By Ray Birch
DETROIT—The current state of the U.S. banking system, which has become more fragile following the failure of three banks, could benefit from credit unions looking to buy a bank, reports the pioneer of these deals.
“Given what has been happening with banks, and the growing lack of confidence among bank shareholders, it may now be easier for a credit union to buy a bank,” Michael Bell, leader of the Financial Institutions Practice Group at Honigman LLP, told CUToday.info. “The banking sector is suffering from this. Stock prices are dropping. Bank values are dropping. So, it is accurate that I think bank prices are going to get a little cheaper.”
Bell believes the current market sceniaro in which consumers are demonstrating a lack of confidence in certain banks, primarily midsize banks, combined with a flattening of stock prices in some cases, could hasten the pace of credit union purchases of banks during 2023.
Indeed, Bell, who has been involved with nearly 50 credit union purchases, has earlier predicted this year could be a record year for CU/bank buys if the country does not enter a deep recession.
‘Make No Mistake’
“Remember, too, when banks buy they use their stock as part of the currency,” reminded Bell. “So, our bank competitors’ stock values are dropping and they could be losing a little bit of purchasing power now. This will give banks a little less horsepower to bid against credit unions.
“Make no mistake, credit unions are still minority players in these deals, but we are now in a more favorable position to be approved as a buyer,” said Bell.
Another factor at work, according to Bell is the number of banks in a position to buy another bank is likely declining, as well. “Credit unions have been buyers and we remain buyers,” continued Bell.
On the selling side, Bell thinks current conditions could push more banks onto the market, and believes the 25 basis point increase in rates approved by the Federal Reserve at its most recent meeting will only continue to create concern among many bank depositors and investors.
“This banking crisis could be the little additional pressure that drives more banks to sell,” said Bell. “They are likely not at all in trouble like Silicon Valley Bank or Signature Bank, but have some challenges, and then this hits. The entire banking sector is affected, deserved or not.”
Michael Bell
Little Extra Nudge
For many banks, he added, the current market may provide just that little bit of extra impetus could be a determining factor.
“This pressure could be what convinces some bank CEOs to realize perhaps it’s good time to sell and realize value for the shareholders,” suggested Bell.
The “unsettling” nature of what is happening in the banking market—where there has been a flight of deposits to the giant too-big-to-fail institutions and to smaller, local banks-- is simply going to change the dynamics of credit union bank buys, at least in the short term, Bell is predicting.
“It's getting a little bit scary…that you can get a run on a bank from social media,” said Bell. “Could that hit credit unions too? I don’t think it’s likely, but this does prove that runs on financial institutions are possible.”
That is a reference primarily to what took place at California’s Silicon Valley Bank and New York’s Signature Bank, both of which were the subject of considerable speculation in social media prior to being taken over by federal regulators.
The Word on the Street
What is Bell now hearing from his credit union clients and potential bank sellers?
“All I have heard from the credit union buyers I represent and the banks that we are in the middle of transacting with is consistent,” said Bell. “They all say they have not heard any concerns from account holders or experienced any kind of run on deposits. That said, what has happened with Silicon Valley Bank and Signature Bank proves that a run on a bank, or a run on any financial institution, can happen. What just happened was real. And I think it can’t be regulated or legislated away, because these runs are often illogical.
“Everyone we are working with is well-capitalized and healthy,” continued Bell. “And these bank runs are isolated, limited to a few institutions and, in my opinion, there is no systemic systemwide issue within banks or credit unions.”
‘Positive’ Breaks for Credit Unions
Whether bank runs prove to be isolated and are eventually calmed by Federal Reserve actions, Bell said the opportunity for credit unions to buy more banks due to more sellers being nudged into the market, and many bank bidders having weaker equity positions, is likely limited.
“What is occurring now will help credit unions that are acquiring banks for a few reasons,” explained Bell. “It does affect competing bank bidders in some way negatively, and two, it could lower the price of a selling bank, and it could bring more banks to the market to sell. I believe all this breaks positive for credit unions.”