Pressures are growing on mutual thrifts, forcing many to choose between being bought by larger competitors or relinquishing their charters.
First Federal Bank of (Waukesha) Wisconsin and Bay View Federal Savings and Loan in Milwaukee are trying a tricky third path to survival by entering into a merger of equals. If it works, it could become a model for other mutuals determined to hold onto their charters despite the strains on their business.
After looking into conversion to stock ownership, a first step for many mutuals that have decided to sell to bigger rivals, "we decided that we preferred to remain a mutual," says First Federal's CEO, Gary Riley. "As a mutual, we have time to control the strategic pace. The board gets to decide the pace of growth, not shareholders."
There are fewer than 600 mutuals now, down from around 4,000 in 1980, according to advocacy group America's Mutual Banks. The pressures that have fueled bank consolidation are more pronounced for mutuals, which have limited ways to raise capital. Nearly half of the mutuals recently surveyed by the American Bankers Association say a merger is likely or certain for them within the next five years.
Though tiny, First Federal and Bay View, with roughly $250 million in combined assets, demonstrate the importance of compatibility in mutual mergers, where money rarely changes hands.
First Federal has three branches and 21 employees. It was prepared for new regulatory and technology burdens, but its earnings have struggled, falling 13% last year to $287,000. "We had made the investments, but we weren't generating enough revenue in today's low-rate environment to make it work," Riley says.
Bay View earned $1.2 million last year, but with just one branch, 10 employees, and no checking accounts or online banking, it was ready to bulk up.
"We needed a CFO, an IT person and a compliance person," says Steve Johnson, Bay View's president. "One of the directors put it very well: We can get these people but then we're turning the organization over to strangers."
So Johnson turned to Riley. The two had met at a conference about a decade ago and had been kicking around the idea of a merger for several years. This time they were ready to act.
Splitting regulatory and technology costs is a key benefit of merging small mutuals, says Doug Faucette, head of Locke Lord's financial institutions practice. "This merger will make life more bearable for each of them," he says.
Plus the mutuals have complementary business lines. Bay View, Riley says, is "like an old-fashioned savings and loan," with a large business in CDs and a sizable securities portfolio. First Federal has a smaller investments portfolio; half of its loans involve commercial real estate.
Despite the good fit, the deal was time consuming to put together. The CEOs first approached their boards with their merger proposal in November 2012. Then they had to work out the details of sharing power. The surviving mutual will have First Federal's charter and brand. Riley will be chairman and CEO, Johnson will become president, the board will be evenly split and no layoffs are expected.
"Mutuals like this should be commended for at least trying to remain mutual and serve their communities," Faucette says. "Their other choice is to convert and merge, and disappear."