The Federal Reserve has approved an acquisition in Minnesota that goes against the wishes of the targeted institution.

Natcom Bancshares in Superior, Wis., had applied to buy 49% of the voting shares of Republic Bancshares in Duluth, Minn. The transaction, which the Fed approved on Monday, will give Natcom indirect control over the $399 million-asset Republic’s bank.

Republic’s management opposed the application, warning that it could lose its status as an S corporation if a change in control took place. Such a change could have negative tax implications for other Republic investors and lead to shareholder litigation, it claimed.

Federal Reserve building.
The Fed said its review of the application under the Bank Holding Company Act does not account for whether the targeted institution wants the change. Bloomberg News

Critics said the transaction could give Natcom’s $610 million-asset bank access to sensitive Republic data. They also noted that both banks currently operate in Duluth.

The Fed pushed back against those objections, starting its review under the Bank Holding Company Act does not take into account the wishes of the targeted bank’s management team.

Republic’s corporate status, and its impact on investors, is a legal matter that does not “fall within the scope of statutory factors” the Fed is required to consider, the approval said. The Fed noted that Natcom and Republic will run separate banks and that Natcom has no plans to change Republic’s programs, products and services.

Natcom had already entered into a consent order with the Minnesota Department of Commerce that limits its access to competitive information that would normally be available to Republic shareholders, including records of shareholder and board proceedings and certain financial statements.

The order was a condition of the Minnesota regulator’s approval of Natcom’s application.

Republic, which has turned to the courts in hopes of invalidating the consent order, asked the Fed to delay its approval until its case was heard. The Fed went ahead with its approval, stating that doing so would not interfere with the court’s ability to resolve the matter.

The Fed’s approval “is a vote in favor of community banking,” Steve Burgess, Natcom’s president and CEO, said in an interview, adding that he viewed the purchase as a “good investment” for his bank.

Republic “has done well over the years as a community bank,” Burgess said. “We have a passion for community banking.”

Burgess said he has not spoken with David Gaddie, Republic’s chairman, president and CEO, even though their banks have been in litigation for a year.

Burgess did not disclose the shareholders who planned to sell stock to Natcom. Republic will have one other investor once Natcom’s deal goes through; Burgess said he doesn’t know the other shareholder’s identity.

Republic was once owned by Jeno Paulucci, who bought a predecessor bank in 1986. His estate was tied up in legal battles for years after his death in 2011, according to the Duluth News Tribune.

Republic executives did not immediately respond to a request for comment.

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