Category: Buying banks

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Chapter II: Bank Purchases by Credit Unions: Just Another “market transaction?”

(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.

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Should Credit Unions Buy Banks?

Two major credit union purchase and assumptions of commercial banks have been announced recently.   The $7.5 billion GreenState Credit Union in North Liberty, IA is buying two banks outside Its home state with total assets of $1.1 billion.

In April the $10 billion Vystar Credit Union in Jacksonville, Fla., agreed to buy the $1.5 billion Heritage Southeast Bank of Jonesboro, Ga., for $189 million, becoming the credit union industry’s largest bank acquisition.

Excess Cash on Hand?

With the average annual asset growth over 20% for the largest credit unions, the explanation that buying size to get to the future faster  would seem questionable.  Organic growth has taken off.

Is it possible that all the excess cash on hand is burning holes in credit union pockets?   If that is a factor than it is well to remember the age-old wisdom about money and value: asset values of banks tend to benefit from excess liquidity and suffer from a dearth of it, like most other asset classes.

Three Ways of Approaching the Issue

In upcoming blogs I will look at several examples, some pending and others completed, around three topics.

  1. Is the purchase of whole banks consistent with the public policy role of credit unions, a role that  justifies their exemption from income tax?  In the political arena, local and nationally, do these transactions help or harm credit union’s reputation?
  2. How do purchases benefit existing member owners? Are the disclosures and information credit union CEOs provide about these transactions adequate for existing members whose loyalty created the capacity to do these cash purchases?
  3. Looking at several examples, albeit with incomplete details, do these investments appear to be financially sound, especially in instances where the announced price is substantially above recent market value?

No Easy Answers and No System Dialogue

At each level of analysis there will be differing viewpoints.  NCUA has taken a hands-off approach signaling that these are merely “market-based transactions.”   I believe this is a misuse of the term.  At one point Chairman Harper, as a board member, indicated concern that “former consumers of the acquired banks will not have the same level of consumer financial protection oversight in their new credit union.”

Because an activity is legal does not mean it is wise.  Either as policy or in a specific instance.

Another difficulty is assessing the financial impact of these larger events on the purchasing credit union.  It may not be possible for years to know the benefits or costs on the acquiring credit union or the communities and customers  whose accounts were transferred.  For example what is the retention rate of depositors?  It is one thing to acquire assets, it is another skillset to manage them effectively.

As a general maxim, the purchase or merger of commercial entities tends to reduce shareholder value.  Before its recent disposal of its media assets, AT&T (T) spun off its DirecTV and other pay-tv services into a separate company, with private-equity firm TPG Capital as a 30% owner of the new entity. The deal valued the pay-tv services at a combined $16.25 billion, compared to the $66 billion that AT&T paid for DirecTV alone in 2015. (CNBC)

My goal in following articles will be to ask questions and to confront the seemingly nonchalant acceptance of this activity within the credit union community.   Through dialogue I hope credit unions can become more aware of what is at stake and what future actions might be, if different from the vacuum that now surrounds these activities.