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January 19, 2023

A Match Made in M&A Heaven

How are credit unions using mergers and acquisitions (M&A) to help gain attention and grow their business?

We are currently in the part of the mortgage cycle where we would expect to see an increase in mergers and acquisition (M&A) activity. According to STRATMOR Group, that’s exactly what is happening.

Experts at the mortgage industry consultancy reported that these events occurred more frequently last year — 50% more than 2018. STRATMOR tracked over 50 deals in the mortgage industry last year and as of the fourth quarter of last year were expecting 2023 to see even more M&A activity.

Unfortunately, most of these deals will not work out. The Harvard Business Review says that “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.”

One part of the business where this discouraging statistic may not hold true is in the interactions we are seeing take place between credit unions and community banks.

A matter of mission alignment

Something about the way credit unions approach serving their members and the way community banks look at their businesses seems to make these two very different types of financial institutions seem closely related. It’s certainly making them pay more attention to each other.

In the news recently, we read about Land of Lincoln Credit Union buying Cochester State Bank and 4Front Credit Union acquiring Old Mission Bank. According to advisory firm Wilary Winn LLC, credit unions buying banks has been a trend since at least 2019.

From a pure mission perspective, credit unions and community banks have a lot in common.

It makes sense. While credit unions have traditionally focused on members engaged in a particular industry or working for a certain employer, community banks have focused on serving residents in a given geography. In both cases, their success has been based on serving people they tend to see in their branches, or at least in the neighborhood.

And there are more reasons we’ll probably see more of these deals in the future.

A good foundation to buy from

In many of these mergers, we’re seeing the credit union take the role of the acquirer. There are some good reasons that these institutions are well positioned to be the buyers at this time.

Community banks, like all banks, are highly regulated. This increases their costs and can make it more difficult to scale up their institutions. Credit unions are also regulated, of course, but to a different degree.

The fact that credit unions are also taxed differently on account of their ownership structure, makes it more likely for these institutions to scale.

That unique ownership structure also means that credit unions don’t typically fail like other banks do. Instead, they tend to merge, with their members taking their business, and ownership stake, over to another credit union in the event of a crisis.

Community banks, on the other hand, tend to succeed or shut their doors.

While banks tend to compete with institutions of all kinds, credit unions stick together, sharing information freely at industry conferences and learning from each other’s mistakes. The way they are organized means they don’t have to compete with other credit unions, unless their customer is in the auto dealership, of course.

Buying expertise through an M&A event

But that’s not to say community bankers have nothing to bring to the table. They do, and it comes in the form of experience with increased regulatory oversight and business complexity.

As credit unions get larger, they attract more attention from regulators. Because they are well positioned to grow, more of these institutions are finding that government oversight is adding complexity to their businesses. They are beginning to look more like regional banks.

In addition, regulators like to see seasoned executives at the helm of growing institutions. That may be one reason credit unions are looking outside for management expertise. Recently, we saw the story about Minnesota Federal Credit Union hiring a new CEO with community banking experience.

The other thing experienced executives bring is technological expertise. In an environment where financial services tech stacks are becoming more complex, more experience can help an institution reduce their risk.

We’ll be paying close attention to that as we employ our technology to help more credit unions grow in the wake of their acquisitions in 2023.

By Joe Camerieri, EVP, Sales & Strategy at Mortgage Cadence 

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Mortgage Cadence: 
Megan Martin 
EVP, Marketing 
(516) 480-6765