DETROIT—Expect more credit unions to buy bank branches this year and for one, somewhat untraditional, reason, according to Michael Bell.
The pioneer of credit union bank buys told CUToday.info more credit unions will scoop up bank branches as they seek to scoop up the location’s deposits and help with the liquidity crunch the industry is facing.
“The dynamic financial institutions with dynamic lending machines could use liquidity, and a bank branch buy is one the easiest and best ways to get liquidity,” said Bell, leader of the Financial Institutions Practice Group at Honigman LLP. “You get the real estate, you get the deposits, you may not take loans…But you can really make this a pure liquidity play.”
Credit union purchases of bank branches were brisk from 2017 to 2019, said Bell, who has been involved with nearly 50 credit union purchases of banks.
“But, with the pandemic, these deals really slowed down,” he told CUToday.info. “Back in 2018 and 2019, lending machines needed liquidity. I think this year we will get back to the previous pace.”
Bell said he expects the purchases to be made among all sizes of credit unions, with the exception of the smallest of CUs. As CUToday.info has reported, he emphasized that deposit growth, which had been at a torrid pace during the health crisis, has slowed or even reversed, with low-paying transaction account deposits flowing out now to higher-paying instruments as rates rise. And, members, too, are spending more of their savings as a result of inflation.
What’s Motivating Banks
On the bank side of these agreements, Bell said sellers are motivated because a branch will bring a higher price today than a year ago due to the greater value being put on the deposits the institution represents.
“Deposits have become more valuable,” said Bell, who added some banks may not want to sell due to their own liquidity pressures. “But for banks that have enough and even excess deposits, they can make more money on the sale of an office now.”
Moreover, banks are currently thinking about selling branches for reasons other than just grabbing a higher sale price, explained Bell.
“One, it's a great way to improve or drive efficiency, and many banks are challenged to do that today,” said Bell. “You can look at your branch footprint and perhaps move or offload your least efficient operation, and you're gaining efficiency. You're going to lower expenses, which will make you look like a hero to shareholders, and you can make money on the deal.”
A Lower Premium
Nevertheless, while those deposits are attractive to many credit unions, the premium credit unions will be paying this year is likely to come in below that being paid several years ago.
Michael Bell
“There haven't been enough recent branch transactions yet to establish definite pricing,” said Bell. “However, I think historically the average is about a 3% deposit premium. Back in 2019 the premiums were much higher, 9% to 10%. But today, I think we will come in just above 3%.”
Bell predicted the branch sellers this year won’t likely be mega-banks.
“You won’t see a big bank sell a branch. But once you get below the big banks or even the regional banks, super regional banks and large community banks, they can often find an effective strategy for selling branches,” he said.
On the other hand, credit unions, said Bell, still find value in a branch footprint.
“They're opening more branches, not closing them,” he said.
Advice Shared
For those credit unions considering acquiring a bank branch, Bell has some advice.
“Be active in what you might be looking for, what might be a right fit for you, because I believe this market is going to really open up again,” said Bell. “I believe sellers are starting to creep to the table. Pay attention to what might be available, perhaps identify some branches. Connect with people in the industry who are doing these kinds of deals. Last year I did one or two branch deals, and others in this space did about the same. These deals just were not happening much. But we will see a much larger number of these transactions this year. In the first quarter I already announced one, and I expect a second one soon. I am not saying we’ll see 20 branch sales this year, but we will see a significant increase.”