By Ray Birch
KALAMAZOO, Mich.–Is the price credit unions are paying when acquiring banks too high? Or generally in line with the market? A CUToday.info review offers some insights.
The CUToday.info review is based on a random sample of bank purchases by credit unions and banks in recent years and it shows both types of institutions have been paying about the same percentage above book on the agreements.
But there are numerous variables, and those interviewed by CUToday.info said a number of factors play into that.
The review reveals that, on average, CUs are paying no more above book value than when a bank wins the bid to buy another bank, according to two experts who have been part of CU purchases of banks from the beginning.
“If you look at 2018 forward, I have not seen the price credit unions are paying over book move materially,” said Michael Bell, the pioneer of credit union purchases of banks, and a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP. “On average, over the last few years, the price credit unions have been paying has been between 1.3 times book value to 1.9 times book.”
Bell, who has been involved in more than 40 whole-bank agreements, plus additional bank branch purchases, said that range reflects what banks typically pay when they purchase another bank.
“Sure, every time a credit union wins a deal they are the highest bidder,” said Bell. “But what we have been seeing is that this range, from 1.3 times book at the low end to 1.9 at the high end, has remained stable.”
Bell reminded that credit unions win bids as the result of another factor: they put cash money on the table.
“Some sellers might decide to take even slightly less because they prefer all cash, as opposed to cash and stock when a bank wins,” he said.
In many of the deals CUToday.info has reported to date, the banks that were acquired were marginally profitable or unprofitable, according to FDIC data.
Michael Bell
Purchase Price Often Secret, But Not Always
The purchase prices being paid for banks is typically not disclosed by the acquiring credit union, although that is not always the case. In September of this year, for instance, the $1.6-billion Scott Credit Union in Edwardsville, Ill announced it was purchasing the $93-million Tempo Bank for $14.25 million in cash, subject to dollar-for-dollar reduction if Tempo Bank’s total equity at closing is below $10.194 million. Shareholders in Sugar Creek Financial Corp., the banks’ holding company, and Tempo Bank, have the right to terminate the purchase and assumption agreement if the were estimated at the time the deal was announced to receive in the dissolution between $14.50 and $16.50 in cash in exchange for each share of Sugar Creek common stock.
A CUToday.info review of four bank purchases of banks and four CU/bank agreements reflects that what banks pay over book has been essentially the same as what credit unions are paying (see list at the end of the story)
Using NCUA Call Report and FDIC data, the CUToday.info review looked at the goodwill credit unions are paying in the quarter in which they acquire a bank, their intangible assets, the bank’s equity capital and other data to estimate purchase prices.
Bell acknowledged that purchase prices are almost never publicly shared and that reviewing bank and credit union performance data will reveal about what was paid for the acquired institution, but the final figure will not be exact.
“You can get close,” he said. “But it will be an estimate.”
The One Question to Ask
Charley McQueen, president and CEO of McQueen Financial Advisors in Clawson, Mich., has served as a financial advisor for credit unions on more than 70% of credit union purchases of banks. McQueen worked with United FCU when it purchased Griffith Savings Bank in 2011, which kicked off the trend in purchasing banks.
Both McQueen and Bell acknowledged a factor in suggestions made that credit unions are overpaying for banks has been that at the outset the banks that were acquired were often small and struggling. But McQueen pointed out that is not occurring much today.
Indeed, as CUToday.info has regularly reported, the size of the banks being purchased by credit unions has markedly increased. For example, Jacksonville, Fla.-based VyStar agreed in April to buy the $1.5-billion Heritage Southeast Bank in Jonesboro, Ga.
McQueen emphasized, however, that credit union purchases of banks are often the less expensive route when compared to the costs related to building a branch or branches in a new market.
Instead, the critical factor that deserves review is similar to any other investment—the return, he said.
“You have to look at these buys from an earnings standpoint—what is the payback?” asked McQueen, adding that the earnings credit unions generate from the acquired institution/branch tend to be immediately higher than that of the bank due to the CU tax exemption . “How quickly will the credit union make its money back and then begin making a profit on the buy? You have to look at the bank’s equity, their annual earnings, and then make your calculations.”
McQueen said those calculations show credit unions have been seeing, on average, an investment payback in five or fewer years.
“The low end being three years, from what we have seen, and the high end five years. We tend to get nervous about the deal when the payback approaches five years,” he said.
Facts Vs. Friction
What also must be acknowledged is an issue that should be solely about the financials has become much more given the animosity the nation’s banking industry has shown toward their not-for-profit brethren.
Bell said the “rhetoric” from the banking industry has created considerable confusion around credit union purchases of banks.
As CUToday.info has reported, the banking industry has used the issue to once again zero in on the CU tax exemption with more attention than ever before. One of the industry’s arguments has been that every time a credit union buys a bank it eliminates a tax-paying entity in favor of a tax-free organization at a cost to that community.
That banker pressure has been increasing, noted Bell. As CUToday.info also reported, the American Bankers Association just launched a digital broadside against CUs—a new website called “Reform Credit Unions.” The Independent Community Bankers of America (ICBA) has launched a national media blitz and website that questions if credit unions have “lost t
Charley McQueen
heir way.”
But those trade group tensions have not translated into bad deals when credit unions buy banks, Bell said.
“Credit unions are absolutely not overpaying, or paying above market. I have not seen evidence that credit unions overpay when they win,” Bell added.
Role of Market Conditions
McQueen said those early purchases of small banks that drew the ire of the banking industry—even though it was their fellow bankers who chose to sell and who received the benefits—in which claims were made the CUs were overpaying, were simply a reflection of market conditions at the time.
“This is a supply and demand issue,” said McQueen. “The credit union might have picked up a bank that was tiny and not doing well, but they are getting a new credit union branch in a new market at a cheap price.”
Added Bell, “The metrics shows these deals have been good for banks and the fact that more credit unions just keep coming back and making repeat bank buys illustrates this point.”
A Sample Review
A CUToday.info review of a sample of purchases of banks by both other banks and credit unions shows:
Credit Union Purchases of Banks
- 6/2019: $1.5-billion Verve, a Credit Union, Oshkosh, Wis., acquired $300-million South Central Bank in Chicago for 1.70 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data.
- 4/2020: $4.4-billion Tinker FCU, Oklahoma City, Okla., purchased $286-million Prime Bank in Edmond, Okla., for 1.90 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data.
- 3/2021: $11-billion VyStar Credit Union, Jacksonville, Fla., purchased $1.5-billion Heritage Southeast Bancoporporation, Jonesboro, Ga., for 1.85 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data, and public records.
- 6/2021: $10.4 billion Lake Michigan CU, Grand Rapids, Mich., bought Pilot Bancshares, Tampa for 1.87 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data, and public records.
Bank Purchases of Banks
- 5/2021: $18.9-billion United Community Banks, Greeneville, S.C., purchased $739-million BankAquesta Financial Holdings, Inc. for 2.17 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data, and public records.
- 6/2021: $25-billion Simmons First National Corporation, Pine Bluff, Ark., purchased Triumph Bancshares, Inc., Memphis, Tenn., for 1.53 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data, and public records.
- 8/2021: $9.3-billion Seacoast Banking Corporation of Florida, Stuart, bought $600-million Sabal Palm Bank, Sarasota, Fla., for 1.81 times tangible book value, according to CUToday.info analysis of FDIC and NCUA data, and public records.
- 10/2021:$14.-billion Community Bank System, Dewitt, N.Y., bought $649-Elmira Savings Bank. Elmira, N.Y., for 1.66 times of tangible book value, according to CUToday.info analysis of FDIC and NCUA data, and public records.