Credit union CEO says small lenders must merge to thrive, too


U.S. credit unions generally differ from commercial banks in that they often offer a more local connection to financial services and lower fees, but they are more like commercial banks in terms of their role in the M&A craze among lenders, which is breaking all-time highs this year.

The United States was home to more than 6,000 credit unions four years ago, but today it’s closer to 5,000, according to industry estimates. If it keeps this pace, it will drop to 2,500 over the next few years.

Los Angeles-based University Credit Union sees itself as a buyer in this market as it seeks to expand beyond its roots in serving the Southern California college community.

“If you look back 40 years ago, small organizations could be competitive by borrowing at 11% and lending at 19%, generating a net interest margin of 8%,” said David Tuyo, president and chief from the management of University Credit Union. “Now you only have a net interest margin of 3% or less. It’s a difficult place for small financial institutions to be competitive, given their operating expense ratios.

With this reality in mind, Tuyo has led University Credit Union on the mergers and acquisitions path for the past four years. In 2019, the company purchased CBS Employees Federal Credit Union in the greater Los Angeles area.

University Credit Union expects to complete its acquisition of Chabot Federal Credit Union this month in a transaction that will add approximately $ 73 million in assets and 1,650 members to its business.

CEO of University Credit Union David Tuyo

The addition of Chabot will increase the University Credit Union’s asset base to $ 1 billion in assets, with nearly 50,000 members by the end of the month.

University Credit Union has taken to heart recent research into the nation’s largest mergers and acquisitions, which showed that seven of 10 M&A deals were unwound 10 years after closing due to lack of return to shareholders.

“We don’t want to merge for the sake of merging,” Tuyo said. “We want to have a focused and disciplined approach. ”

The genesis of the acquisition of Chabot Federal Credit Union by University Credit Union results from the launch by the board of directors of the target company of a discovery process lasting several months to discuss with nine credit unions and assess strategic options.

Tuyo said the deal seemed like a natural solution for both sides, as they both serve the college community in complementary geographies in the north and south of the state. Chabot Federal Credit Union is based in Dublin, California, near San Francisco.

“They chose us after our presentation,” Tuyo said. “We were aligned with our core values ​​and we both serve the higher education community. “

Looking ahead, Tuyo said the credit union continues to consider other transactions as it positions itself to compete in a low interest rate environment. He currently has a “high target” of $ 5 billion in assets, including organic growth and mergers and acquisitions, he said.

Credit unions provide a niche in financial services through a common base of bond ownership through a cooperative organization. As a quasi-non-profit (not-for-profit), credit unions generate value for their stakeholders, but generally operate with lower margins than commercial banks. Thinner margins are based on higher expense controls, lower loan rates, lower fee structures, current account fees in a credit union are often lower, and sometimes credit unions pay lower rates. higher interest on many deposit accounts.

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