(Two blogs precede this chapter II. One posed the issues of credit unions buying banks; a second reviewed cooperatives’ public policy role.)
As of mid-June, four credit unions have announced agreements to purchase five whole banks. Each of the four purchasing credit unions—Lake Michigan, Vystar, Wings Financial and GreenState (buying two banks at once)—have had prior instances buying a whole bank and/or branch combinations.
These events raise both policy and transaction questions. One explanation by NCUA and trade associations is that whole bank purchases are “just the free market at work.” Nothing out of the ordinary. Two independent firms make decisions in the interests of both sets of owners and their communities.
Not Market-Tracking Decisions
However, this explanation is neither complete nor useful. It is incomplete because only one side of the sale is open to owner scrutiny—the selling bank which must have shareholder approval. The credit unions purchasing the assets and liabilities act like private buyers. They rarely release any factual or financial data except press release generalities such as market expansion, diversification, acquiring new lines of business or adding professional expertise.
When facts about the transaction—such as the sale price– are presented, they are from the seller’s briefing their owners not by the purchasing credit union.
In a “normal” market-driven bank purchase (or merger via exchange of stock) both parties will provide their rationale for the transaction. Here are several excerpts from 2021 sale announcements provided by the bank undertaking the purchase, not the selling party:
BancorpSouth said it expects to have $125 million in merger-related costs. The bank said it plans to save $78 million in annual non-interest expenses as a result of the merger. The bank plans to achieve 75% of its merger-related cost savings by 2022, and 100% in 2023. or,
Webster plans to cut about 11% of the combined entity’s annual noninterest expenses, American Banker reported Monday. The company expects to incur $245 million in merger-related expenses, but the deal is projected to save $120 million while the company generates an extra $440 million per year. or,
NYCB and Flagstar: Accelerating Our Transformation Strategy: NYCB estimates the merger will result in additional capital generation of $500 million annually, as well as $125 million in annual cost savings. The bank expects to incur $220 million in merger-related expenses. (the release includes full operational and financial estimates)
Each of these purchasing banks provides data about the transaction, how it will benefit shareholders, goals for cost recovery and the expected return on investment in following years.
Credit union purchases convert firms subject to market monitoring into private entities. No longer can external markets assess management’s performance. Coop member-owners are not involved in the process before or after.
Investing Beyond a Firm’s Experience
In many areas of commercial enterprise there are wealthy individuals or firms who jump into an industry by “investing” in competitive arenas different from where they made their wealth. Consider Silicon Valley entrepreneurs buying professional sports teams, wealthy heirs venturing into the film and entertainment business, young work-from-home retail investors jumping into $0 cost online stock trading, etc.
Long time professionals sometimes refer to these new entrants’ cash inflows as “dumb money”–affluent outsiders bitten by a bug to try something different or indulge a personal interest. And there are plenty of brokers, salespersons and expert third parties helping these newbies learn the ropes and get into the business—for a fee.
These promoters make their living by closing deals. Their most common message is urgency–“act now or miss out” — if you don’t, someone else will take this opportunity off the table.
But how is an interested credit union member supposed to weigh such an event? One approach is to ask if the member would buy the bank’s stock for their personal investment based on the information available to their credit union?
Would You Buy This Bank’s Stock?
Too difficult for a member? Here is an actual case.
A $605 million credit union announced in July 2019 an agreement to buy all the assets of a bank with the following performance record:
- June 30, 2019, bank data: $97.8 million in bank assets, $77.6 million in deposits; $11 million in equity; a $7.0 million FHLB loan; and loans of $73.7 million.
- The bank has had negative income every year since 2008.
- The “efficiency ratio” for 2018 was 111.08% and for 2017, 129.0%. At June 2019, 127.8%. Every period’s operating expenses have exceeded income.
- Two consent orders were issued by the Office of the Comptroller of the Currency. The December 19, 2012, one was followed by a second on November 2015 designating the bank a “troubled institution”.
- This order was ended in February 2019 after the bank raised $4.5 million new capital issuing 600,000 new shares for a price of $7.50 per share in January 2018. The cost of the offering for the bank was $366,000 or 8.1% of the gross proceeds.
- The bank’s 2018 annual report states its core market deposit shares as: 1.69% Arlington Heights, 2.83% Rolling Meadows, and .03% in Cook County.
- The 2018 annual report included the bank’s outlook: We do not anticipate net income until we experience significant growth in our earnings.At mid-year 2019, just before the credit union announcement, the bank’s operating loss was $262,000.
Would a person buy this bank’s stock that has not had positive earnings for a decade, promises none going forward and has miniscule market share? The new investors in 2018 paid $7.50 per share; the day before the announcement the share price was $6.80-below what the new investors paid.
The credit union offered $10.33-$10.70 per share or $2.4 million higher than the book value and 55% higher than the market valuation prior to the sale.
The credit union addressed none of this operating history, even though the facts were public. The credit union offered no information about how this decade long losing operation would benefit it or the members. The purchase was finalized by Corporate America Family Credit union and announced on April 30, 2020.
Why did the credit union bail out this bank’s owners with their members’ collective capital? How will this $13-$14 million dollar “investment” provide any return for the credit union? No one knows; the outcome is now hidden away from external or internal oversight. On the public facts, this would not appear to be a “smart money” move.
Tomorrow I will provide critical questions to evaluate these purchase transactions.