Increased regulatory scrutiny and fears of a recession are among the factors hampering bank acquisitions, whether the buyer is a credit union or another bank.
Banks contend that with all else being equal, credit unions should have an advantage in mergers and acquisitions because their tax-exempt status gives them more cash to make deals. But with economic and regulatory pressures hitting banks and credit unions alike, this advantage isn't enough to get credit unions back in the game.
"It doesn't seem to be a seller's market right now," said Rodney Showmar, CEO of Arkansas Federal Credit Union in Jacksonville, Arkansas. "Lower [net interest margins] are hurting profit, and investment portfolios may be so far underwater that it deteriorates values."
Showmar has made no secret of his desire to buy a bank. The $2.2 billion-asset credit union has been looking at deals for about six years, and Showmar said it has been in negotiations with banks a handful of times.
Most recently, he said the credit union passed on a deal because the selling bank was hampered by its held securities. Showmar said he would like to buy banks with up to $300 million of assets in Arkansas and surrounding states.
There were just 168 U.S. bank M&A deals announced last year, down from 204 in 2021, according to S&P Global Market Intelligence. Only six deals were announced in January, the lowest deal tally for the first month of the year since 2009. Eight deals were announced in February, according to S&P's latest data.
For a time it seemed that credit unions were gaining traction as
Credit unions haven't lost interest in buying banks, according to Ryan Goldberg, president and CEO of DFCU Financial in Dearborn, Michigan. Last year, the $6 billion-asset DFCU
But economic uncertainty and the potential for increased credit losses and internal liquidity management concerns driven by the interest rate environment are giving DFCU Financial pause. It's also unclear what consumers and businesses will do with their deposits going forward, he said.
"Valuing prospective targets, given the number of variables, has become more challenging," Goldberg said. "And the expectation of a laborious regulatory approval process and the likelihood of completing a transaction in a timely manner can serve as an obstacle."
At the same time, bank buyers are hampered by their current stock prices, said Michael Bell, an attorney at Honigman who estimates he has advised on more than 90% of
Credit union buyers still have cash on hand and are looking at banks to buy, but the overall deal count for 2023 will likely be down compared to 2022 due to the current pause in deal announcements.
"I am in the middle of multiple transactions that are nearing the finish line," Bell said. "There will be more activity in 2023 but the question becomes how much."
Acquisitive banks are feeling the same pressures.
Jacob Thompson, managing director of investment banking at Samco Capital Markets, said the Biden administration's heightened scrutiny of bank sales had already
The
Historically, following problems in the industry, lawmakers have tried to bolster regulatory oversight, according to Thompson. More regulation tends to slow down deals, and this dissuades some buyers and sellers.
"So I do suspect the failures will further contribute to slower M&A for at least the near term," he said.
However, larger community banks and credit unions are often better positioned to absorb regulatory burdens while expanding their footprints or diversifying their business lines through acquisitions, Thompson said.
Sid Khosla, Ernst & Young Global Limited's Americas financial services strategy and transactions managing partner, agreed.
More regulation "becomes another strain on cost structures," he said in an interview. "I do anticipate that triggering the next wave of consolidation" among small banks in particular.
And once that consolidation begins, it may also reignite banking groups' pushback on credit unions' tax exemption. Already this year, the Independent Community Bankers of America has been urging lawmakers to take a fresh look at the issue.
"Today's behemoth, growth-oriented credit unions are leveraging their tax subsidy to purchase tax-paying community banks. This trend is reducing consumer choice and eroding the tax base of states, localities and the federal government," the ICBA said in a letter to Congress this year.
