BOCA RATON, Fla. — Cathleen Nash saved Citizens Republic (CRBC), only to agree to sell it. That’s a tough decision she sees many more banks facing in the immediate future.
“It surprises me when I talk to other bank CEOs, especially small bank CEOs, who think this is just somehow going to get better,” Nash, the president and chief executive of Citizens Republic in Flint, Mich., said last week. “I’m not saying, ‘Every bank should sell themselves,’ but I think the next couple of years are going to be extraordinarily difficult.”
Depressed margins, tepid loan growth and the increased cost of compliance with new regulations are piling up for small and midsize banks. Those were some of the factors Nash cited over a breakfast interview in Florida, as she walked through the reasons Citizens agreed in September to sell itself to FirstMerit (FMER) of Akron, Ohio.
The $912 million all-stock deal marked an end to Nash’s turnaround of Citizens, which returned to profitability last year after 12 straight quarters of losses. Nash, who was promoted to CEO in early 2009, also successfully navigated almost two years of business done under an enforcement action from the Federal Reserve. The regulator imposed the order in July 2010, when Citizens was struggling to recover from soured real estate loans and low capital levels, and lifted it this April.
By then, however, Nash knew that Citizens’ days as an independent company had to be numbered. After a year of rigorous analysis and monthly strategic planning committee meetings and other discussions with her board, it became clear that selling Citizens would be the best way to give it a profitable future.
“I became increasingly concerned that we were going to do really well and then start to slowly but surely not,” Nash said. “I had always said to the board that if we chose to do anything, we were going to do it when we were strong, not when we started missing analysts’ estimates.”
Some of the options Citizens examined during its strategic review included: buying or building a fee-generating business, like a credit card portfolio or a retirement-advisory unit; boosting its size by buying a failed bank in a Federal Deposit Insurance Corp. auction; or shrinking itself so that it became much smaller and much more removed from the $10 billion-asset line that triggers many new regulatory requirements.
Citizens, which has $9.7 billion in assets, was already skirting that line, and “we determined that we had to get to about $15 billion (in assets) for it to make sense,” Nash said. “If you’re like $5 billion, you’ve got a runway to 10. But over 10, your world changes.”
She cited as an example the extra compliance personnel Citizens would have had to hire to deal with regulations like debit-card swipe fee caps, which do not apply to banks of under $10 billion in assets.
“We had already added 8 people to our compliance team. And we figured that by going over $10 billion, we would have to at least double that, if not more,” Nash said, estimating that even hiring another ten compliance staffers would cost Citizens an additional $1 million to $1.5 million.
“We make about $20 million per quarter, and now I’ve got to figure out how I’m going to cover that [new expense]. In a big organization, those things tend to be more rounding errors. When you get to smaller organizations, they’re not,” she said. “The compliance costs alone are going to just knock some players out. For community banks that serve a really important role where they are, I think it’s going to be hard for them.”
The other options considered also had drawbacks or were unlikely to help Citizens maintain its growth in the next two years, Nash said. For example, if the bank had brought its credit card business back in-house, it would have had to hire extensively and by the time “we tried to do all that, spent all that, got your return, it’s probably a three- to five-year payback. My worry was, we didn’t have three to five years,” she said.
Drastically shrinking the bank “buys you some time, but I don’t think it solves the problem,” Nash said. Expanding inorganically proved tricky as well, since there is “fierce competition” for the worthwhile FDIC assets, and as a first-time buyer at that auction, Citizens would have faced a regulatory approval process that typically takes about a year.
Ultimately, “when we looked out over 2013 and 2014, we felt we could better do that with someone else than by ourselves. I still think that was the right decision for our company,” Nash said last week.