Would you like to buy a bank? It can be done. In late 2010, one of our credit union clients approached us to inquire if it could legally purchase a mutual savings bank. At the time, we freely admit, we didn't really know how to answer the question definitively.
We reviewed statutes, regs and related materials and couldn't find anything that said it could not happen, which is exactly what we told our client. The client elected to move forward and at the end of 2011 we completed what we believe may have been the first-ever transaction of this nature.
Shortly after the initial transaction successfully closed, another CU client inquired about purchasing a stock-owned savings bank. After conducting the same level of due-diligence, we determined that there was a way to complete this type of transaction, and it was closed and completed in December of 2012. Now that the model for such transactions has been created, expect to see more CUs purchasing banks/thrifts in the coming years. In fact, this trend has already begun.
Many small banks/thrifts across the United States are either "troubled" or "tired." As an example, based upon the most recent data we have seen, we understand approximately 90 mutual savings banks/thrifts are operating under a formal order of the OCC. For many reasons, such as cultural similarities, willingness to provide continued employment for employees, and/or to keep branches open, sometimes the best opportunity for these banks to survive is through a CU acquisition.
Transactions of this nature focus on a pure numbers analysis and don't include as many emotional issues (i.e. board seats, name change and the like) as a standard credit union to credit union merger, making the pathway for credit unions one of quick and efficient growth.
Plenty of Challenges
There are plenty of challenges in transactions of this nature, most of which deal with the sheer amount of regulators that must approve such a transaction. These regulators, by the very nature of our system, are not accustomed to working together and each has their own particular set of interests.
I have found that transactions of this nature take patience and a detailed strategy for regulatory approval to be successful. Consider that currently NCUA does not have a formal application or process in place for cross-industry transactions. However, the model for doing this has been successfully created.
Based on these recently completed transactions, we have developed a litmus test for those that are now considering the strategy of acquiring banks. We have found that there are three key areas that are the focus point of the review by the regulators and should be reviewed prior to moving forward with the transaction: safety and soundness, impermissible assets, and field of membership issues.
Determine the Safety and Soundness of the Transaction. Informal modeling (detailed modeling should be performed post Letter of Intent and pre-definitive agreement) should be performed to get a feel for the proposed transaction's affect on your CU's post-deal cash flow and capital. Modeling we like to see includes a pro-forma analysis of the combined FIs on the closing date and six months post-closing. There is a great advantage to solving this on the front end of the regulatory review.
Determine the Type, Kind and Approximate Amount of the Impermissible Assets. The bank or thrift institution will certainly have deposits, loans and/or investments that are technically impermissible for your institution to retain. The impermissibility will likely be based upon issues relating to FOM, or the type/kind of the loan. An informal examination of these items should be performed to confirm that transaction could still work in light of the worst-case scenario, where the impermissible assets are not able to be modified to become permissible within the time allotted by the NCUA after the closing.
Keep in mind that impermissible assets on their own will not cause the disapproval of the transaction, but will certainly cause scrutiny, and the credit union will need to articulate a plan to manage them. We have developed some key strategies regarding the solutions to impermissible assets that we can help you execute. The strategies involve obtaining increased FOM through the transaction and the modification of loan and deposit products.
Determine the Scope of any FOM Issues. Similar and related to the impermissible asset issue, the bank of thrift institution is likely to have customers that do not fit into your field of membership. An informal exam should be performed to confirm that the transaction could work in the worst-case scenario where these customers cannot be converted to membership.
That said, it is very important to note that there are some key strategies that we are in the midst of creating that could prove to be a solution to this issue essentially allowing all customers to be converted to members similar to an emergency merger scenario.
There is a new tool to add to your strategy for growth-bank/thrift acquisitions.
Michael M. Bell is an attorney and counselor with Howard & Howard in metropolitan Detroit. He can be reached at MB@h2law.com.