On Whose Side Is Nationwide? Analyst, CU Disagree On Price

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The sale of Nationwide FCU to Nationwide Bank has been hailed as a "fair" conversion of a credit union to a bank, because the acquiring bank is paying members a premium for the CU's equity.

But at least one analyst is questioning just how "fair" that selling price is, noting it appears to be well below market value.

Nationwide FCU CEO Paula Edwards noted that the merger entails the members receiving the equity of the CU plus a premium. "We came at the price through a deliberative process. It involved a lot of negotiation and hard work. We hired an independent accounting firm to establish a fair price, and we do believe it is fair."

Based on the sales figure of $79 million for the CU's $65-million of equity, Edward's said that members would actually realize more than 20% for the credit union, not the oft-mentioned 15%. Going over the math would help correct some misrepresentations that have been written and talked about in publications, Edwards said. "I'd like to straighten that out, if you don't mind. If you take the equity and divide by the total share balance it comes out to about 12% and then you add the premium, so it's 21.3% or 21.5%."

"We've been trying to think of ways to help the members calculate what it means, and it's about $150 per thousand (dollars on deposit)," she said. "I understand that if we were a standalone institution (with infrastructure and property) that we would have much more value on the street."

Analyst Sees Low Price

Asked about the relative fairness of the merger price, Eric Fitzwater, a financial services analyst with SNL Financial, a data, news and analytics firm in Charlottesville, Va., noted there is no comparative basis for judging such a credit union acquisition. But using bank data seems to show that the credit union is being undervalued.

"NFCU is located in Ohio. The average Price-to-Book ratio for deals where the target was a bank located in Ohio that have been announced since the beginning of 2005 is 152.77%," he said. "That's quite a bit more than the 121.54% this deal produced. So, relative to bank deals in the same area, this is an inexpensive deal."

"The consideration of whether the CU has real estate or not will affect the sales price such that real estate may be more or less valuable than operations of the company," he continued. "My opinion is that it's minimal in this case. The lack of infrastructure, etc. makes the business transportable, but I don't think it played a large role in the pricing. But, if the company had a bunch of real estate in a high-dollar area, the Price/Book could certainly be higher. I'm not familiar with the area so I can't really say for sure.

"Ultimately, I think the notion that it is a 'friendly price' is probably right on. These companies are closely related. I expect the pricing would pass any fairness test but I doubt seriously if there was ever any question to the outcome."

The Filene Institute, recently published a study authored by James A. Wilcox, of the Haas School of Business, University of California at Berkeley, titled, "Credit Union Conversions to Banks: Facts, Incentives, Issues and Reforms," which includes a demutualization model for CU conversions with suggested safeguards to prevent insider enrichment from the infamous first day "pops" from an Initial Public Offering (IPO), guidelines for member notification, voting requirements and distribution of the retained earnings.

Filene's Executive Director, Bob Hoel believes that members should receive the pro rata value of retained earnings. He estimated that given total capital in the CU movement, some $80 billion, it represents $907 per member. "But at $100 billion of market value, that becomes $1,250 per member."

But debating whether the selling price is fair only looks at one aspect of this transaction, and there is much more to it than that.

The proposed sale of Nationwide FCU to the Nationwide Bank, owned by the Nationwide Insurance Company, itself a mutual, represents a unique twist in the usual CU-to-bank conversion.

Firstly, it's not strictly a sale and not quite a conversion, but the emerging entity, assuming all the regulatory approvals from the Office of Thrift Supervision, the FDIC, and the NCUA come through will make for a very strong and highly competitive bank. And, one that has a ready-made customer base of former CU members. So what is it, exactly?

"It's a direct merger," answered NFCU's Edwards. "That is the proper legal term used by OTS and the NCUA." But whatever the transaction may be called, in the end there will be no more credit union, and that is what is troubling many in the CU world. That, and the selling price.

Secondly, this wasn't a decision that was easily reached, Edwards admitted. She's been with the CU since 1975, when it was a $19-million institution. "There were only 20 people here and we used a manual typewriter to write checks and hand-wrote receipts. They call me a dinosaur now and I suppose it's true; I've been around a long time. Credit unions are in my DNA."

Wanting to remove the greed issue forthwith, Edwards said that "there's no way I'm going to enrich myself (in this deal) and none of my board members will either. This will not be a publicly traded stock; we'll be owned by Nationwide."

The important thing for Edwards was to be able to look her co-workers and members in the eye and be able to say that this deal was the best answer they could come up with given the circumstances. "We've been working on this since April 2005. The Board formed a three-person committee to do a study, and they spent countless hours of their time in analyzing the options."

The process started long before that, in 1998, in fact, when Nationwide obtained a thrift charter. "A lot of insurance companies did that same thing," said Edwards, adding, "Nationwide has always been in the financial services industry."

The company decided in early 2005 that it wanted to go deeper into banking, so they "needed a full service retail operation," she said. "From the very beginning they came to us" with what was an obvious conundrum. "They said they weren't eager to compete with us but it didn't make sense to have a bank on one side of the hall and a credit union on the other side."

Nationwide FCU is one of a diminishing breed of CUs in that it is still a sole sponsor (it does have a few SEGs). The company's embrace of the credit union has always been total. The credit union has no employees, said Edwards; they are all employees of Nationwide. It has no headquarters, either, and no branches, no ATMs, no data system and no phone system of its own.

"I use Nationwide human resources, have Nationwide benefits and our loan portfolio is guaranteed by Nationwide," Edwards said. "So we are truly embedded with Nationwide. So the best path we saw was to enter this transaction. I feel it represents the best opportunity for members to have access to all the products and services we've always offered and for them to be served by all the same people they've come to know."

Hoel noted that "banks are bought and sold all the time and models (of valuation) are well established," but it seems that what (Edwards) doing is giving money directly to the members. "Now, Nationwide has changed its strategy to include offering banking services and it seems fairly reasonable what they're trying to do."

Attorney: 'Long Debate'

That's also the opinion of Bruce Jolly, partner in the Washington, D.C. law firm of Venable LLP and a longtime CU attorney. Jolly represents Nationwide in the transaction, but willingly stepped outside the usual cautionary field attorneys inhabit when he told The Credit Union Journal, "Paula (Edwards) is the best client I've ever worked with and her vision is crystal clear. She's about the members and is not about the money.

"We've debated an awfully long time to pull the press into the saga this transaction represents; it's a good path and we are anxious to see it come to fruition," he said. Jolly deferred any further comment to Edwards, whom he said was the best possible spokesperson for the credit union.

Pressed, he added only that it "wasn't a complicated transaction, but a fascinating one." And he said that the questions raised by Jim Blaine of State Employees CU and others concerning price, distribution and fairness to members were legitimate questions and would all be answered.

Asked about disclosure, Edwards said, "We are committed to total transparency. Each member will receive 40-plus pages of documents, including disclosures, letters and a Frequently Asked Questions (FAQ) sheet. That package will go out as soon as NFCU is notified by regulators that their application has been accepted. The applications were filed on June 16, but no firm timetable has been established. Once it happens, however, Edwards indicated that the details of the valuation process and distribution of equity plan for the merger would be available.

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