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Some proponents assert that buying banks is just another market option for a credit union. Similar to expanding a branch network, investing in technology, or launching a rebranding campaign, this is just a business decision that needs to be “penciled out” to see if it makes financial sense.
Analyzing a purchase transaction is not simple. Every transaction has a different market context and unique financial data.
Credit unions buy banks with cash, not stock, which is the common practice in bank-to-bank purchases. Some data provided in bank announcements to enlist shareholder support are also relevant for credit unions. The following list focuses on evaluating the purchase transaction itself, not the broader public policy implications or a credit union’s strategic framework.
Ten questions before any purchase
1. What will be the total expenses of the transaction for all fees, consultants, contract cancellations, etc., and how will these costs be recorded by the credit union? What transparency will the credit union provide to demonstrate its own due diligence work?
2. What is the dollar total of bank assets and/or liabilities the credit union must sell as ineligible for a credit union charter? If significant, why is the merger being considered?
3. How will key personnel be retained and will there be a cultural fit? What obligations will the credit union have to the former executives and employees of the bank? Will covenants or conditions such as non-compete clauses limit major stockholders, senior and/or key executives whose stock has been paid out from becoming competitors?
An observation from a merger veteran: “Credit unions talk about ‘buying’ skills during a merger. If you can’t keep a commercial lending team, mortgage banking team, wealth management team, then you are not buying anything. Those jobs are like free agency—they sell their skills to the highest bidder. You are not acquiring a piece of equipment, a patent, or a manufacturing process, you are buying people. This is a service and relationship (networking) industry. A star performer can take their network (and team) anywhere. A merger is often the ‘nudge’ the star performer needed to make a change to a different employer. If they don’t see a direct benefit from the merger, you run the risk of losing them.”
4. How will the transaction affect the credit union’s net worth position? If all bank capital is absorbed in the acquisition, will the credit union remain well capitalized and able to realize its growth prospects in the newly obtained market?
5. How will the additional assets affect the credit union’s overall ROA, efficiency, and concentration ratios? What is the payback period (breakeven) on the cash paid out in the transaction? How do various customer retention scenarios affect this return? (Proforma balance sheet and income statements before and after the purchase are useful in addressing these changes.)
6. How much overlap with current markets exists? If there is a high overlap, why merge to begin with? If there is a low overlap, is the credit union reaching too far from its geographic core? How will an investment in a market where the credit union has no presence benefit current members?
7. How will the bank customers become “involved” credit union members? These bank customers did not choose the credit union, have no direct experience with it, and are probably unfamiliar with their acquirer. Can the credit union retain these relationships plus gain new ones?
8. Why did the credit union pay a premium over the market valuation for this transaction? If the franchise is so desirable, why were there no other bids? How will existing market competitors—bank or credit unions—react? Will there be critical comments such as taking away jobs, tax revenue, deposits, and local leadership from the community? Might competitors hire away key personnel?
9. What are the regulatory requirements to be navigated? Will the FDIC require public announcements be placed in affected markets? What process will each regulator follow when evaluating the purchase—will different criteria be used for the FDIC and the NCUA? Depending on the selling bank’s structure, will potential double taxation affect the price—once on the asset value increases in liquidation and again on gains from shareholders’ stock sale?
10. What existing plans will this acquisition defer, disrupt, or postpone? What new risk mitigation measures will this event require?
Think before jumping
Knowing questions to ask in any undertaking does not lead to easy answers. Any list of due diligence questions is incomplete as each circumstance introduces special factors. However, using a check list can help assemble the basic information and analysis to consider versus the generalizations sometimes used to justify these purchases.