Credit unions ended 2022 with a spurt of bank deal activity, and deal advisers expect the momentum to continue in 2023.
Lingering economic uncertainty and the impact of rising interest rates in 2022 muted banks' M&A interest, leading to a slowdown in deal activity. But credit unions are not feeling deterred by those same factors and should continue scooping up banks this year, deal advisers told S&P Global Market Intelligence.
As more of these deals come together, the interest among credit unions is growing, and they are getting more strategic by proactively engaging with advisers to identify potential targets and build relationships with those banks, said Greg Cunningham, senior vice president at Donnelly Penman & Partners.
"Historically speaking, oftentimes, some of the credit unions would just be more reactionary, let the deals come to them and hope they're included in a managed sale process," Cunningham said. "[Now] they're being a little bit more strategic in their proactive outreaches. They're trying to build from a relationship standpoint with targets that make the most sense to them and have that be a more meaningful piece of their strategic plan."
2023 expectations
Credit unions announced 16 bank acquisitions in 2022, breaking the previous yearly record of 13 announcements in 2019, excluding terminations. However, these deals remain the minority of all U.S. bank M&A activity, with the 16 announcements representing just under 10% of the 168 total bank deals announced in 2022.
The activity broke other yearly records in 2022 as well, including the total assets of bank targets involved in credit union transactions, which was $5.70
Further, the total average assets of the 16 bank targets in the 2022 announced sales to credit unions stood at $356.5 million, above the previous record-high of $349.6 million across the 10 targets in 2021.
Advisers expect the number of announcements in 2023 to be fairly in line with 2022.
"We still are seeing a lot of interest from credit unions in pursuing these transactions," Cunningham said in an interview. "As you've seen with the pace here recently, I don't think that the interest from their standpoint has deterred at all, but it remains steady."
No shareholders, no problem
Rising interest rates' impact on banks' bond books and deal math pushed many would-be bank buyers and sellers to the M&A sidelines in 2022. But mounting unrealized losses in banks' securities portfolios, that have to be marked-to-market in a sale, are less of a hinderance for credit unions, advisers said.
While credit unions still have to mark those books to market, they are able to stomach those initial hits easier when they do not have to worry about investors' reactions.
"They're willing to take that on," Charles McQueen, president and CEO of McQueen Financial Advisors, said in an interview. "Where[as] a bank, they're not as willing to take that number because they're worried about being a little persecuted."
Further, without having shareholders to answer to, credit unions can focus on the long-term strategic merits of a deal rather than short-term factors like accounting metrics and deal math, Donnelly's Cunningham said.
Both Michael Bell, partner and co-leader of the financial institutions practice group at law firm Honigman LLP, and Craig Mueller, a managing director and co-head of the financial institutions group at Oak Ridge Financial, agreed that credit union buyers are less concerned with unrealized securities losses and the subsequent impact to accumulated other comprehensive income.
However, securities losses and accumulated other comprehensive income issues are hindering sellers from coming to the market, advisers said.
"I'm not seeing necessarily a delay or lack of interest or hesitation on the buy side. I am seeing it more on the sell side," Bell said. "There are sellers that are sitting there thinking, 'Hey, this may not be the time for me to get my best price.'"
Sellers' market
For sellers that do come to market, they will have the upper hand in negotiations given the imbalance of credit unions buyers versus banks looking to sell, advisers said.
"It's a seller's market," Mueller said. "There's clearly more buyers than sellers out there going into 2023."
Oftentimes, a credit union is an attractive buyer for small community banks in rural markets as bank buyers are usually looking for larger targets in high-growth markets, advisers said.
"A lot of times banks are not interested in buying in some of these smaller markets," McQueen said. "They have kind of disappeared as acquirers of community banks in small markets."
Further, the price credit union buyers offer is typically anywhere from 10% to 50% higher than bank buyers, according to Mueller. Only eight U.S. bank deals announced in 2022 held a deal value to tangible common equity ratio above 200% at announcement, and credit union-bank deals accounted for two of those transactions.
With a deal value to tangible common equity ratio of 210.6%, DFCU Financial's purchase of First Citrus Bancorp. Inc. was the fourth-most expensive U.S. bank deal announced in 2022. Arizona Financial Credit Union's purchase of Horizon Community Bank followed closely behind in fifth place with a deal value to tangible common equity ratio of 210.4%.
For credit union buyers, banks are attractive targets because they offer geographic expansion and commercial banking expertise — an area credit unions typically are not very experienced in given their consumer focus, advisers said.
State setbacks
One hurdle for credit union-bank deals in 2022 was some states' efforts to halt these deals either through regulatory intervention or legislation. Mississippi, which has never seen one such deal, passed legislation barring state-chartered banks from selling to institutions not insured by the Federal Deposit Insurance Corp.
State regulators in Minnesota, Nebraska and Tennessee tried to shoot down these transactions by not approving deals announced in their respective states. While the efforts in Missouri and Nebraska succeeded, a judge in Tennessee did not side with state regulators and allowed Orion FCU's purchase of Financial Federal Bank to go through. The Minnesota state regulator is currently facing a lawsuit regarding its position.
Similar situations could arise in 2023 if credit unions pursue bank deals in new states. So far, these deals are concentrated in the Southeast and Midwest, but Bell said he expects some "geographic diversification" in 2023.
