By Ray Birch
DETROIT—As banks gain scale and move up the “food chain,” they are leaving behind small business customers that credit unions, in turn, have been capturing—doing so in many cases by first buying a bank, according to one analyst.
As CUToday.info reported, in two recent acquisitions—the purchase by Atlanta Postal CU and its subsidiary Center Parc CU of Affinity Bank, and the purchase by Michigan-based ELGA Credit Union of Florida-based Union Marine Bank & Trust—a primary motivator was the ability to gain commercial lending capabilities.
There are more credit unions buying banks today for their commercial lending capabilities, emphasized Michael Bell, a partner and chair of the Financial Institutions Practice Group at Honigman. Bell has been part of more than 60 whole-bank agreements, plus additional bank branch purchases.
“A lot of the buys today involve this strategy, where they're building out not just the commercial lending skills, but other things, such as Treasury management, sweep accounts, commercial deposit gathering…” said Michael Bell, a partner and chair of the Financial Institutions Practice Group at Honigman, who has been part of more than 60 whole-bank agreements, plus additional bank branch purchases. “I would say they are looking to acquire the capabilities of the community banks entire commercial suite.”
Bell recalled that it was approximately five years ago when the tenor of some discussions changed.
“I remember clearly, years ago, having conversations with credit unions about expanding beyond consumer and mortgage lending, and then having credit unions say, too, they wanted a full suite of commercial products—deposits, Treasury management, and it really has evolved from there,” he said. “ Now it's just becoming normal.”
‘Real Benefits’
Bell believes there is significant support for acquiring commercial lending expertise rather than developing it organically.
“I think there are real benefits in being able to grow something overnight,” Bell explained. “The day after closing you're not launching some new product with some new person; you're launching a new suite of products with seasoned veterans who know those products. You're getting all the people and all the products—and you get them overnight. And I think that's significant.
“You can hire people and roll out new commercial lending products for sure, and there's a strategy there,” continued Bell. “But how interesting is it that on Friday at 5:00 p.m. the doors get locked, the bank deal closing occurs, and either Saturday or Monday morning at 8:00 a.m. they get unlocked and you have a full-blown, up-and-running commercial department?”
Michael Bell
Additional Reasons
There are other reasons for such acquisitions, as well, Bell said.
“Credit unions have been better than banks, traditionally, with consumer lending,” he stated. “But community banks historically have been better at business lending and deposit services. They're just better at it and more experienced. They are deeper. And, I think some of it goes to the technology banks use—they’re better equipped as an industry to do this kind of work.”
Beyond the expertise and the technology, Bell said there is also the other obvious benefit: the acquisition of an entire book of business.
No Brake-Tapping Expected
Bell does not expect any slowdown in the pace of credit unions looking to acquire commercial lending operations as part of a larger bank purchase.
“In fact, I see it being used more in the future,” he forecast. “I think there's an easy way to understand why. If you look at the banking sector, top to bottom, the entire sector is seeing mass consolidation. That's what the market requires. So, when banks get bigger the customers they serve change, and they typically get bigger. Banks that were regional become super-regional; they all go up the chain.
‘The Strategy of the Bank Has Changed’
“And then they are saying to some of their smaller customers, we don’t want you anymore,” continued Bell. “The strategy of the bank has changed. As they get bigger they scale up the customers they seek, and I believe there's this phenomenon in the banking world now where there's all these business customers that aren't very big, but also aren't so small. They're good customers that are kind of being unbanked, ignored and left behind. I think there's a real strategy for community banks and credit unions to serve small business customers that are being left behind by the bigger banks as they grow.”
Responding to Critics
As for the broader criticism in the market that credit unions are engaged in “mission creep” as they buy more banks, Bell disagrees.
“Let's not kid anybody, none of these deals involve a credit union trying to become a huge commercial bank doing 100-million-plus dollar loans,” Bell told CUToday.info. “These are credit unions serving segments of the commercial market that have been forgotten by the banks—small businesses and family-owned businesses. I just don't want there to be confusion. There's a lot of excitement when people see these deals and think that there's mission creep. But this is credit union 101, helping the local business, the family business.”