Though the slowing economy doused expectations, the trend continued in 2022 for credit unions acquiring community banks. Will it continue? Just ask Michael Bell, a partner and M&A specialist at the Honigman law firm.

Bell says to expect 20-plus deals annually in the sector once the economy normalizes. Even if it doesn’t, he expects a “normal” year of deal flow in the mid-teens.

Bell helped engineer LGE Community Credit Union’s acquisition of the Greater Community Bank in Rome, Ga., which was announced in mid-December. It was Atlanta-based LGE’s second acquisition of a community bank after its 2018 purchase of Georgia Heritage Bank in Marietta.

“The acquisitions were driven by geography,” Bell says, as LGE pursues targeted expansion.

Bell and his firm pioneered credit unions’ acquisition of banks 12 years ago. The first one required navigating the regulatory and legal challenges in the two different categories of financial institutions – the not-for-profit member-owned credit unions and the privately owned chartered banks.

Detroit-based Honigman settled on a purchase and acquisition strategy often used when a bank acquires a branch or other assets from another bank. “It feels, tastes, and smells like a merger,” Bell says, as the buyer purchases 99 percent-plus of the acquired bank. “Operationally, it doesn’t make any difference.”

Banks have groused for years that credit unions enjoy a competitive advantage because as non-profits they are tax exempt.

“It’s a hundred percent legitimate political lobbying point,” comments Bell. “But for a transaction, it’s a red herring.” Besides, he notes, many community banks are organized as S-Corps and don’t pay corporate income tax anyway.

Consolidation in the U.S. banking sector has been going on for over 20 years as regulations on interstate banking have crumbled. This is certain to continue, Bell says.

“I don’t expect it to stop,” Bell says. “It’s the same in every sector.” He cited consolidation in hospitals as non-profit institutions and networks take over for-profit hospitals as a good comparison.

Credit unions and community banks are much smaller than the behemoths like JPMorgan Chase and Bank of America that dominate banking. It is a challenge for the smaller institutions to match the resources of the big players.

“They do compete. They have to offer something similar,” Bell notes. By now, tech solutions, for instance, have become cheaper, allowing smaller lenders to purchase them off the shelf or to pool resources.

The smaller institutions have their own selling points. “They have a different story to tell,” he says.

Bell works primarily with credit unions and many are looking to expand through acquisitions. It’s the sellers who are hesitant. A combination of recession fears, Federal Reserve action on interest rates, and consumer reaction to rising rates for auto loans and home mortgages are creating uncertainty.

“When it clears up, there will be more deals,” Bell says. “The longer it takes, the fewer deals you’ll have. First there has to be clarity.”

When will that be? “I don’t know,” he says. “The catch is you hear lots of things from different people.”

Contact Bell at [email protected].

Darrell Delamaide