Why Aren't You Buying a Bank?

Credit Union Management magazine’s Web-only “CFO Focus” column runs the second Thursday of the month.

A lot has happened since January 2013. In January 2013 I wrote a “CFO Focus” column titled “Buying a Bank,” which included a litmus test for whether a credit union would want to buy a bank. Just over a year has passed and we have reached a point that has changed the question from “Should you buy a bank?” to “Why aren’t you buying a bank?”

What has happened outside our industry to make it a good time for a CU to buy a bank?

The short and vital answer: Both nothing and a whole lot.

First the nothing. The merger and acquisition market outside our industry has been and remains stagnant. Bank-to-bank M&A activity in general has been in a “flatline” situation since 2009 with virtually no activity nationally among smaller banks of less than $500 million in assets. Small banks are not merging with each other for a series of reasons, including punishing regulations and high deal costs. Large and regional banks are not acquiring smaller banks at the moment, either. Small banks have effectively been forced to eliminate M&A from their strategic plans.

Now the whole lot. The regulatory environment could not be more challenging for smaller banks. I fully understand that we, too, in the CU world are feeling the regulatory burden; but, those on the bank side are feeling it more. The Office of the Comptroller of Currency and the Federal Deposit Insurance Corp. are required by law to regulate the biggest banks and the smallest banks equally. As a result, a small bank today is facing sharply increased regulations, slim margins and no options for M&A deals or combinations. They are essentially stuck in this very difficult existence. Finally, due to the difficult environment and the lack of an M&A marketplace for quite some time, boards and senior management of banks are growing tired. Strategic planning indicates something needs to be done, but what can realistically be done? This question can sometimes be answered by the still unknown transaction (despite considerable coverage in the press in both industries): CUs buying banks.

What has happened inside our industry to make it a good time for your CU to consider buying a bank?

The precedent for a CU to buy a bank has now been set as both federally and state-chartered CUs have done so. Many types of banks have been purchased by CUs, including mutual banks, publicly traded banks, healthy banks, banks with financial challenges, and banks with TARP money. Transactions have occurred in three National Credit Union Administration regions. Transactions have been approved by NCUA, the Office of the Comptroller of Currency, Federal Deposit Insurance Corp., Federal Reserve and various state regulators. So far, these transactions have been viewed favorably by regulators—and regulators are getting more efficient in their review of these arrangements.

What is so great about buying a bank?

With a properly structured and priced transaction, a credit union can purchase an existing bank operation that could contribute to the CU’s bottom line by adding positive cash flow from day one. New branches certainly have their place in the market, but buying a bank can make it possible to establish a de novo branch that already has its own associated loans and deposits. Our clients have had success buying banks to expand their geographic footprint. In addition, these transactions offer an opportunity to gain talent, including gin the member business lending area (i.e. originations, underwriting, and management).

We are currently working with CUs nationwide that have decided to move forward with buying a bank. During 2014 you should hear a series of announcements of transactions like these across the country. You should also hear about expansions of this concept with announcements of CUs purchasing “quasi-banks”—companies in the financial services area that are not full-blown banks. Where do you start? Create a list of potential banks to purchase and pick up the telephone.

Why aren’t you buying a bank? Perhaps you should be.

Michael M. Bell is an attorney and counselor with Howard & Howard in metropolitan Detroit. He can be reached at MB@h2law.com.