By Ray Birch
DETROIT—Concerns with the economy and the Fed rate hikes put an end to what was expected to be a big, record-breaking year for credit union purchases of banks in 2022. Now, the pioneer of these deals, says the pace of credit union acquisitions of banks in 2023 will depend on those same factors.
Michael Bell, who has been involved with nearly 50 such deals, told CUToday.info that those economic factors have been weighing heavily on the minds of bank sellers.
“We started off 2022 at a record pace for bank buys, really set to smash our old records,” said Bell, the leader of the Financial Institutions Practice Group at Honigman, LLP. “Despite the economic uncertainty, we managed to announce 14 credit union/bank transactions this year—one better than our record year in 2019. Without the economic tumult there would have been over 20 deals announced, I am certain.”
Bell said the deals slowed but the interest in the buys has not, based on conversations he has had with credit unions and banks.
“The slowdown has been coming from the sellers’ side,” explained Bell. “What has been going on with the economy—recession concerns—and not knowing when the Federal Reserve will end the rate hikes has sellers uneasy.”
Affecting Decision-Making
Bell said all those factors are affecting banks’ decisions to sell.
“The uncertainty of the rate increases impacts banks in several key ways,” said Bell. “One, their investment portfolio could be out of whack. There's been a lot of pressure on investments and their portfolios could be underwater or at least temporarily impaired.”
And, much like the credit union industry, banks are also wrestling with liquidity issues following a period of record deposits, which is impacting their lending and profitability, explained Bell.
“The demand for loans is continuing to grow, but some banks are shutting lending down because of liquidity issues,” said Bell. “The general business of the bank is experiencing these economic forces that they haven't faced for years. They feel unsettled, which makes you then say maybe it's not time to sell.”
Some of the bankers’ concerns over selling in the current market are also related to expectations over the potential selling price for the bank, Bell stated. He said bankers realize mortgage prices are settling, and that the businesses of potential buyers could be declining, as well as their capital.
The ROI
As CUToday.info has reported, credit unions that have conducted such transactions say they typically see a return on their investment in three to five years. But in a weaker economy, buyers may have concerns the ROI timeframe is longer, he said.
Michael Bell
“I think there is a perception among some people in the banking community that buyers today won’t be willing to pay as much—not as much as they will when the economy improves,” said Bell. “They begin to think that the potential selling price for their bank could be falling with everyone watching their checkbooks, or they need to lower their price to attract more buyers. For whatever the reasons, many sellers are now waiting.”
Again, Bell emphasized that sellers have their eyes on signals from the Federal Reserve that the series of rate hikes is over, and whether a recession will likely. At its December meeting, the Fed raised rates 50 basis points and signaled additional rate increases will follow as it seeks to tame inflation.
“But let me be clear, this is just a pause and the demand is there,” said Bell.
Looking to 2023
How quickly sellers’ concerns are quelled will dictate what kind of year 2023 will be for credit union purchases of banks, Bell said.
“There is a great deal of pent-up demand due to this pause,” said Bell. “I think if the Federal Reserve ends it rate hikes early next year and the economy levels out there is the potential for a record year for credit union bank buys,” said Bell. “But if all this drags out, we will see more of what we are seeing now.”
Bell pointed out one other factor could drive additional credit union acquisitions of banks.
“The interest for these deals is spreading across the country,” Bell said. “We continue to see the sales in Midwest and the Southeast, but I am also seeing a lot of interest now from regions in which there have not been many deals in the past, such as the Pacific Northwest.”
Changes in Texas, California?
Texas and California have not been known for banks selling to credit unions, but Bell said that is changing.
“For one reason or another, deals in these two states just not have happened,” said Bell. “I can't give you the reason why. I've been in the middle of deals in these states that just failed. But I think that next year will be the year where deals break loose in those marketplaces.”