Unrealized Bond Losses: Mergers & Bank Acquisitions

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hey, this is Mark Treichel with another episode of With Flying Colors. Today I want to chat about, , some things I've been picking up on by reading the American, , banker and also by listening to a podcast called the ABA Banking Journal, which I'm gonna play a snip of Pure, , shortly, but, There's some interesting things going on in the economy for many reasons, and there was an article in the American Banker, , that was called.

There's an article in the American Banker called How Unrealized Bond Losses Are Hampering the Banking Industry. It's a fascinating article, but it talks about merger momentum slowing in banks because of the upside down nature of hold to maturity, investments, and other investments.

If you will, but, in my mind, I think actually those unrealized bond losses in the credit union industry are likely going to speed up the mergers in credit unions. By the way, mergers in credit unions in 2022 were up about 20% over the 2021 rate. That's if you annualize the three quarters of this. Of this year into a full year.

, mergers are up about 20% and in a minute I'll tell you why I think mergers will likely be going up as well. But here's this, , a couple minute snippet of the ABA Banking Journal podcast that was published, , earlier or mid-November. So one final question for you. The, , um, you know, we, we, we've, we hear a lot about the, , we talk a lot in this industry about the, um, the credit union acquisitions of banks.

Um, I, I don't think, I feel like we haven't seen as many in the, in the last year as we've seen kind of pre, pre pandemic, certainly. Um, what's the, what, what's your read on, , the long term tri on credit unions acquiring tax bank community? Well, you know, number one, um, I don't wanna, you know, downplay the concern that banking industry has over it, but there really haven't been that many in the whole scheme of things.

Right. Um, you know, I mean, it's still a very, very small component of overall bank m and a. Um, that being said, , credit unions are able to pay cash to the seller and in an environment right now where you. The buying power of, , publicly traded banks is, , adjusting. Um, stock deals are maybe becoming a little more expensive.

You know, people who can walk in, it's like buying a house. If somebody can walk in with a cash offer, you have to entertain it, right? So I think we'll see more credit union deals. I think, you know, thanks for better, for worse, have a responsibility to their investors to at least review those offers. , you know, um, and again, you know, it's gonna be hard to compete against a, a group that can pay cash and make the mathematics work like, like these credit union deals.

 All right, so that was interesting. I don't know if you caught it, but they talked about what do you think about the acquisition by credit unions?

, Credit unions acquiring tax, paying community banks with a little needle there that it takes taxes out of the system if a, if a bank is acquired by a credit union, , which is there. The ABAs one argument about why it shouldn't be allowed. , and this is, I'm digressing a little bit, but , it was very interesting.

The big difference between a bank acquiring another bank is they acquire it with stock. If stocks, if the stocks are down at both banks, it makes the acquisition less likely to go through at the banking level. Now, credit union deals are cash deals because there is no stock, and that makes them better deals.

And as the, , guest on the show pointed out, I think at the dismay of the ABA person hosting it, , The credit unions are positioned to do it with cash and, , the bank stockholders have a duty to try and get the best return, which is why credit unions often win in that scenario. , but the article, so, so kind of linking that to the article, , the article in the American Banker says Merger momentum has slowed as bank valuations take a hit.

And it goes on to say the unrealized bond l