A tepid economy and regulatory uncertainty together make for strange bedfellows, as epitomized by recent deals to sell two banks to, of all things, credit unions.
The deals, in New England and the Midwest, are probably not a fluke, though whether they will become a trend is unclear. Participants in those deals do expect more such sales to take place, as mutual savings banks grapple with stagnant growth amid fears that the Office of the Comptroller of the Currency could emerge as a more demanding overseer than the now-defunct Office of Thrift Supervision.
"We already face a sizeable regulatory compliance burden, and we're not sure how the OCC will deal with an" $82 million-asset bank, says William Pierce, the CEO of Monadnock Community Bank in Peterborough, N.H., which has agreed to sell itself to GFA Federal Credit Union.
"We had our concerns" about regulation, Pierce says. Still, he says 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."
GFA, in Gardner, Mass., will pay $6.4 million for Monadnock, which converted to a mutual saving bank from a state-chartered credit union in 1997.
In January, Griffith Savings Bank in Indiana was sold to United Federal Credit Union in St. Joseph, Mich., for $80 million. Thrivent Financial for Lutherans has applied with the National Credit Union Administration to convert its $547 million-asset thrift, Thrivent Financial Bank in Appleton, Wis., to a federally chartered credit union.
Doug Faucette, who leads the banking and transaction group in the Washington office of Locke Lord Bissell & Liddell LLP, says there is considerable OCC "angst" at smaller banks, though he wonders if the worry is warranted.
"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," Faucette says. "You don't want a stampeding of the herd … 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, a lawyer at Kilpatrick Townsend & Stockton LLP who advises mutual savings banks and credit unions, says it is unclear whether the OCC or the NCUA should be viewed as the preferred regulator. "I don't know that they would choose the NCUA over the OCC because the NCUA has had some critics as well," he says. "But there is a concern in the mutual community that the OCC does not understand how to regulate mutuals."
Bankers' worries, paired with well-run credit unions with strong capital positions, could lead to more deals. Observers say initial interest will likely come from eager buyers rather than overtures from bankers to credit unions.
In fact, Aguggia says that an increase in acquisitive credit unions could renew debate on whether credit unions should pay taxes.
"There's this tension that is going on with credit unions trying to be modern, strong financial institutions for the benefit of their members," he says. "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?' "
Still, there are few credit unions equipped to buy banks.
David Bartoo, the president of Merger Solutions Group, says there are about 220 credit unions with the size, capital and charter needed to court small banks. "Is the possibility there for more of these unions to take place? Absolutely, and it will happen again," he says. "Is it going to become a trend or more commonplace? I would not hold my breath."
"Credit unions are somewhat limited in their ability to buy banks because they don't have the ability to raise capital," Aguggia says. "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 long-standing trend."
Gary Easterling, the CEO of United Federal Credit Union, says he believes recent deals will encourage more credit unions to seek out deals. "I have gotten a lot of calls from CEOs asking me about the Griffith deal," he says.
"I don't know how many of the small banks are actually creating overtures yet," Easterling says. "I do think they'll be getting a lot of calls. A regulatory pathway has been established, and it's now been proven that 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."
Tina Sbrega, GFA's president and CEO, says she believes more deals are looming because the operating philosophies of mutual savings banks are more closely aligned with credit unions than with large banks.
"I think we're more similar than we are different," Sbrega says of Monadnock. "Their operating philosophy and their culture are 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."
Sbrega says buying a stock institution is somewhat tricky because of the intricacies of determining a stock valuation. The deal, meanwhile, is contingent on Monadnock, which had a loss of $1.8 million last year, exiting the Troubled Asset Relief Program.
Aguggia says there is still "hesitancy" at some banks to sell because some "think they're at a depressed price and they're worth more." He says other banks want 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."