Mutuals Ponder Mergers to Keep Model Alive

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Mutuals of the world unite!

That might be a bit of an exaggeration, but several industry experts believe consolidation might be the best way for the shrinking banking model to survive.

Take Dollar Bank in Pittsburgh, for instance. The $7.4 billion-asset bank recently announced its first acquisition in more than 30 years, agreeing to buy the $112 million-asset Bank @lantec in Virginia Beach.

The next deal could come much sooner for the 151-year-old mutual.

"There are a lot of smaller banks out there facing these struggles," said Jim McQuade, Dollar's president and chief executive. "We want them to know [that merging] is an option that could be more beneficial than pursuing an IPO or becoming a credit union."

For McQuade, who just took the helm at Dollar in May, the Bank @lantec deal should serve as a template for future mergers of small, depositor-owned banks that are having a hard time meeting mounting costs tied to compliance, competition and technology.

Other mutuals are taking part. Dollar's planned merger is at least the eighth in the past two years to combine two depositor-owned banks, with most of the deals resulting in the phaseout of a much smaller institution.

"Unfortunately, the average mutual bank is under $250 million of assets in size," said Douglas Faucette, a Washington lawyer who serves as counsel to America's Mutual Banks, a trade group. "Given the incredible crush of regulation, it's hard to see how the smallest mutuals can thrive."

Faucette, a longtime advocate for mutuals, admitted that there is a downside, even if a rise in deals preserves the business model. "At the end of the day, we're down another mutual," he said.

Mutuals are not the only cooperative institutions affected by the trend. Between January 2015 and May 2016, the National Credit Union Administration approved 324 mergers, the vast majority of which involved the takeover of a smaller credit union.

Neither credit unions nor mutual banks can tap the capital markets to raise capital, which is proving to be an increasingly serious handicap, Faucette said. "There's no way to replenish capital, except through regular earnings," he said.

Dollar is not the only large mutual pursuing a roll-up strategy. Last August, the $1.6 billion-asset First Federal Lakewood in Lakewood, Ohio, formed a mutual holding company with an eye toward buying small, struggling depositor-owned banks. Under its plan, though, targets would retain their charters under the umbrella of the holding company.

First Federal, which has already agreed to buy the $51 million-asset Belpre Savings Bank in Ohio, has had constructive discussions with several other institutions, said President and CEO Thomas Fraser.

"Our conversations … confirm that there's interest in a merger situation that allows them to remain independent and depositor-owned, while offering the opportunity to better serve their customers with a wider range of products and services, and realize cost-savings and benefits in such areas as information security, compliance and risk management systems," Fraser said in a statement.

One feature that distinguishes Dollar's deal from other recent mutual mergers is geography. While all the other deals have involved overlapping or neighboring markets, Dollar agreed to take over a mutual 450 miles away from its corporate headquarters.

Dollar wasn't looking to expand southward, but it jumped at the chance to do so when Susan Ralston, Bank @lantec's president and CEO, suggested to McQuade's predecessor late last year that a merger was possible.

Ralston "is from western Pennsylvania, so she knew the Dollar Bank name very well," McQuade said.

"I am very excited about Dollar Bank's future ability to serve the financial needs of this region," Ralston said in a press release announcing the deal. "This merger will further advance the position of having a stronger mutual institution available as an option to compete with national stock based banks."

Efforts to reach Ralston for additional comment were unsuccessful.

For Dollar, which has 65 branches in Pittsburgh and Cleveland, the opportunity to enter fast-growing markets in southeastern Virginia was especially tempting.

"Virginia Beach and Hampton Roads have seen substantial growth the past 10 to 15 years," McQuade said. "All the trends are positive."

As for the geographic gap, McQuade said he plans to bridge it with a lot of traveling.

"We'll have their management team up in Pittsburgh on a regular basis and folks from Pittsburgh will be down there as well," McQuade said. "I am a great believer in boots on the ground."

The merger is expected to close in the fourth quarter. Once it does, Bank @tlantec will become a division of Dollar. Aside from new signage, little is expected to change. Bank @tlantec's four branches will remain open and Ralston has agreed to stay on and manage them as Dollar's chief operating officer.

Dollar's last deal, for Continental Federal Savings and Loan in Cleveland, closed in September 1984. Bank @tlantec, founded as a credit union in 1952, converted to a mutual bank in January 2004.

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