It’s a sign of the times, say bank and credit union officials, hinting that more mergers and acquisitions may be on the horizon – bringing economies of scale, enhanced revenue to expand lending and cutting costs through operational efficiencies.
News of growth through strategic acquisitions has been front and center lately. First National Bank of Santa Fe, with assets of $1.7 billion and the largest of the state’s community banks, in July merged with Kansas-based Sunflower Financial. The transaction created “a super community bank” with 60 offices in five states.
Another notable transaction was New Mexico Bank & Trust’s acquisition of Community Bank in Santa Fe in 2015. Also that year, Chino Federal Credit Union folded into First Financial Federal Credit Union and U.S. Eagle Federal Credit Union expanded its footprint to Santa Fe when it merged with New Mexico Correctional Employees Federal Credit Union.
With combined assets of $3.1 billion, the combined Sandia-Kirtland institution will dwarf the resources of the largest community bank headquartered in the state – Los Alamos National Bank, which has assets of $1.4 billion.
Community bank executives worry that mergers such as the one between Sandia and Kirtland are another sign that member-owned credit unions, which are nonprofit, are unfairly muscling in on the banks’ turf. Most banks are in business to keep shareholders happy by generating profits so that stock values increase. And while credit unions pay millions of dollars in property, sales and employment taxes each year, they enjoy a federal exemption on corporate income.
“It’s an uneven playing field,” said Jay Jenkins, president of the New Mexico Bankers Association. He said credit union charters originally focused on serving people of “modest financial means” with car loans, savings accounts and the like. With the move into commercial lending, Jenkins said, “You start to look and smell like a conventional bank.” He makes the argument that credit unions should perhaps be taxed on their business loan portfolios.
Credit unions say diversifying loan products is a natural evolution to help members fund all aspects of their financial lives and grow the New Mexico economy.
“It brings more capital to the table to invest in New Mexico businesses,” said Robert Chavez, Sandia president and CEO. He said merging Kirtland’s $760 million assets with Sandia’s $2.4 billion will enable the newly formed credit union to make an additional $90 million in business loans. “It won’t be overnight, but we will have that capacity,” Chavez said.
As for the banks’ gripes about federal incomes taxes, Marsha Majors, president and CEO of U.S. Eagle Federal Credit Union, said it’s an advantage credit unions enjoy because their mission is fundamentally different. “The focus on returning earnings not needed for reserves to members through lower fees and better rates” is our hallmark, Majors said. After payroll and other operating costs, most profit is plowed back into the organization on behalf of members.
Demands from consumers for services such as 24-hour call centers, multipurpose websites and mobile banking are increasing every day, she said. “All of these things cost money,” said Majors.
Why the mergers?
Credit union mergers aren’t a new trend, Majors said, but have been going on for decades. Many small credit unions find it hard to comply with the costs of increased regulation and limited cash resources to accommodate a growing base of members and service demands, she said. Hence the urge to merge.
“No doubt the trend will continue nationwide and in New Mexico,” said Majors, adding that, by 2020, there will be 4,000 credit unions in the U.S., down from the current 6,000. “Mergers are occurring on the order of one a day,” said Majors. U.S. Eagle hasn’t ruled out the possibility at some future time, she said.
U.S. Eagle, which is the third-largest credit union in the state, with $917 million in assets, has been posting double-digit growth year over year in assets and members, according to Majors.
Kirtland’s top executive said the credit union’s current charter doesn’t allow it to make business loans, so the merger with Sandia is a good move on that front. “We’ll also see economies of scale by sharing compliance and regulatory costs, which is a growing expense,” said Dave Seely, Kirtland’s CEO and president, on uniting the assets, membership and employees under one brand in the next 18-24 months.
Under current law, credit unions can make an unlimited number of small-business loans of $50,000 or less. Larger member business loans are subject to an aggregate cap of 12.25 percent of all assets, but SBA-guaranteed loans don’t count toward that cap. This leaves substantial room for credit unions to make any type of prudent small-business loan.
New Mexico’s slow economic recovery has made banking a tougher business than it was before the 2008 financial panic, said Jenkins, who also is president and CEO of Carlsbad National Bank, a $325 million business with three locations in Carlsbad.
But small community banks like Jenkins’ can expand their footprint without mergers.
“Everyone’s always looking for a partner,” said Jenkins, referring to a common practice of teaming with other smaller community banks to make commercial loans. Some of these packages are on the smaller side – about $10 million. But Jenkins said they help banks diversify their loan portfolios by getting in front of new customers in metro markets. And it helps them build relationships with other institutions that share a lending philosophy, such as the one Carlsbad has with Main Bank in Albuquerque.
“We are primarily a commercial real estate bank,” said Main Bank President Alan Shettlesworth, noting that 80 percent to 85 percent of its assets of $120 million are secured by real estate of some kind. “Our biggest concentration is in owner-occupied commercial real estate, such as mom-and-pop-owned dry cleaners, restaurants, collision and repair shops,” said Shettlesworth. The average loan amount is well under $1 million, he said, adding he doesn’t believe credit unions’ commercial lending expertise on the real estate side is sophisticated enough to make inroads into this business.
“This is a small town, and this is our sweet spot,” said Shettlesworth. By contrast, he said the big national banks are primarily deposit-generating institutions, deploying money collected from New Mexico account holders and funding larger loans elsewhere. Even if someone came knocking on their door, Shettlesworth and his shareholders are not looking to flip Main Bank to a larger player. “We are having fun and growing,” he said.