Credit Union Mergers Under Scrutiny

September 4, 2019 at 9:31 am 2 comments

The banking industry likes to blame everything from the Ebola virus to the demise of the community bank on the fact that credit unions do not pay corporate taxes. So, I wasn’t surprised that yesterday’s article in the Wall Street Journal (subscription required) detailing the increase of credit unions “buying” banks included the usual boilerplate nonsense in which banking industry representatives ascribe the sharp increase in the trend to the credit union tax exemption. That being said, the trend is noteworthy and the dynamics that are fueling it are not going to end anytime soon. The important thing to keep in mind is that the increase is simply a reflection of larger trends impacting both credit unions and banks.

By the way, although I will be talking about credit unions buying banks, legally speaking, almost all of these transactions are not classic mergers, but purchase and assumptions in which the credit union agrees to buy specific assets owned by the bank.

First, the community bank is on the endangered species list. As the Federal Reserve Bank of St. Louis noted in this thoughtful analysis earlier this year, “In the current banking environment, there is a strong perception that bigger is better.” That is not perception; it is reality when it comes to banking. Businesses are either growing or shrinking. There is no in between, and credit unions are not exempt from this reality. Volume affects everything, from the scope of services you can provide your members, to the price at which the services can be offered.

The consolidation that is taking place within the banking industry is nothing short of astounding. According to Forbes, “what is particularly concerning for smaller banks is that the top 25 banks grew credit by $49 billion, while the rest of the industry shrunk its asset base by $32 billion. Once again, the big are getting bigger.” By the way, this trend is a direct result of Clinton era banking deregulation, which authorized interstate banking and put the community banks at the mercy of the behemoths, but it is so much easier to whine about the credit union tax exemption than it is to explain the unintended consequences of federal legislation.

Second, there is the cost of compliance. The bigger you are, the easier it is to absorb the cost of complying with the onslaught of Dodd Frank regulations. Look at the asset size of the banks merging with credit unions. Many of them are relatively small institutions, precisely the type of bank that is likely to grow frustrated by an increasingly competitive marketplace and a staff too small to meet its regulatory responsibilities.

Third, there has been a greater willingness on the part of state and federal credit union regulators to greenlight these acquisitions. In 2012, there was only one credit union purchase and assumption of a bank. That number has accelerated in part because of the willingness of regulators to be flexible in dealing with issues unique to credit unions, such as accounting for the portion of a bank’s customer base which is outside of an acquiring credit union’s field of membership. That is why the most interesting takeaway from yesterday’s article was NCUA Chairman Hood’s announcement that he would be proposing new regulations to better clarify the responsibilities of credit unions acquiring banks. Done properly, these regulations could provide a useful roadmap for everyone involved. Done improperly, they could put unnecessary hurdles in the way of a trend which helps community banks, credit unions, and their consumers.

Entry filed under: Compliance, General, Regulatory. Tags: , , , .

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2 Comments Add your own

  • 1. Anonymous  |  September 4, 2019 at 9:39 am

    Do you have any idea of the percentage that these transactions are in the broader “FI” merger landscape? I see that it’s increasing but is it even really a substantial number of mergers when taking into account the merger of CU’s with CU’s and banks with banks?

    Reply
    • 2. Henry Meier  |  September 4, 2019 at 9:50 am

      Point well taken, which is why I think it is so important to view this in the context of larger trends reshaping the entire financial sector.

      Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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