Serial entrepreneurs and the savvy investors that often keep them afloat frequently mention “exit plans” when plotting their next ventures or allocating their latest round of funding.
In many cases, that exit plan is as simple as selling the business outright for some nominal profit.
But there are alternatives.
Once a business is established, efforts can be made to grow the business instead of selling it. But lately, it seems like it’s near impossible for some smaller concerns – notably small community banks and credit unions – to grow past a certain point without putting themselves up for sale. And that’s not how it’s supposed to work.
We reported recently that financial institutions with less than $200 million in assets are finding themselves on the wrong side of a regulatory line in the sand. Those with deeper pockets can afford the skyrocketing costs of compliance and razor thin margins that characterize today’s banking environment.
Those with less resources can’t. No matter how well run these smaller institutions are, how loyal their customers are or how sound their bookkeeping is, the simple fact is that as compliance costs rise, these companies must increasingly dig into their own reserves to cover the difference – reserves that otherwise could be spent on growth.
When a bank or credit union starts up, there are generally three courses before them: Growing to the point of self-sustainability, growing to the point at which they’re an attractive asset to sell or failure.
Current conditions seem to have largely eliminated the first option. And faced with the remaining two, any sane executive has to choose to sell rather than fail.
And we’ve been reporting on the results for months – a spate of mergers and acquisitions that all feature a larger competitor scooping up the infrastructure and assets of their smaller brethren, be it a bank buying a bank, a credit union “merging” with another or even a credit union buying a bank.
Invariably, the public face of these transactions is presented as “the best choice for our membership,” or “an opportunity to take advantage of the economies of scale offered.”
And that’s fine. We don’t expect non-surviving institutions to readily acknowledge what is becoming an open secret: They simply couldn’t afford to stay open on their own anymore.
We know that the “exit plan” of a good number of de novo banks and bank investors is, indeed, to grow to a certain point and then sell to the highest bidder. We have no qualms with that.
But we doubt that’s the plan of every small bank and institution. Certainly, at least some aspire to grow large enough to become the hunter instead of the hunted. For many, the exit plan isn’t to exit at all, but rather to solidify a base, put down roots and weave themselves permanently into their community fabric.
But too many can’t. And too many more are finding that permanence they thought they’d achieved has, in fact, gone up in price and is no longer affordable. Look no further than the recent acquisitions of more than 100-year-old companies like Mercantile Bank and Filene Federal Credit Union, two institutions that certainly weren’t planning on pulling up stakes after just a few years.
A banking environment in which the big fish consistently gobble up the small fry, with few opportunities for the little to survive long enough to grow into big fish themselves, is unsustainable at best and disastrous at worst.
Compliance costs and regulatory barriers must come down, and the price paid to play in the banking market must be made more attainable. Otherwise the big fish eventually turn to eating each other, and the entire food chain collapses.
