More credit unions are acquiring banks as part of their growth strategies, and the moves appear to be paying off.
Membership growth at credit unions that have acquired banks outpaces the rest of the industry. Since the fourth quarter of 2015, credit unions that have purchased banks grew membership 22.7%, while other credit unions only grew membership 15.1%, according to S&P Global Market Intelligence data.
Atlanta-based Georgia's Own CU, which purchased Fayetteville, Ga.-based State Bank of Georgia in 2018, saw a slight drop of 1.4% in membership in the quarter following its acquisition, but the credit union still retained most of the accounts, according to its CEO.
"We're proud of the fact that we've retained just over 90% of [State Bank of Georgia] accounts," CEO David Preter wrote in an email.
Georgia's Own was also able to maintain about 90% of shares and deposits, Preter said.
"This, as you can imagine, was another big win for all of our members, because of the credit union member-owner business model, in which growth translates into better rates and fewer and lower fees," Preter wrote.
An analysis by S&P Global Market Intelligence found that shares and deposits grew 45.9% from the fourth quarter of 2015 to the second quarter of 2019 at credit unions that had purchased banks. At credit unions that did not purchase banks, that growth rate was only 25.3%.
Credit union leadership and experts were very positive about the strategy of buying banks. Preter wrote that acquiring banks was "absolutely" a good strategy for the credit union.
Dunedin, Fla.-based Achieva CU has acquired two banks in the past four years. Those deals succeeded in boosting Achieva's membership, but some customers need more education, one of the credit union's executives said.
"You always have people that haven't had exposure to a credit union before and don't really understand," CFO Janice Hollar said in an interview. She said through educating these customers, the credit union was "very successful at keeping and growing the market."
Credit unions that purchase banks typically receive an initial increase in membership from the acquisition, and an analysis by S&P Global Market Intelligence found that these credit unions were mostly able to maintain the new membership. Only one credit union saw a drop in membership in the quarter following the closure of the acquisition. The remainder continued to increase membership after the acquisition, with a median of 1.4% growth in membership in the quarter following an acquisition.
Shares and deposit growth fared slightly less well but still grew on a median basis of 0.2% in the quarter following a bank deal. Seven credit unions that had acquired banks reported a drop in total shares and deposits. Keeping shares and deposits, as well as staff from the acquired bank branches, has also gone smoothly for Achieva, Hollar said.
Robert Parks, a CPA and financial institutions expert at DoerenMayhew, said acquiring banks has allowed credit unions to get into new markets and expand their footprints. Using M&A to expand is often faster than opening a new branch, Hollar said.
"It helped us get into new markets without starting ... with 'member number one' and working up from there," she said. "It has enabled us to get our feet on the ground and make a difference very quickly."
John Stockamp, a director in the financial services practice of consulting firm West Monroe Partners, said credit unions' focus on member experience has helped the bank acquisition strategy go smoothly.
"They're kind of delighting the bank customers that are coming over, particularly on the retail side," he said in an interview.
Since credit unions pay in cash when they purchase banks, small banks often find them to be good acquirers. The two industries share some of the same challenges, DoerenMayhew's Parks said.
"The reason that a lot of these are occurring is that smaller community banks ... [have] challenges of innovation and technology, cost of compliance and the ability to retain and attract talent," said Parks. "[Credit unions] are kind of in the same situation."
The biggest hurdle for credit unions purchasing banks is the time it takes to complete the acquisition, said Parks. Keeping internal staff, particularly in commercial lending teams, can prove difficult if the acquisition is delayed. Commercial clients will often follow their bankers if they leave the institution.
"You see a little runoff in situations like that," said Parks. "It's been a concern on the commercial side ... if the credit unions are able to keep intact the commercial lending team at the bank."
But overall, Parks said culture clashes between credit unions and the banks they acquire are infrequent. Deals like these can be beneficial for both sides, with more potential buyers and all-cash deals for sellers and membership and deposit growth for buyers, so experts expect the trend to continue.
"I don't see it slowing down," said Stockamp. "There's still a lot of financial institutions out there. It's kind of been the story since the last recession."