Why Buy a Bank? Why Not?

For credit unions seeking to grow their field of membership, buying a bank has become an increasingly viable expansion strategy.

The handful of credit unions that have dipped their toes in the bank-buying pool have learned that this option carries many of the same opportunities and risks as building from scratch (e.g., de novo) or merging with another credit union. In fact, some aspects of buying a bank or even just a bank branch can be more straightforward, which may explain why more credit unions have shown interest in bank acquisitions in recent years.

Exploring the Market

Banks that prove to be most attractive to credit unions (and vice versa) are privately held, often family-owned, community-based institutions. The values and community commitment of these institutions tend to be more aligned with credit unions than with those of larger banks. This commonality may give credit unions a leg up in negotiating a deal – if they’re open to handling the challenges that come with this opportunity for growth.

This type of deal is quite different from a credit union merger, where a broader range of issues such as governance, branding, surviving charter, etc., can bring complexity and emotion to the table – making a combination difficult even when it makes sense for both memberships. In a bank acquisition, purchase price tends to be the most important criterion. When a privately held bank looks to sell, the owner’s priority is simple: Give us the best price. It is that greater simplicity that makes a bank acquisition so attractive.

Risk Reward Analysis

Acquiring a bank or bank branch and its customer base can square up nicely with a credit union’s strategic priorities of expanding market share, diversifying its business model (e.g., business lending) and entering new markets. Buying can pave the way for growth in a prized community or provide access to experienced bankers who understand a new market and its customers.

That said, before a credit union can acquire a bank, it needs adequate liquidity to cover the upfront price tag and a capital position that can absorb the dilutive impact of new intangible assets. A bank acquisition generates considerable goodwill, which is the difference between the purchase price and the bank’s book value. As a result, credit unions considering a bank acquisition should have a capital cushion well above regulatory limits. This effectively creates a cap on the size of the bank the credit union can acquire – meaning a credit union buys a bank to achieve growth, not economy of scale.

Obviously, buying a bank branch is less capital dilutive than buying a whole bank. Although the credit union still needs to write a check, it may cost less in the long run than building, staffing and marketing a de novo credit union branch. Depending on how the deal is negotiated, it could bring in the deposits and loans of the branch’s customers. In other words, buying an operating branch is typically not just a real estate deal.

In general, when customer deposits are transferred along with the branch, the credit union typically pays a deposit premium to acquire those accounts. Even so, the price can be lower than the cost of recruiting new members and their deposits and loans in a credit union merger or via organic growth.

Expect Challenges

An acquisition is never easy. There are regulators to deal with – although the NCUA or a state agency overseeing credit unions takes the lead for review and approval.

The trickiest questions often involve field of membership. The acquiring credit union needs to either explain how existing customers fit within its existing field of membership or file for an expanded FOM.

Within the limited but growing history of these acquisitions, state-chartered credit unions are seeing more success regarding FOM questions than those with federal charters. These unique issues mean that credit unions – even those that have been through multiple mergers – need to work with experienced legal experts.

Post-approval activities also require special handling. The credit union must educate its new members on what a credit union is and explain that no services will be lost; in fact, more may be gained.

In addition, as of “legal day one” (the day when the credit union formally owns the bank), the credit union must eliminate the word “bank” in all communications, change its disclosures, and update many processes. These are just a few of the many potential “gotchas” that credit unions need to identify and manage.

Winning Over New Members

Once the acquisition is finalized, the acquiring credit union must work to build and maintain the new member relationships and generate a return on the investment. This includes winning over new members – many of whom have questions about what a credit union is. The credit union should be prepared to offer products and pricing that are worthwhile to members – both old and new.

A key to success will be ensuring early engagement with bank loan officers and branch managers (within 60 days of the acquisition announcement), because they are the face of the post-merger credit union in those markets that the bank served

Keys to Success

These are the five top things a credit union needs to do to successfully buy and integrate a bank:

1. Determine how a bank acquisition fits (or not) into your overall strategy, including whether you have the capital to do it. For example, you buy a bank to enter into a new market, not as a means to build scale.

2. Identify the strengths that can be “exported” into the bank’s markets. In other words, how can your business and operating models bring more value to the members and communities than the bank’s did? This will help you determine the best price and “story” for the seller – especially in a competitive situation.

3. Consider purchasing bank branches versus a whole bank. Although harder to find, it may be worth the effort to be more targeted in your market entry. Buying a branch instead of the whole bank would also reduce the financial impact to the credit union (liquidity, capital, etc.).

4. Even if you’ve done a merger before, be alert for the nuances of a bank (officer titles, product offerings/pricing, disclosures, etc.). This may seem like a minor detail to the credit union, but it can be a big deal to bank staff and/or customers.

5. Proactively define a communication plan for the bank’s communities and new members/customers. This will prove especially important if the bank has a high proportion of business customers, with whom communicating is quite different than the traditional consumer membership of most credit unions.

Vincent Hui is Senior Director for Cornerstone Advisors. He can be reached at 480-423-2030 or vhui@crnrstone.com.