More Credit Unions Are Buying Banks

In 2012, only one credit union purchased a community bank, and in 2013, there were none. In 2018, seven such purchases were made. A recent Regional Economist article explored why more credit unions are buying banks.

Acquiring Banks

Senior Economist Andrew Meyer noted that the vast majority of credit union expansion by acquisition historically has been through buying other credit unions. One appealing reason behind buying banks instead of another credit union could be their presence in business lines where credit unions aren’t typically as strong.

Meyer gave business lending as an example. Since 2012, the average ratio of business loans to total loans for acquiring credit unions in the quarter prior to acquisition was 8.6%. However, the banks being acquired had an average ratio of 33.8%.

“Moreover, like credit unions, small community banks tend to have strong community ties and know their customers on a more personal level than their large-bank counterparts do,” Meyer wrote. “This strong community relationship can be an asset to the acquirer.”

Issues with Acquiring Banks

Meyer noted that one significant roadblock to acquiring community banks could be credit unions’ field-of-membership requirements. “For example, if a credit union’s membership is limited to employees of a particular corporation, it would be hard-pressed to find a commercial bank whose customer base covers only those same employees,” Meyer wrote.

Credit unions with wider fields of membership—say, all residents of a particular state—may find it easier to locate a bank with customers who all fit that requirement. “If that portion is located somewhere other than where the majority of the purchaser’s existing members are located, there is an added bonus of geographic diversification along with some new employees who are familiar with the new area,” Meyer noted.

Meyer identified a few other considerations:

• After acquiring a bank, the credit union cannot use the word “bank” on any of its signage or literature.
• The credit union must also make clear that depositors are now protected under the National Credit Union Association’s Share Insurance Fund, rather than the Federal Deposit Insurance Corp.’s Deposit Insurance Fund.

Banks Selling to Credit Unions

On the other side of the equation, banks may look to be acquired by credit unions—for a few reasons.

Return on Investment

Credit unions don’t typically have the same pressure to provide returns on investment that banks do, Meyer noted. “Rather, credit unions need only cover their operating costs, provide satisfactory member services and maintain an adequate regulatory capital base,” he wrote.

This may prove enticing to banks with profitability under pressure. Indeed, of the 19 banks acquired by credit unions since 2012, six had negative return-on-assets ratios in the quarter prior to being acquired.

Tax Treatment

Unlike commercial banks, credit unions are not subject to profit taxes. Thus, Meyer noted, credit unions might be more willing to pay a higher price for a community bank than another commercial bank might offer.

Community Ties

Meyer also noted that community banks tend to have deep ties to their communities and might simply prefer selling to another organization that shares their local pride. “That is, they might feel that they have more in common with the culture at a neighborhood credit union than with the culture of a distant large bank,” Meyer wrote.

Conclusion

Meyer pointed out that it’s unknown whether this trend will continue. “Because of all the regulatory and business-model barriers involved, it will likely never be a dominant transaction type, but there are clearly times when it makes business sense,” he wrote.

Additional Resources

• Regional Economist: Why Are More Credit Unions Buying Community Banks?
• On the Economy: Do Banks Have Pricing Power?
• On the Economy: Banking on “Bank On”