Merging a Credit Union with a Mutual Savings Bank

Putting a credit union, well-known for their consumer and auto lending skills and service philosophy, with a mutual savings institution, known for their real estate and business lending prowess and community focus, creates a powerful, member-oriented franchise.

Merging a credit union with a mutual offers an exciting option for credit union members, since mutual banks are known for their real estate lending prowess and community focus, while credit unions are known for their consumer & auto lending skills and service philosophy. "Putting the two together creates a powerful member oriented franchise".

According to the January 2001, US Department of the Treasury study comparing credit unions with other depository institutions, "mutual thrifts are federally insured depository institutions most similar in structure to credit unions, because like credit unions, mutual thrifts generally do not have corporate stock, are not for profit entities, and are owned by their depositors, or members, rather than shareholders". Therefore, like credit union mergers, no exchange of shares of stock or other purchase transaction is associated with a merger. Over 700 mutually owned savings institutions, some over 100 years old, with combined assets of almost $200 billion are serving communities around the country. "The mission of these mutual institutions, like the mission of credit unions, play a vital role in supporting many communities."

In 1998, Congress authorized federal credit unions to merge with mutual banks in acknowledgment of the need for more "community based" financial institutions and in recognition that the credit union charter imposed significant limitations on credit union expansion. "These mergers are influenced by a sweeping nationwide trend of consolidations among credit unions. In just over a dozen years, the number of credit unions have declined from about 22,000 to almost 10,000. In the next 10 years the number should be 5,000 according to industry experts".

Callahan & Associates, states that 71% of credit unions are going out of business. According to Callahan’s research, performance numbers show that credit union members at thousands of credit unions are slowly liquidating their involvement. Many credit unions with fewer than $20 million in total assets are experiencing negative share growth and their membership growth is less than half the national average, Callahan reports. Thinner margins, increasing operating expenses, and slow response to the demand for new services make it difficult for small credit unions to produce value for their members. Also, Callahan reported, many larger credit unions are suffering from the same market-driven changes.

Clearly, many credit unions should explore the possibility of merging with a mutual. The merger of a mutual and a credit union addresses several significant needs faced by both institutions. Credit unions need skilled mortgage lending personnel to address increasing demand by members, because mortgage loans are the fastest growing product among credit unions. Also, mutual banks are able to help credit unions address the nuances of expansion into the community, since mutual banks have deep roots in their communities, and credit unions are adopting community charters in droves. In addition, mutual banks are looking to diversify into auto lending and consumer lending, and credit union personnel bring these important lending skills to the table. Federal and State regulators of mutual institutions are also more experienced than credit union regulators at addressing investment and loan products, corporate structure, and compensation issues which are required to be competitive. Mutual Banks also have the tools necessary to address the changing financial landscape including the ability to form mutual holding companies and operating subsidiaries which enhance product offerings and attract personnel.

Dramatic changes in the financial services business because of consolidation, legislation, technological advances and litigation results in strong competition for both credit unions and banks. Bringing new products and services on-line is costly, hence, many institutions, will find that a merger will quickly provide an expanded menu of products and services without the capital expenditure otherwise necessary.

The mission of mutual savings institutions parallel the mission of credit unions. Mutual banks were organized primarily to offer real estate loans, while credit unions focused on unsecured loans and loans for consumer goods. Mutual banks and credit unions were organized by individuals, statesmen, and merchants during the 1800’s and 1900’s to encourage thrift, prudent borrowing, and to help member / owners to improve their standard of living. The first credit union in the United States, organized in 1909, is called St. Mary’s Bank, and is one of the largest in New Hampshire. The first mutual was formed in 1816 in Massachusetts.

Key Benefits to Merging with a Mutual Bank

  • Maintain independence & your corporate mission
  • Gain credibility in the community
  • Members get access to real estate lending and business lending talent; and more branches
  • Succession issues and director compensation / retirement plan issues are solved
  • The transaction gets favorable accounting treatment allowing compensation accruals which are prohibited for credit unions

Merger Capabilities

CU Financial Services, is a national growth and merger consulting firm that can help you evaluate the feasibility of a merger or growth initiative involving mergers, help you find the right candidates, and help you understand the elements which are important to negotiate during the merger process.

Conversion Experience

CU Financial has advised credit unions about charter conversions since 1994, and has advised the majority of those making the switch. The firm was (1) advisor to the first state chartered credit union to convert to the bank charter, (2) advisor to the first merger of a credit union into a mutual savings bank, (3) advisor on the first simultaneous conversion / capital raising transaction, and (4) helped lobby Congress for the right to convert to a bank and for the streamlined rules implemented as part of HR-1151. We are currently the most active advisor specializing in this unique area.

Broad Credit Union, Banking, and Securities Experience

Since 1984, CU Financial has advised credit union executives in many areas including asset and liability management, investment diversification, mortgage lending, business lending, and charter options. The firm's senior advisor has an executive background which included positions with a major Wall Street investment firm, as president of a mutual savings bank, as founder and senior executive of a mortgage banking and business lending firm, and as founder and executive of a National Association of Securities Dealer (N.A.S.D.) Member firm.

Cost Effective Services

Cost effective implementation of pilot programs and strategic initiatives is our focus. Intelligence developed by serving financial institutions ranging in size from $8 million to $400 billion, and a hands on approach generates measurable results quickly; in part by the rapid transfer of skills, information, and technology to staff, thus reducing consultant dependence. As conversion coordinator, our experiences helps reduce attorney costs, helps reduce incidental conversion costs, helps control public relations issues and costs, and speeds the conversion process.