By Ray Birch
DETROIT—The person who has pioneered credit union purchases of banks is predicting a record year in 2022 for the deals for one primary reason: a lot of small banks are for sale.
"I am saying this somewhat facetiously, but it seems to me that every small bank is up for sale now,” said Michael Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP.
Bell, who has been involved in more than 40 whole-bank agreements, plus additional bank branch purchases, is forecasting that deals will far surpass the roughly 13 that were struck in 2021, and the few that were made during 2020, the height of the pandemic.
“We will get back on track to where we were heading in 2019 when credit unions closed about 19 deals,” said Bell. “I think we will hit 25 this year.”
Bell expects the majority of the agreements to continue to be made in the Southeast and upper Midwest.
“These are the regions of the country in which most small banks are located,” he said.
Three Primary Drivers
What’s driving all the small banks to sell? Bell pointed to three primary reasons.
“The number-one reason remains the price point,” said Bell. “Prices are at a point where sellers can get a good deal and make their money, but it's not so high that buyers can't get a good deal. It's been pretty much win-win pricing for a long while, and it's still the case.”
Bell added that with inflation rising on the consumer side at a record pace, he does not believe it will affect bank sale prices in large part because there are so many small banks on the market.
“There is a great deal of supply right now,” he said.
The Ring of the Familiar
But another motivation for the owners of small banks to sell will sound familiar to many in the credit union community.
“You have aging management at small banks and they often have succession planning issues, and then there just is the rising cost of doing business,” Bell said. “Things just keep getting harder and harder. There is greater margin compression today—and don’t forget the growing pressures on overdraft income.”
The health crisis has also given some bank presidents time to reflect, added Bell.
“The pandemic did two things. One, it made some people reflect and say, ‘Hey, I'm going to live my life. I want to sell this asset and move on. I want a liquidity event.’ And, two, the pandemic placed much greater emphasis on digital banking.”
Michael Bell
While small banks that learn to do digital well can lift themselves to an even greater competitive position and reduce the need to build branches, Bell believes most small banks are struggling with the move to e-banking, as are many small CUs.
“For some of these smaller players, the price to keep up with digital is just too great,” said Bell.
Bell believes the trend line of CU acquisitions of banks will begin to wane later in 2022. But he also believes many bank shareholders will push back on efforts by their trade associations to stop such purchases, as cutting out credit unions as potential buyers reduces banks’ sales options and lowering potential sales prices.
‘Hurting the Banks’
In Nebraska, one credit union’s plans for purchase a bank have been thwarted by now after a regulator rejected the deal. In Illinois, the state bankers association has called for an “exit fee” to be paid by banks that are acquired by credit unions.
“If you are paying attention you will see that when banking trade groups convince state legislatures to block purchases of banks, the lawmakers are largely not limiting credit unions’ ability to buy, they are limiting banks’ ability to sell. This is hurting the banks and I believe, finally, this year bankers will talk to their trade groups and persuade them to back off and focus their efforts elsewhere.
“I don’t think the banking trade groups’ membership is clamoring for this legislation, or really asking them to fight this fight,” continued Bell. “I think a lot of bankers are realizing that having the power to sell to a credit union is an important thing, whether you decide to use it or not. It's an important power to have because it only makes your price go up and gives your shareholders greater value. I think they will begin to tell their trade groups that it’s a mistake to fight these sales.”