Mutuals should wheel and deal more often, says Tom Pastorello, the chief financial officer of Liberty Bank in Middletown, Conn.
Pastorello should know. Liberty, the No. 9 mutual bank by assets, agreed in January to buy Southern Connecticut Bancorp (SSE) of New Haven, Conn., for $11 million in cash, or about 90% of Southern Connecticut's book value. It would be Liberty's third acquisition of a stock-owned bank since June 2001. Liberty can afford to be ambitious because of a defining characteristic of U.S. mutuals — it's got plenty of capital.
"We have the capacity to be able to do this," Pastorello says.
More small, struggling banks are expected to sell themselves to mutuals, and a close look at the track records of Liberty and Southern Connecticut explains why.
Liberty's Tier 1 leverage ratio stood at 14.6% as of Dec. 31. Regulators consider a bank to be well capitalized starting at least 5%. Almost 70% of 582 mutuals tracked by SNL Financial have leverage ratios of at least 10%.
The Southern Connecticut deal, which is expected to close by June 30, will chop about 60 basis points off Liberty's leverage ratio. But the thrift expects to recover to its current level in about a year, Pastorello says.
"We have had strong earnings over time, so we've been able to replenish our capital base for transactions like this," Pastorello says.
However, the process has to be carefully managed, he warns, because mutuals lack easy access to capital markets -- or, in other words, the ability to raise money in a hurry to correct mistakes.
Liberty's fourth-quarter net income rose 36%, to $28.2 million, from the previous quarter, according to its Federal Deposit Insurance Corp. call report.
After the deal its assets would rise by about $121 million, to $3.7 billion, and it would gain four offices in New Haven County. But Liberty still would hold enough capital to acquire an even-larger bank than Southern Connecticut, if it met the thrift's strategic goals, Pastorello says.
"We could certainly execute a deal significantly larger than this transaction," he says.
Liberty's last deal was for $175 million-asset Connecticut River Community Bank. That acquisition cut Liberty's leverage ratio by about 70 basis points, and Liberty replenished its capital to its previous level within a year, Pastorello says.
As was the case with Connecticut River, Southern Connecticut has credit-quality problems. Southern Connecticut's bank subsidiary, the Bank of Southern Connecticut, currently operates under an FDIC consent order that requires it to strengthen its capital levels, reduce problem assets and implement new risk management policies.
Southern Connecticut had reached an agreement in February 2010 to sell itself to Naugatuck Valley Financial, which at the time was a mutual thrift that had planned to conduct a second-step conversion to stock status. But Naugatuck Valley canceled it in November 2010 after failing to get regulatory approval.
Southern Connecticut considered a range of possibilities for improving its capital standing before deciding to look for a buyer, Chief Executive Joseph Greco says. Several institutions made offers that involved full or partial payment in stock, but it preferred the all-cash deal.
"In that whole process we opened avenues to not only private investors, but also potentially to strategic alliances with other financial institutions," Greco says. "We decided that a merger with Liberty Bank was certainly in the best interests of shareholders."
Southern Connecticut also explored the possibility of deregistering from the Securities and Exchange Commission, Greco says.
"Unfortunately that would not have solved our capital issues," he says. "Trying to raise capital through private offerings would have been much too dilutive to our shareholders."
For Greco, the deal marks the second time he's sold a stock bank to a mutual thrift. While he was CEO of the First National Bank of Litchfield, Conn., it sold itself in April 2010 to Union Savings Bank of Danbury, Conn.
More mutuals may buy small, publicly traded banks, Greco predicts.
"Mutuals compete very well in the community banking space, whereas small public companies have the added cost of being public, and they also have higher shareholder pressure on earnings," Greco says. "It all bodes well for mutuals."
Sterne, Agee & Leach was financial advisor to Southern Connecticut and Day Pitney was its legal counsel. Cranmore, FitzGerald & Meaney was legal counsel to Liberty.