By Ray Birch
WASHINGTON—Credit unions have advantages—and disadvantages—when bidding to buy a bank, insists one expert who said the growing trend of CUs buying banks will not continue “unabated.”
Richard Garabedian, counsel with Hunton Andrews Kurth LLP, and who has been involved in a number of CU/bank agreements, spoke with CUToday.info about the deals, and cautioned that bankers—as they have already begun doing in lobbying Congress with a message the acquisitions indicate a departure from the credit union “mission”—will eventually seek to stall such purchases.
“The banking trade groups are focused on these transactions,” Garabedian said, referring to the trend that has ramped up this year—seven banks were purchased by CUs in the first six months of 2019. “I would not expect this trend to continue unabated into the indefinite future. They do carry some significant policy considerations, such as converting a taxable entity into a tax-exempt entity. The banking community also loses a financial institution that has CRA obligations. NCUA Chairman Rodney Hood has also announced the potential for forthcoming regulations.”
Garabedian said he has noticed a growing interest in banks acquiring credit unions.
“In that case the members actually get paid for their ownership interest, unlike a credit union merger,” said Garabedian, prior to First Bank of Berne’s announcing it intends to merge in the $18.4-million Adams County Credit Union.
Garabedian, who has largely represented banks when CUs have purchased a bank, said the big advantage credit unions have as bidders is they don’t have to satisfy shareholders and can be “aggressive” on bidding.
“They also do not have to deduct the resulting goodwill in calculating their regulatory capital compliance, as do banks,” said Garabedian, who noted he is currently working on four credit union/bank transactions. “We have been on both sides of the deals.”
Richard Garabedian
Are CUs Overpaying?
As CUToday.info has reported, some analysts have suggested credit unions have been overpaying when buying banks.
“The credit union has usually been the highest bidder (in deals Garabedian has participated in) but not always,” he said. “The credit union transaction has more risk and takes much longer to complete. Since a credit union can only pay cash, the shareholders must recognize a capital gain immediately. If a bank was the acquirer and used stock consideration, the shareholders could defer the gain until they sold the stock of the acquirer.”
Garabedian, like attorney Michael Bell with Royal-Oak Mich.-based Howard & Howard—the pioneer of these deals—agreed the more credit unions buy banks the higher the profile of such transactions becomes, and that will likely result in more CUs exploring deals of their own.
“Credit unions are becoming more aggressive bidders, probably because they see other CUs buying banks and have less reservation about the transaction,” Garabedian said.
Some High Hurdles
But there are some high hurdles for CUs in striking the deals, said Garabedian.
“Being an all-cash buyer does have drawbacks, particularly when the transaction is structured as a purchase and assumption—which the NCUA requires for federal credit unions—rather than a merger,” he explained. “In a purchase and assumption, the bank must recognize any gain upon receipt and pay the taxes; the remainder is then distributed to the shareholders. Credit unions often cover the taxes—an additional cost to the merger consideration—so that the shareholders receive the full purchase price. In a sense they are paying more than the fair value of the securities. And is this consistent with the directors’ fiduciary duty? Doubtful a bank would do that.”
The all cash offers, as opposed to the combination of stock and cash that a bank buyer typically offers, does not necessarily amount to an advantage, according to Garabedian.
“It all depends upon what the seller is seeking,” he said. “As a general statement banks are more sophisticated buyers since they have more experience and have more experienced advisors, since credit unions historically have only acquired other credit unions where no consideration is exchanged.”
Investment Bankers Court CUs
What is also drawing more credit unions to the offer table, said Garabedian, is increased activity by investment bankers in contacting credit unions to become potential bidders.
“That was not the case a few years ago,” he said.
Citing data CUToday.info has previously reported that indicates banks may be paying more than CUs when purchasing another bank—data that runs counter to several reports suggesting CUs are paying top dollar—Garabedian said there is no clear answer on the issue.
Michael Bell
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.
‘No Typical Price’
Data Garabedian provided to CUToday.info covering seven transactions of publicly owned banks since the deals began show credit unions paying an average of 89.54% price to book value.
“There is no typical price to book value with bank-to-bank transactions,” Garabedian said. “You would have to review the various size categories to get a better understanding. Typically larger banks obtain a higher premium since they have a larger franchise and more attractive management. The section of the country is also a factor in the pricing. Metropolitan based banks will have a higher premium than more rural banks. Klinger’s finding of 1.52 times book is not a bad estimation for the mainstream of deals.”