So You Bought a Bank. Now What?

As of the summer of 2024, 12 credit unions had entered into deals to purchase banks since the beginning of the year. That’s more than all of 2023, when 11 deals were announced. These mergers are unusual in the sense that banks and credit unions don’t typically see eye to eye on their go-to-market approaches, how they position themselves and what products they offer to meet their customer or members’ needs.

According to a recent article published by American Banker, these deals are not hostile takeovers but mutually beneficial arrangements. The acquiring institutions, all with balance sheets numbering in the billions, have the appetite and sophistication to handle such a merger, while the acquired banks have the willingness.

In general, credit unions have not invested heavily in member business banking capabilities or growth in traditional business lending. There are exceptions of course – institutions responding to demand from their entrepreneurial members and the wider community. The trend continues to shift as more credit unions look for ways to enter and grow member business lending, but these mergers mark a more dramatic change. Acquiring credit unions now hold large traditional commercial and industrial banking loan portfolios.

The opportunity for growth in member business lending is huge. While expanding membership segments affords linear growth, commercial banking opportunities can grow balance sheets by leaps and bounds. In fact, credit unions have increased their commercial lending portfolios at twice the rate of banks.

Commercial growth comes with its own set of challenges and operational demands, especially in the area of commercial lending risk. Although acquirers are bringing in commercial banking teams and processes alongside the book of business, they need to make strategic and philosophical shifts across the organization – which are often more difficult than introducing new lending technology.

And that takes us back to our question – you bought a bank … now what?

With these acquisitions overnight the credit unions have brought on new risks and new opportunities in member business lending. This introduces a whole new set of risks, ranging from the uncertainty of the CRE portfolios that may be in jeopardy to the unfamiliarity of the traditional C&I lending process, which the more sophisticated member business owners will demand as they leave a bank to now be a part of the credit union.

Commercial Real Estate Is a Mixed Bag and Will Be for a While

In terms of dollar amounts, commercial real estate is one of the larger portfolios to cross over to these acquiring credit unions’ balance sheets. Office real estate has taken a beating over the last three years and may continue to shrink even as companies reconsider the concept of remote work. According to an analysis published by Franklin Templeton, industrial real estate has compensated for much of the ground offices lost as part of commercial lending portfolios.

That’s a good thing because it indicates the demand for commercial lending isn’t suppressed. It’s just shifting to a different economic sector. It also poses a learning curve for the lending and compliance teams that need to manage the specific risks associated with manufacturing and heavy industry borrowers.

Commercial office properties still pose a threat in the sense that it’s going to take a while for borrowers and lenders to digest the steep devaluation that those properties are undergoing. While it would be nice to reduce commercial real estate (CRE) economics down to a few stats or a bar chart, the reality is that national reporting on CRE will always obscure the regional dynamics that matter far more to financial institutions – especially the newly formed credit union and bank merger financial institution. The vast majority of credit unions operate regionally, and their commercial portfolios will reflect regional economics, which, depending on if you are in San Diego or Houston, would have a significant impact to your CRE strategies.

Credit unions with commercial portfolios will need specific insight and tools to deal with unique risk exposure. You should keep an eye on national news headlines, but you should investigate what’s happening down the street.

Bicycles, Motorcycles and Commercial Risk Management

In principle, a bicycle and a motorcycle require roughly the same skills and physical coordination. They operate on similar mechanics of balance, turning, exposure to traffic and singular focus. But in reality, they require very different skills because of the power and speed of a motorcycle. The risk factors for motorcyclists are much higher than for bicyclists.

In the case of credit unions absorbing commercial lending portfolios, the difference might not be as drastic as it is between a bicycle and a motorcycle, but it would be foolish to underestimate the risk.

To their advantage, acquirers are also gaining teams of experienced commercial lenders and the institutional processes and knowledge that come with them.

There are two main areas that credit union lending teams should pay special attention to as they become familiar with their new portfolios:

• Exception tracking: In theory, regulation and best practices should keep loan exceptions within a nominal tolerance. However, the world of commercial lending is far more complex than consumer lending and exposes you to larger losses if you are not managing that risk. You don’t know what you don’t know. Credit unions will need a methodical way to assess exceptions, ensure that they are aligned with the credit union’s risk appetite and view them in the context of the portfolio.
• Statement spreading: Again, basic financial analysis and understanding cash flow is a familiar process for any lender. However, the complexity of commercial statement spreading strains those similarities almost to the point of breaking them. Commercial property management companies and other commercial borrowers have radically different business models, cash flows associated with complex relationships and liabilities. Running these financial projections is an art and a science.

Let’s say the merger is going famously. The dust has settled, and the business owners are all happy. The 800-pound gorilla in the room is the dreaded “master spreadsheet” filled with complex formulas and circular references that has been used to manage risk. Some of the largest and most sophisticated institutions still rely on manual spreadsheet heroics to monitor, analyze and report on their portfolios.

This prospect is terrifying and unnecessary, although it’s not a cause for casting blame or shame. There’s simply a better way to oversee the complexity of properly managing commercial portfolios. A comprehensive lending platform allows lending teams to manage commercial lending portfolios as if they were riding a bike.

As the renowned poet Maya Angelou once said, “Do the best you can until you know better. Then, when you know better, do better.”

Modern Solutions Are the Ultimate People Pleaser

Mergers generate friction even in the best scenarios, but managing the commercial lending portfolio doesn’t have to be the rub. By adopting a modern portfolio solution, acquiring credit unions can have the power to keep everyone happy. Borrowers have the peace of mind to know their loan is in good hands, while credit union employees have the tools and skills to keep everything balanced and profitable.

When willing parties come together for a common purpose, the possibilities are inspiring. If current trends continue as they seem likely to do, we’ll see more credit union/bank mergers in 2025.

Mike Horrocks is SVP Corporate Strategy & Product Marketing for the Carmel, Ind.-based lending technology company Baker Hill.