SEATTLE–One financial analyst is suggesting some banks are holding out on selling as they await a credit union to pay a premium to acquire them.
Writing on Substack, Sam Haskell (https//fivepoint.substack.com) of Five Point, which covers the financial investment universe with a focus on U.S. banks, said some banks are “well positioned for the high tide of a credit unions merger wave,” one of which he said is Sound Financial (SFBC), the billion-dollar bank that operates around Seattle and which, coincidentally, used to be a credit union.
In 2003, the former Credit Union of the Pacific converted to a bank charter, which led to a number of new regulations from NCUA making such conversions more difficult, including by requiring greater member input.
The Fundamentals
Analyzing Sound Financial’s attractiveness to a credit union acquirer, Haskell stated, “I care about Sound’s fundamentals only to the extent a credit union would. Credit unions have slightly different ambitions than a bank might when looking at targets. They care about locations, assets, and new consumer relationships. Earnback and accretion are not nearly as important in an acquisition as with banks. Sound delivers on this low bar.”
Moreover, said Haskell, “SFBC…is loaded with treasure - four directors owning over $1 million (in shares) led by the CEO with $4 million worth. The lightest holding is half a million.”
In addition, Haskell said one of SFBC’s newest directors is employed by activist fund Stillwell Value, which threatened a proxy fight because SFBC did not repurchase enough stock in 2023.
‘Array of Factors’
Stilwell and Stewart’s interests are “aligned,” Haskell added, when considering an array of factors he said include:
- What a credit union might pay. “Credit unions are currently paying material premiums to bank offers in certain states.”
- CEO Stewart’s age – 75
- The change of control agreement and stock option ownership favor a sale relative to director compensation of around $60,000 annually.
Haskell said there is a “bear side” argument to be made given that First Financial of the Northwest (FFNW) just sold for 1.3x tangible book value to a credit union and Sound trades 1.15x, implying modest upside.
No Sure Thing, But…
“There are no sure things in banking but to the first point, the Stilwell nomination marks an important change, and those speaking with Stewart know that she understands the credit union bid may not persist,” wrote Haskell. “Banks in CU-friendly states who decline generous credit union offers may be neglecting their fiduciary duties…We will see if SFBC could garner 1.5x tangible, or a 30% premium, from a credit union. They seem incented and willing to listen.”