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CFO Focus: Buying a Bank

January 2013 – Vol: 36 No. 1
by Michael Bell

Use this three-part litmus test to see if the transaction you're considering makes sense for your credit union.

January 10, 2013

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

It can be done. A credit union can buy a bank.

In late 2010, one of my credit union clients approached me to inquire if it could legally purchase a mutual savings bank. At the time, I didn’t really know how to answer the question.

My partners and I reviewed statutes, regulations and related materials and couldn’t find anything that said it could not happen, which is exactly what we told the client. At the request of the client, we 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.

Now that a model for such transactions has been created, we expect to see more credit unions purchasing traditional banks over the coming years. In fact, this trend has already begun.

Shortly after the initial transaction successfully closed, effective Jan. 1, 2012, another credit union 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. This particular transaction has received approval from four out of five regulators and we expect it to close at any moment.

Many small banks and/or thrifts across the United States are either “troubled” or “tired.” 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 the survival of these banks to survive is through a credit union 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 merger of two credit unions, making the pathway for credit unions one of quick and efficient growth

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.

I have found transactions of this nature take patience and a detailed strategy for regulatory approval to be successful. Consider that currently the National Credit Union Administration does not have a formal application or process in place for cross-industry transactions. However, a playbook for doing this has been successfully created. At this time, my team and I at Howard & Howard are working closely with the various regulators to get the transactions vetted, examined and approved.

Based on these recently completed transactions, we have developed a litmus test for those credit unions now considering the strategy of acquiring banks. We have found there are three key areas that are the focus point of the review by the regulators. These key areas should be reviewed by your credit union before 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 should be performed to get a feel for the proposed transactions’ effect on your institution’s post-deal cash flow and capital ratio. Detailed modeling should be performed post-letter of intent and pre-definitive agreement. Modeling we like to see includes a pro-forma analysis of the combined institutions on the closing date and six months post closing. There is a great advantage to solving this issue 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 field of membership, or the type/kind of the loan. An informal examination of these items should be performed to confirm that the 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 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. 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 field of membership through the transaction and the modification of loan and deposit products.
Determine the scope of any field of membership 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 examination should be performed to confirm that the transaction could work in the worst-case scenario, in which 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.

It’s a whole new world out there for credit unions with more possibilities now than ever before. Who would have thought just a few years ago that one of the growth strategies to consider would be a bank or thrift acquisition?

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

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