Are Nationwide FCU Members Being Offered Enough for Their CU? Will Merger Open the Door to More CU Sales?

COLUMBUS, Ohio — Are the roughly 44,000 members of the $586 million Nationwide FCU being offered enough money for their credit union?

That is one of the questions some credit union, bank and thrift observers have begun to ask as news of the deal whereby Nationwide Bank, the newly chartered thrift which is a subsidiary of the Nationwide financial services firm, will buy Nationwide FCU has started to sink in.

Once NCUA has finished reviewing the CU's disclosure documents about the deal, the bank will offer the CU's members $79 million for the CU, or roughly 20% above the CU's equity as of March 31. The members will then have a period of 90 days to review the disclosures and will have to vote in the end on whether to accept the deal.

At a time when, by contrast, some credit unions are converting to bank charters and expecting their former members to buy shares in the equity they already own in stock offerings, reaction to Nationwide's offer to pay Nationwide members was received with a lot of enthusiasm in many quarters.

“When what is happening in so many other places amounts to little more than thievery, the fact that Nationwide was willing to try to do the right thing means a lot,” said Jim Blaine, CEO of the $13 billion State Employees' Credit Union, headquartered in Raleigh and a longtime critic of credit union-to-bank conversions.

But Blaine said that his comments and support for the purchase only reflected the degree of transparency that the CU has offered so far. If that transparency were to diminish, if the CU were to hold back on letting its members and the public at large know about how it and Nationwide Bank arrived at the $79 million price tag, then the deal might face more of an uphill climb, Blaine explained.

Some financial industry observers are raising questions about the purchase price because, it seems to them, the bank is getting a lot of value for the $20 million premium it has offered for the CU–a premium which will be even less by the time the deal eventually closes because, over the intervening months, Nationwide's equity will increase while the $79 million price stays fixed.

The most tangible things that the bank will gain, the sources observed, are a head start over the introductory hurdles that startup banks face and a pool of deposits and committed depositors for whom the bank will be a somewhat known quantity.

“In a certain sense those two things are priceless, because it is very difficult to assign prices to them,” explained John McCune, a thrift and banking analyst with SNL Financial, a Charlottesville, Virginia information and research firm which specializes in analyzing the financial services industry and appraising financial service firms.

McCune explained that a thrift just starting up, if it moves aggressively, will still take roughly 18 months to turn a profit–and many startup thrifts take 24 and even 36 months to make money. By buying the CU, the bank may find a significant way to cut that time frame because it will have a pool of deposits and depositors with which to work from the start.

Nationwide will also benefit from having less “runoff” than other bank purchasers might have, McCune said. “Runoff is the amount of deposits and depositors that a purchasing bank runs off because of the deal,” McCune explained. “Either they don't like the deal, they don't trust the incoming bank or whatever. If a large, clear majority of the credit unions' members vote to approve the purchase, Nationwide will start with people who have signed off on the change.”

McCune said the unprecedented nature of the proposed purchase has also been one of the things, which led some in the banking community to raise questions about the price.

“There just haven't been too many of these,” McCune explained. “So there really isn't a body of data to use to compare and contrast them.”

The one thing that banking sources can point to are sales of independent thrifts which, since 2005, have generally sold for premiums of hundreds of percent and which make the price the bank has offered for the CU seem inexplicable. “A lot of people I know are incredulous,” said one banking source that declined to speak for the record. “They are asking me, would the members of a CU really sell for 20%?” Nationwide CEO Paula Edwards and the CU defend the price, noting that it came about after a special committee met for over 16 months to determine a price that would be fair and that the committee had no active Nationwide employees on it. Edwards added that the committee had been aware of what independent thrifts were selling for, but had determined that Nationwide's case was significantly different.

“First, we have no employees,” Edwards said. “All of my employees are employees of Nationwide insurance and Nationwide already provides us with much of our back office and other support that an independent thrift would have to provide on its own.”

The CU also has very few members, “a handful,” Edwards said, who are not Nationwide employees or the immediate family members of Nationwide employees.

She also added that all of Nationwide's business loans, which reached $216 million as of March 31, are made to Nationwide insurance agents and are, in effect, guaranteed by Nationwide. This represents a huge percentage of the credit union's business that would not necessarily be there if the CU were an independent credit union or thrift. Finally, she noted that the CU had received an independent assessment of its worth, performed by an outside firm, in order to get a clear figure about what the CU would be worth. Edwards said the CU had not yet decided whether to release the assessment to the general public, but added that the CU members would have a chance to include their assessment in their evaluation of the deal. Shape of Things to Come?

But where Edwards argued that there are factors which make the Nationwide case and its purchase price unique, McCune and other banking analysts note that a premium of even 150% or 200% of equity for an independent CU might not be out of line and would still be considered inexpensive compared to the prices commanded by independent thrifts. “It's a very interesting idea with a lot of different ramifications,” said Keith Leggett, a senior economist and leading CU critic with the American Bankers Association.

Leggett noted that there is a lot of interest among some investment bankers who see the possibility of simply buying a credit union, rather than taking the time and money to try to get one to convert, to be a very viable option. But Leggett also pointed out that there might be regulatory questions, which need to be overcome if there started to be a significant trend in bank purchases of CUs.

As an example, Leggett pointed to the data banks had to collect about their branch level operations, deposits and lending, and pointed out that these are among the data that federal regulators look at when approving bank mergers. Currently, NCUA doesn't ask CUs to report branch level data and that may be one of the changes to reporting requirements that would have to be made if bank purchases of credit unions were to become more routine.

But another banking source said he expected that if banks did start buying credit unions, the phenomenon would be more likely to remain an occasional development where banks might approach CUs which have access to particular markets or market niches and where CU members would be willing to sell. “Everyone has a price,” the analyst noted, “but it's unclear that a bank will have the right price for a credit union,” he said.