By Ray Birch
LAKE TAPPS, Wash.—Is the liquidity crunch that's hitting the balance sheets of many credit unions also now getting in the way of CU purchases of banks and slowing those deals? Two experts have two different views on that question.
Glenn Christensen of CEO Advisory Group told CUToday.info that while he sees more credit unions considering the acquisitions, some are tabling their decisions for now as capital is feeling a squeeze.
As CUToday.info has reported, some credit unions are facing a liquidity shortage as members spend down their stimulus money stockpiled during the health crisis as inflation puts pressure on household budgets. They are also moving money out of liquid accounts, largely checking, as rates rise and consumers look elsewhere for higher rates.
Christensen told CUToday.info he is seeing a slowdown in credit union purchases of banks, especially after the record of deals the market was seeing earlier in 2022.
“We saw a good pace, now it's slowing down,” said Christensen, who believes the slowdown is temporary. “I think credit unions are still looking. But, there's a couple of things that are going on with bank acquisitions.”
One, and it is a big concern for some, according to Christensen, is uncertainty over their organization’s financial future in what has become an dicey economy.
“I think a lot of credit unions have some concerns about their own earnings going forward,” he said. “We've had several credit unions that have pulled out of deals because they've had concerns about their earnings for the next couple of years.”
A second factor playing a role in stalling the pace of the acquisitions is the fact credit unions are all-cash buyers.
“I would say more and more credit unions are having liquidity concerns, and because of liquidity concerns they don't have the free cash flow to be able to invest in a bank buy,” Christensen said.
Commercial Loans Create Hesitation
And then there is the fact that banks—which tend to hold more commercial loans than similarly sized credit unions—are a little less attractive now, he said.
“The last thing credit unions need right now, with a recession looming, is a bunch of new loans on the commercial side,” Christensen said.
Christensen said taking on more commercial loans raises additional concerns “in terms of what kind of additional risks are we taking from an asset liability management standpoint” in a rising-rate environment.
“And, as we know, credit unions are struggling to meet the record loan demand of their existing members. So, that is impacting their decisions, too,” he said.
But all of that will eventually settle, Christensen said, repeating his belief that the current economy is creating in some cases more attractive acquisitions for credit unions.
“On the other side you're seeing banks now have a pretty strong deposit base,” said Christensen. “This is an opportunity for many credit unions to gain low-interest-bearing deposits. Banks are sitting on a pretty high level of demand-deposits in checking accounts. It's a pretty attractive deposit base.”
The Role of Bank Values
Banks’ values are also falling as the number of banks looking to buy another bank is also currently down from earlier this year, Christensen said.
“The competition for banks from bank buyers has decreased because the value of their shares has dropped,” Christensen explained. “This can be an opportune time for credit uni
Michael Bell
ons to acquire a bank because some of the competition is muted.”
Christensen believes some banks are “leery” of putting themselves up for sale in what’s perceived as a down market.
“They might hold off for a year or two to get a better price,” he said. “Ultimately, credit unions are looking at what's their long-range strategy. And we've had some credit unions that have pulled out of deals. On the other hand we also have credit unions that are very anxious to find the right deal for themselves and it's just a matter of making the right match. As I said, there are opportunities now.”
Not Seeing a Slowdown
But not everyone is seeing a slowdown in the market. The pioneer of credit union purchases of banks, Michael Bell, told CUToday.info he believes the pace of bank acquisitions has not been affected by the current market.
“I am in the middle of many deals. I think it’s just a question of getting them over the finish line and announced,” said Bell, the leader of the Financial Institutions Practice Group at Honigman LLP. “The transactions have many details that need to be negotiated prior to announcement.”
Bell has been involved in well over 45 whole-bank agreements, plus additional bank branch purchases.