Important Considerations for Credit Union-Bank Mergers
Learn the unique considerations credit unions must keep in mind before acquiring a bank.
Member Retention
When financial institutions merge, there is always a risk some customers or members will be lost. This is especially true if aspects they value, such as convenience or personal relationships, are lost. Proactive communication and effective disclosures regarding impending changes can help. As it relates to mobile banking and other banking platforms, the credit union must consider the operational inconvenience and expense of having to change mobile deposit or online banking platforms. Tech transformations are not always easy.
Another credit union-specific issue: Field of membership. Will the target institution’s customers qualify for membership in the acquiring credit union? Membership restrictions could require the member to live or work in a certain county or state, while the acquisition target may have multiple branches outside the field of membership. While the credit union can seek to expand its field of membership, this may be denied and is often time consuming. An alternative option is to negotiate the sale of branches falling outside the acquiring credit union’s membership requirements. Ultimately, an acquiring credit union must ensure it is operationally capable of servicing the combined membership.
Balance Sheet Composition
Another important aspect to consider when looking to acquire a bank is how it will affect the composition of the acquirer’s balance sheet. For example, credit unions have statutory limits on member business lending. This restriction can eliminate many targets from consideration. However, if the credit union can stay within regulatory limits, gaining a unique niche in lending sectors such as commercial real estate and Small Business Administration can offer a tremendous upside.
CRE and SBA lending usually require an elevated degree of due diligence relative to residential mortgage and consumer lending. Ensuring servicing operations are adequate is a must. CRE lending is a competitive and relationship-based sector. SBA lending can also be particularly valuable due to the rigorous barriers to entry and regulations within the sector.
For credit unions worried about the MBL cap, there are a few ways to bring in commercial loans without impacting the cap. The first is by partaking in non-member commercial loans. In 2016, Section 723.8 of the NCUA’s rules and regulations was revised to exclude any non-member commercial loan or non-member participation loan from federal credit unions’ MBL cap. For SBA lending, the government-guaranteed portion of the loan isn’t counted toward the cap; but as stated earlier, SBA lending carries with it added complexity. Many credit unions are hesitant to venture into this market without the proper staff. Lastly, credit unions with low-income designations may apply to remove the MBL cap altogether.
Investments
Many banks hold municipal investments for their tax benefits. Because credit unions are tax-exempt, they don’t have as much need for such investments. Municipal bonds require due diligence on bond structure and the projected performance of the municipality, which may be outside of the acquiring credit union’s expertise. Also, the target bank may hold other potentially impermissible investments under credit union regulations. The acquiring institution should consider the appropriate disposition of such investments prior to completing the transaction.
Funding and Deposits
Acquiring credit unions should review a bank’s funding structure to determine the stability of sources of funds required for expansion. Banks generally have a higher level of brokered and municipal deposits, for example. Acquiring credit unions should review whether such deposits are permissible and assess the impact on cost of fund volatility. The permissibility of municipal deposits varies based on charter and state laws.
Special Considerations
Two important regulatory considerations for credit unions planning to acquire a bank are whether the bank has Community Reinvestment Act tax credits or Home Affordable Modification Program loans on the balance sheet.
CRA: The CRA is designed to encourage banks to help meet the needs of low- and moderate-income borrowers within their communities. CRA rules generally don’t apply to credit unions. This change in regulatory scope may require the target bank to sell the specific CRA-designated loans.
HAMP: The HAMP program allows borrowers who are at risk of foreclosure due to financial hardship to reduce their monthly payment. This can pose a problem in a merger if the acquirer doesn’t have the appropriate authorization to service such mortgages. To resolve this issue, the acquirer can either set up subservicing arrangements with another party or arrange for the loans to be sold. However, credit unions need to be mindful about potential duplication of vendors and potential termination fees in their servicer contracts. If a target institution has a termination fee, it would immediately reduce the value of the merger.
By ensuring the unique considerations of a bank merger are considered, management can make it more likely acquiring a bank will enhance value for their membership.
Jake King is Senior Analyst, Strategic Solutions Group for ALM First Financial Advisors, LLC. He can be reached at 214-451-3990 or jking@almfirst.com.