IGA Federal Savings Bank, the converted credit union formerly known as IGA FCU, lost its bid to remain independent and agreed to be acquired by local banking competitor, PSB Bancorp., parent of First Penn Bank, just a year after going public in an initial public offering.
The takeover was made possible when IGA became the first converted credit union to go public in October 1999 and within days became a target of Wall Street predators seeking a merger or other initiative aimed at increasing its stock value.
John O'Connell, chairman of Jade Financial Corp., the holding company parent of IGA, conceded they would have preferred to remain independent, but said he believed the merger will provide improved and expanded services to customers of IGA, most of whom were members of the credit union.
"This is a way to find another community oriented way to better enable us to serve the former members of IGA Federal Credit Union," he said.
Under the deal, PSB will pay IGA shareholders $13.55 a share, a premium of $5.55 over the $8- a- share initial public offering price a year ago-for a total of $24.1 million. O'Connell, who headed the credit union, will become chairman of the board of PSB, and Mario Incollingo, Jr., president and chief operating officer of IGA, will become chief operating officer of PSB.
Anthony DiSandro, president of PSB, said they hope to take advantage of IGA's card services, car loans and ATM services, none of which PSB currently offers. "It will diversify our loan portfolio, bolster our core deposit base, and will provide the customers of the combined company with a wide array of products and services," he said.
O'Connell insisted that in negotiating the merger IGA officials worked to ensure that IGA stockholders, most of whom were former credit union members, earned profits roughly equivalent to the $10 million in capital IGA FCU had when it converted to a mutual savings bank. With PSB buying 1.8- million IGA shares it does not already own at the $5.55 premium over the IPO price, that comes out to about $10 million.
O'Connell said more than 95% of the IGA shares sold at last October's initial public offering went to former credit union members. He and Incollingo said they believe most of the shares are still in former members' hands, meaning they will earn a 70% profit on their stock in one year.
O'Connell, Incollingo and eight other top insiders at IGA, who bought stock at the $8 IPO price will also realize the 70% profit on their shares. O'Connell will earn about $205,000; Incollingo, $130,000; Dennis Wesley, a director and another CU founder, $65,000; Edward McBride, director, $52,000; Dorothy Bourlier, CFO, $45,000, and Robert Adelsberger, another director and founder, $33,000.
IGA FCU was founded in 1975 by the Independent Group Association, union workers for Philadelphia Electric Co. (PECO). But the growth potential dwindled with the halving of the electric utility's workforce to about 6,000 a few years ago, before the merger of PECO itself. At that point the credit union officials explored several options, including merging with another credit union or obtaining a community charter.
But O'Connell said community charters were hard to come by four years ago, making conversion to mutual savings bank more attractive. "We just decided to bite the bullet and went all the way," he said.
So in July 1998, IGA FCU became one of the first CUs to convert to a mutual savings bank. IGA FCU had almost $11 million in capital at the time. A little more than a year later it became the first converted CU to go to the equity markets with an IPO, raising another $9 million. Since then, at least one other converted credit union, BUCS Federal Savings Bank (Formerly BUCS FCU) of Owings Mills, Md., has filed to go public (the application was subsequently withdrawn because of poor market conditions).
The additional funds enabled the newly formed bank-holding company, Jade Financial, to invest $2.5 million, about 10% of its new capital, in a start-up Internet banking venture called BankZip, which is selling Internet banking services to community banks. One of the other three investors in BankZip is PSB Bancorp.
Even though IGA officials had hoped to maintain the company's independence and expand into the Philadelphia market, the large capital position made it an immediate target for Wall Street speculators. And soon after the initial offering several speculators surfaced, criticizing the large BankZip investment and calling on IGA to act to maximize shareholder values, such as engineering a merger. Lawrence Seidman, a New York investor who had helped engineer several other mergers of small community banks, was one such speculator who acquired about 10% of the IGA stock on the open market. Seidman eventually sold PSB an option to acquire his shares, giving it a foothold into acquiring the rest of the converted credit union.
O'Connell and Incollingo insisted the sale of the former credit union was in the best interests of the former members and suggested other credit unions should consider conversion to a mutual bank. "They ought to consider doing it themselves," said O'Connell. "If you're stuck in a situation where you have to play around with the rules, and you are, in effect, playing around with the rules, manipulating them just to save taxes-and community credit unions are nothing more than tax-free banks-then you ought to consider it."
