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Community banks feel the pressure as credit unions grow

Credit unions are growing at a faster clip than banks, and the nation's largest, Navy FCU, recently surpassed $100 billion in assets. Credit unions are also increasingly acquiring banks. Both factors are further exacerbating longstanding tensions between the two industries.

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Rapid growth at Navy Fed

Credit unions excluding Navy Fed grew assets 35.5% since June 30, 2014, while banks grew 20.4%.

Navy Fed grew total assets 75.3% during that period, surpassing $100 billion as of March 31. At $106.04 billion as of June 30, Navy Fed is larger than the next four credit unions combined.

Navy Fed's field of membership is U.S. military members and their families. This is "an otherwise extremely underserved segment of the population," according to Dennis Dollar, a credit union consultant and principal partner at Dollar Associates LLC.

"Navy Federal can build scale in their market segment by emphasizing service to their military members and their families over the need for profitable return to stockholders that drives many for-profit banks away from the market that Navy Federal exclusively focuses upon and serves," wrote Dollar.

"We attract members because of the value of the products and services that we provide," Navy Fed CEO Mary McDuffie wrote in an email.

But some in the banking industry say Navy Fed's size and rapid growth are the result of an unfair playing field.

"If they were a bank, they would be a [systemically important financial institution]," said Chris Cole, senior regulatory counsel at the Independent Community Bankers of America, or ICBA, a trade group. Systemically important financial institutions, or SIFIs, are subject to heightened capital and regulatory requirements. Banks must have $250 billion in assets to be deemed SIFIs, and credit unions are not subject to these requirements no matter their size. The SIFI asset threshold has increased over time, from $50 billion when the label was first introduced after the financial crisis.

"Credit union rules are not in parity with bank rules. This is an institution that should be subject to risk-based capital," said Cole. "Why aren't they subject to the same standards as banks?"

But Dollar called it "laughable" that Navy Fed would be placed in a similar category as "too big to fail" institutions such as JPMorgan Chase & Co., which has $2.6 trillion more in assets than Navy Fed.

"The dispute between banks and credit unions is totally competitive-driven, hidden behind crocodile tears by the banks," he wrote.

Navy Fed said that despite its large size, it is "united" with smaller credit unions in its not-for-profit cooperative structure. "Consumers find real value in the products and services offered to them through credit unions," CEO McDuffie said.

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An uptick in M&A

Navy Fed has increased its size by leaps and bounds through organic growth, but some smaller credit unions are growing through M&A, including by acquiring community banks. This trend has increased in 2019. In the first half of the year, eight deals were announced with a credit union buying a bank; there were only nine such deals throughout all of 2018. Four more deals have been announced since the beginning of July.

Michael Emancipator, regulatory counsel for the ICBA, called the trend "startling." The NCUA has allowed credit unions "to take advantage of their uneven playing field" and expand aggressively, he said in an interview.

Credit unions are not subject to the Community Reinvestment Act, which Emancipator said can make it easier for them to buy banks. Banks, on the other hand, must go through a community feedback process regarding CRA. "Effectively, [community groups] are closed out of the transaction, which is a bit alarming," said Emancipator.

And he expects this trend of credit unions acquiring banks to continue. "Until something changes, it's possible that this will continue for the foreseeable future," Emancipator said. "Which is just going to exacerbate the problem of a consolidating industry."

Credit unions control 8.4% of total banking assets in the U.S., according to S&P Global Market Intelligence data.

"While credit unions are a very small component of the overall banking assets, they're fairly large if you're a community banker," said Charley McQueen, founder, president and CEO of McQueen Financial Advisors II Inc. McQueen said many banks with $250 million to $300 million in assets are looking to sell, and while acquisitions of this size can be a hassle for a larger bank, they are often a good fit for credit unions.

"Credit unions are eager to grow, and there are a number of them of the size that a $250 million acquisition is a substantial acquisition," McQueen said. As the community bank industry consolidates in the face of expensive regulation, credit unions are trying to fill the void, he added.

"I don't blame the credit unions, I blame the bank regulation," McQueen said.

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