By Ray Birch
KALAMAZOO, Mich.—Thanks to two factors, 2021 could be a record year for credit unions acquiring banks, according to the pioneer of such deals. And that’s after records were already set.
Michael Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP, told CUToday.info that bank buy activity among CUs in 2021 could reach twice the level seen pre-pandemic. Bell has been involved in more than 36 whole-bank agreements plus additional bank branch purchases.
“As you may recall, credit union purchases of banks had reached record levels in 2019, and 2020 started well. But then the pandemic hit and people hit the pause button,” said Bell.
What Bell is seeing now in the level of interest from both credit unions buyers and bank sellers is well above what he witnessed for most of 2020.
“I wouldn’t say I get a call every day about a possible sale of a bank, but I’d say it’s more than every other day,” stated Bell. “The deals are beginning to line up and we have a lot in the pipeline. In 2021 there will be two or three times the opportunity for these deals to happen because there are more sellers of bank branches or full banks than we have seen before, and I also believe they're more credit union buyers than ever.”
Driving the Rebound
Driving the rebound in interest in credit union/bank agreements, according to Bell, is not only have buyers and sellers become more comfortable with doing business during a pandemic, but financial institutions did not suffer as badly financially as they had expected outset of the COVID-19 crisis.
“What caused a great deal of the pause last year was not knowing what was going to happen to the seller’s most valuable asset, their loan portfolio,” explained Bell. “No one knew in March last year.”
Michael Bell
Bell believes financial institutions in times of great uncertainty become overly conservative.
“Everyone was saying, ‘Oh, this is going to be pretty bad,’” said Bell. “They set aside a great deal in their loan loss allowances, and now many are finding that they were well over-reserved last year and could also be this year.”
Tapping Excess Reserves
As CUToday.info reported in a series of articles, credit unions leaders—at least among the largest CUs--and industry analysts believe 2021 could be a good year for CU balance sheets as loan loss reserves begin flowing back to the bottom line.
“In general, everybody within credit unions has realized that the seller's most important asset has not been impacted as negatively as everybody thought and that it is time to begin buying banks again,” Bell said. “I am seeing now, in several deals that are lining up, that bank loan portfolios have not been hurt that bad.”
On the buyer’s side, things are better too, added Bell.
“The buyers now have more money than they thought they would have at this time, so they can move forward with a bank purchase,” he said.
Bell does not want to call credit unions hitting the pause button on bank buys last year as an overreaction.
“Many just got a little scared with all of the uncertainty and said let’s take a step back for a while,” he said.
The banks Bell is now seeing are interested in selling are not a group of financial institutions damaged by the pandemic.
“Sure, there are those banks, just as there were a lot of them coming out of the Great Recession,” Bell said. “But the banks that are selling now are the ones that were considering selling prior to the pandemic. They made it through the health crisis so far, and believe they are in a good position to sell. Those banks that are in bad financial shape today and were hurt badly by the pandemic typically are ones that went into the health crisis in bad shape.”
There is simply a great deal of pent-up demand among buyers and sellers who find they are, somewhat surprisingly, in sound financial shaped, concluded Bell.
“They have also become more accustomed to doing business transactions during a health crisis, as well,” said Bell. “I have never seen anything like this in the level of interest from buyers and sellers.”
Bell predicts in the first quarter of 2021 there will be at least three whole-bank deals.
“That may not seem like a landslide of business, but remember it takes months to get things lined up with agreements, and the ones we will see in the start of this year were being worked on last year. I think this is the tip of the iceberg and we will see a lot more agreements in the third and fourth quarter of 2021. There will be more opportunities to do these deals this year—more by a long shot.”