Bank buys boost credit unions' key growth metrics but hurt net interest margins

Acquiring banks has helped put credit unions on a path that accelerates growth even though the combinations can end up squeezing a buyer's net interest margin, an analysis by S&P Global Market Intelligence found.

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

"Banks, a lot of them are really good at commercial; then, the credit union comes in, who's typically better at consumer lending. When you marry the two together, you've got a great capacity to grow," said Charley McQueen, president and CEO of McQueen Financial Advisors. "From just a pure growth trajectory, 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."

However, bringing on banks' more commercial-leaning customer base also comes with drawbacks, namely in cost of funds and margin pressures. Still, credit union acquisitions of banks have been on the rise, and 2024 is set to become a record-breaking year when it comes to the transactions.

Pros

Credit unions that have acquired banks since 2018 have largely posted higher quarterly deposit growth rates compared with their credit union peers that have not struck bank deals. The deposit growth at credit unions that have acquired banks has also rivaled and sometimes even outpaced the deposit growth rates at community banks.

In the first quarter, credit unions that have acquired banks posted median deposit growth of 3.0% compared with 1.0% for community banks.

Credit unions that have struck bank deals also greatly outpaced their peers on member growth since at least the fourth quarter of 2018.

Acquiring credit unions are able to bring on more members with geographic and product expansion and more of the community realizing they are eligible for membership at a credit union following the bank acquisition, advisers said.

These deals "break down the barriers," McQueen said. "Maybe 20% of the community is working with a credit union, 80% with a bank. All of a sudden, you now have 100% of the community that understands that credits unions are for everyone."

Moreover, most credit unions have small product sets compared with more vast product offerings at banks, advisers said. Bringing on more products allows these credit unions to bring in more customers and vie for more deposits.

"You're not just growing in the actual deal with like assets and liabilities or the customers, you're deepening and growing your product offering and skill set," said Michael Bell, leader of Honigman LLP's financial institutions practice, who advises on many credit union-bank deals. "That kind of pays off over a term of many years."

However, part of the trend of credit unions that have struck deals outpacing their credit union peers on key growth metrics comes down to the fact that acquiring credit unions simply tend to be more aggressive regarding growth compared with those that do not engage in M&A, both Bell and McQueen said.

There is a small subset of credit unions focused on aggressive organic and nonorganic growth; the majority are more focused on serving their mission rather than growing aggressively, Bell added.

"These credit unions, before they ever bought a bank, were in the growth business organically," he said. 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."

Cons

But scooping up a bank is not entirely free of headaches.

The analysis found that credit unions that have not struck bank deals have better net interest margins (NIMs) than their banking-buying peers and community bank peers. The three groups' median NIMs moved largely in line with each other before a divergence that began in 2023.

In the first quarter, the median NIM for credit unions that have not acquired banks was 3.89%, compared with 3.20% for credit unions that have bought banks and 3.25% for community banks.

While many credit unions strike these deals to diversify, the new customers can come with challenges. Bank customers, which lean more commercial than credit unions, are "much more price sensitive than a standard credit union member," McQueen said.

To keep deposits, credit unions that have acquired banks are more likely to run specials such as share certificates, which are equivalent to certificates of deposit at a bank. In the first quarter, share certificates made up 24.4% of total deposits at credit unions that have acquired banks compared with 15.9% of the total deposits for all other credit unions.

"Once you've done a bank transaction, you don't want to lose those deposits, you want to be sure you keep them," McQueen said.

Anecdotally, another risk for credit unions when they acquire a bank is increased employee poaching. While the risk of losing employees as a result of disruption is a possibility in any merger, banks often use credit unions' lack of commercial experience to appeal to the bankers being acquired.

Banks will approach those commercial lenders and say, "'Hey, you're now at a credit union. Credit unions don't know how to do this stuff,'" McQueen said.

Banks benefit

Despite some drawbacks, the strategy overall is often fruitful for credit unions and can pay off for selling banks in the short term too.

The estimated deal premium for such deals announced since 2019 was 52.9%, higher than the 21.8% median for bank-to-bank deals.

Some banks have been able to fetch significantly high prices relative to their stock prices, such as Catskill Hudson Bancorp Inc., which fetched a 118.9% premium to its $18.50 closing share price prior to announcement.

Credit unions have been paying up in these deals recently, with the three most-pricey deals since 2019 announced this year.

Since credit unions do not have stock, they must pay all cash in the deals. Bank industry groups argue credit unions can pay a higher price due to their tax-exempt status.

With the pressure bank stocks have faced in recent years, many bank sellers are looking for cash deals rather than stock exchanges in a sale.

"Bank stocks have been unfairly battered," Bell said. So banks right now are preferring "the value of cash being known and understood versus a speculative stock."