Regulators generally disapprove of a mutual thrift's selling itself within three years of converting to a public company, but the $10 million-asset Elk County Savings and Loan Association in Ridgway, Pa., aims to be one of the rare exceptions.
Observers said the unusual deal it announced last week — to convert and simultaneously sell itself to Emclaire Financial Corp. in Emlenton — could inspire other small mutuals to consider such a strategy as operating costs escalate in a difficult banking market.
But there are challenges to getting these deals done, as the case of Elk County Savings and Emclaire illustrates. "We've been working on this a long time," said David L. Cox, the $320 million-asset Emclaire's chairman, president, and chief executive officer.
Talks for the deal began in August, Mr. Cox said. Elk County Savings was under no regulatory pressure to sell, but the two companies involved regulators in the discussions early on, because the deal is so unusual, he said.
Several analysts who follow conversions said more of these deals could come about, possibly even a few prompted by regulators to rescue ailing mutuals.
Though they are historically reluctant to condone such deals, "you may be seeing the regulators say, 'You better look into being acquired,' " said Theodore Kovaleff, an analyst at Sky Capital LLC.
Kevin Houlihan, a partner at Patton Boggs LLP in Washington who is advising Emclaire on its deal, said his firm turned up only four similar ones, the most recent in November 2002. He anticipates more of them, but offers a caveat. "While the environment is ripe for it, it depends on the regulators as much as anything."
Elk County Savings is supervised by the Office of Thrift Supervision. William Ruberry, an OTS spokesman, said permission for thrifts to sell themselves less than three years after going public "is usually done for very small institutions that can't really continue on their own and don't have any other options."
Mr. Cox said compliance expenses weighed heavily on Elk County Savings. "It was making it hard for them to compete."
Mr. Houlihan said the conversion, which still needs OTS approval, would have an aytipcal structure. Elk County Savings would issue its shares to Emclaire, which then would conduct a stock offering of its own. Elk County Savings depositors would get the first opportunity to buy the Emclaire shares at a discount to the market price. If they did not buy the minimum number of shares required by regulators to complete the deal, the offering would be extended to the community and then the general public.
Mr. Cox said that Emclaire expects to offer $4 million of stock, and that only about half that amount would be needed as part of the Elk County Savings transaction. The additional capital would be used to fuel Emclaire's growth.
Emclaire, which has a dozen branches in seven counties, is eager to expand in western Pennsylvania and is open to doing more acquisitions, Mr. Cox said. His company aims to have $500 million to $1 billion of assets within five years.
Mr. Houlihan said partnering with a larger public company makes it more feasible for a small mutual to convert. Those with less than $25 million of assets generally cannot manage an offering of their own, because of a lack of interest from investors.
The informal talks with regulators over the past nine months revolved around demonstrating that Elk County Savings' "best opportunity" is to partner with Emclaire, he said.
Elk County Savings lost $9,000 in the first quarter, and it has been profitable in only three of the past nine quarters, according to data from the Federal Deposit Insurance Corp. But its asset quality and capital are healthy: Its ratio of noncurrent loans to loans was 0.33% as of March 31, and its total risk-based capital ratio was an unusually strong 46.83%, the data shows.
David P. Lazar, a managing director and the head of Middle Atlantic bank mergers and acquisitions at Stifel, Nicolaus & Co. Inc., said he recalls several similar deals that fell through, including one that regulators rejected. "Why don't they happen more frequently? My assumption is that many mutuals don't have an interest. They have adequate capital and low expenses."
A small mutual that is struggling or lacks a management succession plan has other options, Mr. Lazar said; it could merge with another mutual or liquidate.
More should consider partnering with a public company, given the higher operating costs these days and the difficult banking environment, he said.
The transactions are expected to close in the fourth quarter. Elk County Savings would be merged into Emclaire's Farmers National Bank.
