Cash is king: Why credit unions are winning the battle for community banks.
We are seeing a growing trend in the community bank merger and acquisition space: credit unions have become more active and successful acquirers of community banks. We anticipate this trend to continue as community banks are experiencing multiple challenges in the competitive financial services environment.
Liquidity is a common factor as community banks consider merging with another financial institution. There are two aspects to the liquidity challenges faced by many community banks: balance sheet liquidity and shareholder liquidity.
Community banks continue to face challenges acquiring deposits to fund balance sheet growth. Deposit gathering tends to be highly competitive in many markets due to the increased presence of large nationally based banks, alternate financial service providers such as brokerage firms, and credit unions. Technology also enables customers to bank with out-of-market financial institutions and other financial services providers.
These factors not only make acquiring liquidity challenging – it also increases funding costs causing net interest margin pressure. Limited liquidity for growth and pressure on net interest margin can restrict profitability and return on equity to shareholders.
Shareholder liquidity is becoming more important for community bank investors. Most community bank investors desire liquidity of shares during their investment holding timeline for multiple reasons – retirement and estate planning, change in investment focus, etc.
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As bank board members consider a merger as a liquidity event for shareholders, they often find a limited pool of community bank buyers. These buyers tend to have funding challenges so combining two community banks generally doesn’t solve this issue. Large banks with marketable stock as currency generally are not active buyers for smaller community banks, as the acquisition-related risk and effort do not provide an appropriate return at current pricing. Credit union buyers’ currency is cash, providing the most certain liquidity event for shareholders.
Bank boards have many considerations as they address liquidity for their balance sheets and shareholders. We anticipate an active bank merger market over the coming months with both banking and credit unions as acquisition partners.
Artisan Advisors has represented financial institutions on both sides of the merger and acquisition process and is uniquely qualified to conduct both merger and acquisition due diligence evaluations. Artisan is also deeply experienced in assisting financial institutions with capital planning that will support a financial institution’s strategic plan in all scenarios.
Michael Boettcher, CPA, is a seasoned banking executive with more than 35 years of financial management experience. He counsels clients on a wide range of issues including asset liability management, balance sheet funding strategies, investment portfolio management, capital planning, transaction due diligence information technology core processing and network contract negotiations, treasury management, branch structure and profitability modeling, as well as risk management and compliance related concerns.
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