By Ray Birch
ROYAL OAK, Mich.—With the number of credit unions buying banks markedly increasing, analysts are now saying what CUs have been spending on the deals is equal to—if not less than–what bank buyers have been paying.
When credit unions first began buying banks, starting in 2011 when Michigan's United FCU acquired $81-million Griffith Savings Bank in Indiana, and then until recently, many have suggested credit unions have overpaid when making purchases.
But new data shows that may not be the case. As CUToday.info reported, Robert D. Klingler, a partner in the firm Bryan Cave Leighton Paisner, noted that in the four credit union transactions in 2019 that have publicly provided pricing, the acquisition price was 1.40 times tangible book value. In the 20 non-credit union, all-cash, transactions to date in 2019 that have publicly provided pricing, the acquisition price was 1.52 times tangible book value.
Moreover, data provided to CUToday.info covering seven transactions of publicly owned banks since the deals began shows credit unions paying an average of 89.54% price-to-book value.
‘Can’t Argue’
That Klingler research jibes with what Michael Bell has seen over the years. Bell, an attorney and counselor at Michigan-based Howard & Howard who pioneered such transactions, has been involved in the majority of CU bank buys, having worked on more than 35 of the agreements.
“I can't argue with those numbers,” Bell said, noting that the data only involve sales of publicly owned banks. “But I can tell you that over the last two years, I’ve seen prices credit unions have paid ranging from 1.4 times book to 2.2.
“This is good that this data has come out,” continued Bell. “The truth is that credit unions have not been overpaying or underpaying. I think they're just paying … The analysis by Klinger is right, because we win some and we lose some. Yes, there is a difference in the accounting treatment between bank and credit union purchases of banks, and I think there's advantages and disadvantages that cut both ways. But the point is credit unions are paying market and banks are paying market—sometimes one wins, sometimes the other wins.”
Where The Market Became ‘Confused’
Michael Bell
Bell contends that has always been the case, even in the early years when very few credit unions were looking at buying banks and CUs were not seen by bank sellers as very serious players in this market. Bell believes the perception credit unions were overpaying stemmed from market views on the selling bank’s value.
“Here's where I think people got confused. Credit unions have often been willing to buy a small bank in a small rural market because it is a good fit for them—the bank’s philosophy, the bank’s customer base, the bank’s marketplace–is a good match for the credit union. So they see value in the bank. Now, on the other hand, larger banks do not see the value or have a need to buy this kind of bank, so they are less interested in the deal, and therefore place less value on the selling bank. That viewpoint leads the big bank and experts who view the deal to say the credit union overpaid, when, in fact, for what the bank returns to them, they have not. The CU did not overpay, they just bought something bigger banks had less interest in.”
The Opposite Scenario
Bell suggests the opposite situation occurs when a bigger bank in a large urban market wants to sell. Credit unions have less interest in those acquisitions, he said, while big banks become very active bidders.
Bell said that credit unions being all-cash buyers has provided a slight advantage in the current market, but it’s not significant.
“First, more deals with credit unions are happening—more sellers are interested in selling to credit unions and more credit unions are becoming interested in buying banks,” explained Bell, who said the growing number of CU/bank buys is driving more press coverage and therefore more attention to the option for both parties. “When a credit union buys a bank they can only pay all cash. When a bank buys it’s a mix of cash and stock. Now, if a seller's interested in cash, you have an advantage. And at this moment in time I think small bank sellers are interested more in cash. So credit unions have a slight advantage. But if the situation would change, and stock becomes more attractive, then the situation reverses.”
Trend to Continue
Bell, who has been accurate with his predictions in previous CUToday.info reports that the pace of CU acquisitions of banks will quicken, sees the same scenario playing out for the remainder of 2019 and into 2020.
“We had a record year so far for the number of credit union/bank buys,” said Bell. “And I am certain we’ll see three or four more by the end of the year.”