NILES, Mich.-Attorney Michael Bell recalls reviewing the proposal for United CU to acquire Indiana's Griffith Savings Bank and telling UCU CEO Gary Easterling, "There's no reason why we can't do this."
Bell, a partner with Kotz Sangster who represented United in constructing the final offer, admitted he was not 100% certain the deal could be done when he made that statement, since the agreement represented the first time a credit union would acquire a bank. But he was right. Not long after Griffith was sold to the $1.4-billion United, the $350-million GFA FCU acquired Peterborough, N.H.-based Monadnock Community Bank-the first time a stock institution was purchased by a credit union. The GFA/Monadnock deal still awaits regulator approval.
Those deals have established a precedent that others may well follow, a number of sources have indicated (Credit Union Journal, March 19). Credit Union Journal spoke with two legal teams behind the groundbreaking deals to learn more about what went into completing the first-of-their-kind arrangements.
"This had never happened before, but nothing said we could not complete it," said Bell about UCU/Griffith merger. "I told Gary (Easterling), 'Let's give it a shot.' This was challenging, certainly. There was no form to follow with NCUA to get approval on something like this."
For credit-union-to-credit-union mergers, Bell noted NCUA has a checklist of things to provide the agency and matters to consider. "For these bank deals there isn't anything, nothing you can look at for guidance, or to check your progress. I learned a lot in working on these two transactions, one thing being that a lot of regulators need to touch these transactions, and the regulators are not accustomed to working with each other. That can add some time."
Bell said the United transaction did not present a great deal of difficulty in getting it completed. He did note, however, when he was called in to work with GFA on the Monadnock acquisition, there were some additional hurdles in getting that deal done, most centered on addressing the bank's stock.
Three Primary Issues
Overall, in getting both the St. Joseph, Mich.-based UCU and Gardner, Mass.-based GFA acquisitions completed, Bell said there were three primary issues he believes concerned NCUA.
"Prior to the credit union throwing resources at a potential bank merger, make sure the credit union's field of membership is compatible with the bank's customers-I am sure that is no surprise," he said. "Second, you have to understand there are some impermissible assets and understand how to deal with those. Finally, it's just the safety and soundness of the transaction."
Richard Garabedian, a partner with the Washington-based firm of Luse Gorman Pomerenk & Schick, who worked with the Monadnock Bank as it was being acquired by GFA, suggested that the credit union's field of membership does not have to mesh completely with the bank's customer base. "If the field of membership does not match up perfectly that is not an insurmountable obstacle. I understand United was able to find SEGs it could place members of Griffith into."
According to Bell, the "800-pound gorilla" in the Monadnock deal was the bank's outstanding stock. The legal teams had to "figure out how to do this transaction so GFA never touched the stock, but the selling bank and the shareholders got the consideration they needed."
GFA paid a $6.4-million purchase price-$5.50 in cash for each of the 1.164 million outstanding shares. The price represents 119% of tangible book value, a 13.1% price to deposits, and a 2.73% premium to core deposits based on December financials.
Building The Box
Bell stressed that a lot of time was spent "building a box" that would permit all of the elements of the GFA transaction to go through without the credit union ever, for even an instance, contacting the stock. However, he declined to share some of the details. "I am not trying to avoid the question, but how the box is constructed is just unique to each transaction and there are a lot of details."
Garabedian explained that what helped in this scenario was that the transaction was structured in substance as merger, but legally set up as purchase and assumption. "The NCUA was concerned about merging the bank into the credit union," said Garabedian. "Structuring the deal as a purchase and assumption accomplishes the substance of the transaction-which really is a merger-and eliminates NCUA's concern that the credit union is somehow acquiring the stock of the bank."
Garabedian encouraged credit unions to "think creatively" when considering acquiring a bank. "The key point is that you should not let the field of membership issue and the bank's asset structure deter you from taking a hard look at a bank that otherwise would make sense for the credit union," said Garabedian, who believes there will be many more opportunities for CUs to buy banks.
Hallway Conversations
During the 2012 CUNA Governmental Affairs Conference in Washington, Garabedian said there were numerous hallway conversations about bank and credit union mergers. "There may be a little hesitancy now. But once the Monadnock deal goes through I think that will cement in many people's minds that this pathway has some real viability to it."
Bell and Garabedian are confident that GFA acquisition will be completed, even as they acknowledge it still must be approved by the NCUA, FDIC, the OCC, and state regulators.
NCUA spokesperson John Zimmerman said NCUA was not surprised when the United/Griffith merger was first presented to the regulator, and indicated the agency treated the deal as it would any other CU merger.
"So far the banks have not been that big," said Zimmerman. "So by definition it would be normal course of business for us. It's not a big deal for us. It is a rare occurrence, and the only difficulty or bump in the road might be if the assets are different products for the bank. But other than that, just make sure the two entities fit together within the credit union's field of membership."
Bell thinks more credit union and bank mergers are coming, and that he is getting calls on potential deals. "I think these things work out for both sides. On the bank side of the ledger there seems to be institutions that are not right to be purchased by a bank. This gives the credit union a good opportunity to grow, and gets off the FDIC's books an institution that may need help and that needs a buyer."
