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Purchase of Credit Union Not Quite A Square Deal

Nationwide is growing and expanding as a financial services company. Nationwide insurance agents will soon be hawking banking, investment and retirement products to complement the standard auto, home and life insurance services. Nationwide now promotes the trademark: "Life comes at you fast!" - agents swamped with the new look at Nationwide must certainly agree!

Hopefully you've read that the new Nationwide Bank has proposed to acquire the venerable Nationwide Federal Credit Union, offering credit union members a 15% premium for their ownership interests. The purchase price of $79 million has convinced the Nationwide Federal Credit Union Board to recommend the sale to the membership. Lots of regulatory approvals and hurdles remain to be addressed, but at this point the acquisition and purchase look to be "a go!"

Charter changes, conversions and sales have been topics of heat among credit union pooh-bahs and politicos over the last couple of years. Converting mutual institutions-whether credit unions, insurance companies or savings and loans-however, isn't a new idea-it's a shell game that has existed for decades. All it takes to play are a flock of unsuspecting mutual owners; a board and management of flexible conscience; a complicit or politically neutered regulator; a small dose of human nature, and a big wad of cash! It's really unremarkable how quickly that mix can convert self-help into help yourself! After all, if you lose your wallet or purse, what makes headline news is when an honest person returns it! Honesty, these days, often seems to be a "free market" exception.

But, back to the story. The proposal by Nationwide to take over its employees' credit union has already attracted the usual pack of critics and cynics. You know the type-amateur conspiracy theorists! Always suspicious, always suspecting that "something's up!" This gaggle of doubters claims that Nationwide Federal Credit Union has been "coerced" into the purchase agreement "by the powers that be" at Nationwide. How else, they claim, can one explain the low offering price being made by Nationwide for the credit union?

Low offering price?! Nationwide Bank is offering credit union members a 15% premium for their ownership rights; they're offering to pay $79 million for the total equity capital in the credit union of only $65 million! Isn't that a sweet deal?

No, say the green eye-shaded number crunchers and here's why! Financial institutions of all stripes are bought and sold in the marketplace every year. The price commanded by a financial institution usually is reflective of the quality of earnings; history and prospects of growth; experience of management; and financial soundness. Clearly, Nationwide Federal Credit Union is an "A-rated" financial institution in all categories!

So, what's the problem? What's the issue?

Well, the free market price paid for other financial institutions is substantially higher than the price being offered for Nationwide Federal Credit Union. SNL Financial, a Charlottesville, Va.-based investment/financial analytics firm, tracks closely the merger/acquisition activity of U.S. financial institutions-particularly of mutual savings banks, savings and loans, and credit unions. SNL reports that the historical average price paid for a financial institution has been substantially higher than the 115% of book value (the price offered by Nationwide). A substantially higher price in each of the last five years (see chart, below).

In other words, the average price paid for a strong, reputable financial institution in 2003 was 211% of "book value" of the institution. (Book value is equivalent to the value of the equity capital in a credit union.) Accordingly critics say, Nationwide Federal Credit Union is worth substantially more to the member-owners than the $79 million offered by Nationwide.

In fact, here's what Nationwide Federal Credit Union would have been worth if sold in prior years at the average price. Now, $79 million is a lot of bucks but it sure is a long way from $120 to $148 million! Why would an "A-rated" organization like Nationwide FCU be worth so much less?

Nationwide knows its "numbers"! There are few organizations more capable of providing advice and analysis of investments to businesses and consumers. In fact, that's how Nationwide makes its living, by helping millions of Americans with financial advice and investment products. And, most important, Nationwide promises with that "blue box logo" that customers will always get a "square deal."

Can't be any more important "customers" for Nationwide than its own employees; you know, the folks that own the Nationwide Federal Credit Union...

It's just gotta be a "square deal" and Nationwide has the facts to prove it! Don't they?

Jim Blaine is CEO of State Employees Credit Union, Raleigh, N.C.

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