%, ROE of -0/12% versus 6.39%, and ROA of 0.05% versus 0.83%. Additionally, the acquired banks and savings institutions were less liquid, with slightly higher loan to deposit ratios, 71.29% versus 70.55%, but lower net returns.

After the bank purchase deals were finalized, most credit unions expanded their mortgage and business loans portfolios, Walker said. The acquisitions also opened opportunities for credit unions to reach new members in underserved economic areas. What’s more, he noted credit unions managed to retain bank employee talent to keep growing the acquired bank product lines rather than having to build a new staff.

Walker’s research determined credit unions that acquired banks had somewhat stronger financial performance metrics with higher capital ratios, greater returns on both assets and equity, and lower loan net charge-off ratios than comparable-sized credit unions by the end of 2017. He calculated these metrics by conducting a financial analysis of the credit unions and banks based on the variables and ratios that simulated the CAMEL regulatory system.

Walker’s analysis revealed that the acquiring credit unions had a mean net worth of 10.99% versus 10.90% for their peer credit union group with assets from $500 million to $1 billion at the end of last year. Moreover, the credit unions also posted a mean ROE of 11.49% versus 10.33%, a mean ROA of 0.95% versus 0.72%, a mean liquidity of 92.51% versus 84.11% and a mean asset quality of 0.60% versus 0.52%.

Gary Regoli, president/CEO of the $1.5 billion Achieva Credit Union in Dunedin, Fla., who recently participated in a podcast panel discussion about bank acquisitions and the findings of Filene’s research, said his credit union’s 2015 purchase of the $167 million Calusa Bank in Punta Gorda, Fla., has improved Achieva’s bottom line.

“We invested $23 million in this transaction, and our ROI on that investment right now is looking like it’s going to be 10% or 11% this year,” Regoli said. “So from a return on investment standpoint, we feel pretty good about that, and we think it could obviously even go much higher.”

In February, Achieva announced it signed a second deal to buy the $119 million Preferred Community Bank in Fort Myers, Fla.

Other credit unions that have made two bank purchases include the $404 million Five Star Credit Union in Dothan, Ala., and the $1.6 billion Advia Credit Union in Parchment, Mich.

However, Walker acknowledged that even though the bank acquisitions contributed to the credit unions’ growth, there were certainly other factors, such as the slow but steady national economic recovery following the Great Recession, and other local and regional market aspects, which helped cooperatives improve their financial performance. Since 2000, credit union assets have increased by 214% and bank assets jumped 177% while the U.S. economy grew by 83%, according to Walker.

In addition to Regoli, Walker interviewed CEOs Linda Cencula of the $771 million Avadian Credit Union in Hoover, Ala.; Cheryl DeBoer of Advia; Brandon Riechers of the $2.2 billion Royal Credit Union in Eau Claire, Wis.; Robert Steensma of Five Star and Tina Sbrega of the $505 million GFA Federal Credit Union in Gardner, Mass.

From these interviews, Walker said most credit union CEOs recognized that significant economies of scope (products and services) and scale opportunities were more likely from buying a bank than from merging with another credit union.

“Credit union executives reported that most acquisitions were beneficial and/or profitable for the credit union within 18 months of the acquisition,” Walker said. “Executives are generally satisfied with their bank acquisitions.”

Because of these positive outcomes, credit union executives told Walker they plan to pursue new bank acquisition deals over the next 18 months.

In addition to the completed acquisition in June of the $20 million High Desert Bank in Bend, Ore., by the $289 million Mid Oregon Federal Credit Union in Bend, seven pending credit union/bank acquisition deals that are expected to close this year are the $2.3 billion Georgia’s Own Credit Union in Atlanta of the $90 million State Bank of Georgia in Fayetteville; the $916 million SRP Federal Credit Union in North Augusta, S.C., of the $81 million Southern Bank in Sardis, Ga.; Achieva of the $119 million Preferred Community Bank in Fort Myers, Fla.; the $414 million Superior Choice Credit Union in Superior, Wis., of the $77 million Dairyland State Bank in Bruce, Wis.; the $1.4 billion Evansville Teachers Federal Credit Union in Evansville, Ind., of the $106 million American Founders Bank in Louisville, Ky.; the $1.2 billion LGE Community Credit Union of the $92 million Georgia Heritage Bank in Dallas and the $1.1 billion Credit Union One in Ferndale, Mich., of the $222 million Hantz Bank in Southfield, Mich.