Washington D.C. attorneys Jeff Cardone and Mike Bell agree that back in 2017, a business trend emerged in the financial services industry: credit unions purchasing community banks.
In the intervening years, Cardone and Bell have tracked the activity in their roles as “deal attorneys.”
From their observation of the industry, however, they are finally seeing a slowdown of the M&A activity in this sector. They conjecture that contributing factors to this change of pace are current economic forces in the industry, market uncertainty, and even the upcoming election.
Credit Unions Poised for Growth? Investor Groups Join M&A Surge
Cardone predicts the decrease in tempo for these deals will be particularly evident in “…$1 billion to $10 billion publicly traded depository institutions. Without question.” But the appetite for these deals will continue to come from purchasers such as credit unions and investor groups, Cardone theorizes.
“Those players have scale,” Cardone said. “They have cash. And from a seller’s vantage point, boards and shareholders of a selling bank want price certainty. And the only way to get price certainty in this environment is cash.”
He continues: “So while I think, at a macro level, M&A is going to be down, I do think M&A involving — and I don’t use this term disparagingly — second-tier buyers (whether it’s credit unions or investor groups), we’re seeing that grow fairly consistently.”
Quantifying his prediction, Cardone says, “I think the high point for credit union/bank deals was 16–18 in one year. We’ll probably exceed that in 2024.”
Bell concurs. “I think credit unions buying banks or investor groups buying banks remain always the minority of the deals,” he says. “There’s no question about it.”
“But I think this year we break the record of the most ever. I firmly believe that.”
Bank Succession & Liquidity Drive M&A Activity
Cardone and Bell agree that the current level of credit-union-to-bank M&A activity is partly driven by the current regulatory environment.
Cardone qualifies that observation, saying that credit union purchasers can close deals faster, thanks to the current particulars in the regulatory process.
“The average number of days for a bank-to-bank merger, from announcement to deal closing, is up to 160 days,” he notes. “When you look at that dynamic, a buyer has to be very selective in who it’s going to partner with because you’re going to be sidelined from any future activity until you get that deal behind you.”
“From an acquiring bank’s perspective, these sub-$1-billion banks become less and less attractive. And that’s where credit unions are coming and filling that gap with smaller banks.”
Bell identifies another factor sparking activity: the succession side at the bank shareholder level. “That’s driven a significant number of deals,” he says.
“[With] a lot of these closely held institutions, there’s no public market to offload stock. So, how are you going to have a liquidity event?”
“A sale will accomplish that. And that leads to deal-making.”
Bell also notes that the demographics of the bank’s leader can also be a factor. “The age of the CEO or the management team tends to be on the higher side when it comes to a sale,” he observes. “That’s without question. Interestingly, I think S&P put out a report that the median age of bank CEOs is 60 or 61. But for a selling bank, I think it was 67 or 68.”
“That’s not surprising. But to have actual data backing that up shows that succession is certainly a function driving M&A activity. Without question.”
Credit Union-Bank Deals: Tax Concerns Fuel Controversy
Despite the proliferation of these sales, the trend of credit unions purchasing community banks remains controversial. Detractors, for one, cite a tax ramification, in which tax revenue is lost when a for-profit entity is absorbed into a nonprofit entity.
Continue learning more: Watch D.C. experts discuss Credit Union Bank Acquisitions
