PETERBOROUGH, N.H.-The separate purchases of two banks by credit unions in recent months may have established a precedent that others could follow.
While analysts agree the two transactions are not yet a trend, other credit unions and banks may also find the combinations attractive, especially as small banks continue to struggle to grow and fear that demands from the Office of the Comptroller of Currency could further limit their ability to get bigger.
The two recent deals that may pave the way are the purchase of Monadnock Community Bank by GFA FCU, marking the first time a stock institution was purchased by a credit union, and the purchase of Indiana's Griffith Savings Bank by United Credit Union, the first-ever CU acquisition of a bank.
In the case of Monadnock Community Bank, it's a case of going home again. The $82-million bank was a credit union until converting to a bank charter in the 1990s.
Monadnock CEO William Pierce said that the recession exacerbated growth problems his bank was experiencing and uneasiness about falling under a new regulator, the OCC, led to the final decision to sell to the Gardner, Mass.-based GFA.
"The concerns about the OCC were secondary to our overall problem of not being able to grow to the size we felt we needed to reach to maintain profitability," Pierce said. "However, we are not as large as many of the banks now under the OCC. We already face a sizeable regulatory compliance burden, and we are not sure how the OCC will deal with an $82-million bank. We had our concerns."
'Angst' Among Banks
Doug Faucette, partner and head of the banking and transaction group at the Washington office of Locke Lord Bissell & Liddell LLP, told Credit Union Journal there is a great deal of OCC "angst" among small banks, adding that he is uncertain whether the federal agency warrants all the worries, and that "time will tell. I do know that the OCC is a foreign culture to a lot of thrifts. And I think the OCC will have to bend over backward to calm their constituency. You don't want a stampeding of the herd. The herd gets spooked and off they go. But it's really too early to make that kind of call because two instances of credit unions buying banks do not a trend make."
Paul Aguggia, an attorney with Atlanta-based Kilpatrick Townsend & Stockton LLP, who has advised mutual banks and credit unions on mergers and other corporate matters, believes that small banks selling to credit unions or converting to CU charters to get out from under the OCC may simply be a matter of picking their poison. "I don't know that they would choose the NCUA over the OCC per se, because the NCUA has had some critics as well. But there is a concern in the mutual community that the OCC does not understand how to regulate mutuals."
Those concerns, combined with the strength of some well-managed credit unions with strong capital positions and are looking to take advantage of the growth opportunities that have resulted through the dislocation from the financial crisis, could likely have more credit unions prospecting in the bank market. But sources also stated that initial interest will likely come first by way of credit unions, citing no concerted efforts by banks or brokers to reach out to CUs.
"Yet credit unions are somewhat limited in their ability to buy banks because they don't have the ability to raise capital," added Aguggia. "So it's really their balance sheet at the current time (that drives acquisitions). Because of that, I don't know that this will be a longstanding trend (see related story)."
Analysts indicated, too, that bank boards may discourage a sale to a credit union because their paid positions would be eliminated. GFA is offering Monadnock's directors slots on an advisory board. CEO Pierce will have a short-term consulting position to ensure the transition goes smoothly.
CEO Getting Calls
But Gary Easterling, CEO of the St. Joseph, Mich.-based United CU, which acquired Griffith Savings Bank in a deal valued at $80 million, believes the two acquisitions have set a precedent that is encouraging more credit unions to consider buying small banks.
"I have gotten a lot of calls from CEOs asking me about the Griffith deal, but I don't know how many of the small banks are actually creating overtures yet," Easterling said. "I do think they will be getting a lot of calls. A regulatory pathway has been established, and it's now been proven a credit union can acquire a bank. This somewhat reverses a trend where all the noise was about credit unions wanting to convert to a bank charter."
Easterling, Pierce, and GFA CEO Tina Sbrega contend that more CU/bank deals are on the horizon because the operating philosophies of small banks-especially mutuals-are more closely aligned with credit unions than large banks.
"I think we are more similar than we are different," said Sbrega about Monadnock. "Their operating philosophy and their culture is much about the local community they serve. In becoming part of our credit union the bank was looking not only to better serve its shareholders but its employees and community as well."
Before Monadnock converted to a mutual bank in 1996, it was known as AWANE FCU, because it served the Automotive Wholesalers Association of New England.
Sbrega acknowledged that purchasing a stock institution is a bit trickier than acquiring a mutual, particularly the intricacies around how the valuation of the stock is determined. Her $350-million credit union hired Sterne, Agee & Leech to perform the evaluation, and Sbrega said she was pleased with the final $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. The deal is also contingent on the 2,000-customer bank, which lost $1.8 million in 2011, repaying TARP funds.
Sbrega said that additional premium was viewed by the credit union as the price for acquiring new members, and for growing the credit union moving forward. Easterling added that a credit union buying a stock institution should heavily weigh the price it pays on the future valuation of the financial institution.
Kilpatrick's Aguggia stated that there still is a "hesitancy" in some banking circles to sell. "The hesitancy is because some banks think they're at a depressed price and they're worth more. But others want to find a friendly buyer and my instinct is that they would find a community-based credit union as more friendly on some of the social issues as another big buyer."
Credit Unions Beware
But credit unions beware, cautioned Aguggia, about expanding their acquisition strategies. "This reopens the taxation debate. Some bankers are saying, 'Wait, if you're going to play in the same sandbox as banks, why do you still have the exemption from taxation?' There is this tension that is going on with credit unions trying to be modern, strong financial institutions for the benefit of their members, and people on the banking side saying credit unions are acting like banks, so why are they getting tax benefits?"
