The proposed buyout by GFA Federal Credit Union of a troubled New Hampshire savings bank continues to generate industry interest but with a pivotal question: Can the credit union and bank clear the legal hurdles with the NCUA, the Comptroller of the Currency and the FDIC.
In the meantime, the president/CEO of the $345 million GFA of Gardner, Mass. expressed new confidence that the $6.4 million cash deal for the $82 million Monadnock Community Bank of Peterborough can pass the regulatory thicket and, in fact, demonstrates new cooperation between community banks and CUs.
"This is a great opportunity to recognize the similarities we share and how we can work together," said Tina Sbrega. She cited the value of weakened small thrifts or community banks finding partners in the credit union community that are unavailable in the banking sector.
Attorneys representing the credit union and the bank agree the potential is there for more of the same in 2012 but the GFA-Monadnock transaction does have several special characteristics, including the troubled bank operating under supervisory surveillance.
The bank, which lost $1.8 million last year and was under a cease and desist order, had been scouting potential merger partners for a year. The bank looked mostly at other banks until GFA showed an interest later in 2011.
"There are certain supervisory situations which can work well and this is one of them since the credit union doing the merging is well capitalized and can absorb the dilution of paying cash," explained Washington attorney Richard Garabedian of Luse Gorman Pomerenk & Schick, which represents Monadnock Bank.
Garabedian, who has been involved in at least five credit unions to bank conversions and has advised on various currently undisclosed credit union conversion explorations, said he has represented Monadnock for five years and helped connect the bank's management to GFA and its lawyer, Michael Bell.
Bell of Detroit-based Kotz Sangster Wysocki P.C. previously put together the Jan. 1 the deal between the $1.3 billion United FCU of St. Joseph, Mich. with Indiana's $80 million Griffith Savings Bank, a troubled bank now operating as a United FCU branch. Bell has maintained CUs can be brought in to solve situations that might have otherwise led to a failure.
Credit unions like GFA find value in taking over banks such as Monadnock and under a purchase “can move it out of the FDIC insurance system,” he said.
“This type of transaction should be embraced and celebrated as a viable solution that in the long run strengthens the financial system as a whole,” said Bell.
Garabedian pointed out that, in both cases, the acquiring credit unions had common culture and geographic links with the banks being absorbed.
GFA has said it expects the Monadnock move would strengthen its business lending capacity across the border in New Hampshire where it has an existing branch.
Both Bell and Garabedian agree that what has already been proven with the UFCU transaction, and potentially now with the GFA-Monadnock deal, is that credit unions can successfully buy banks.
“In my view,” said Bell, "there is a three-part litmus test that should be conducted by a credit union prior to thinking seriously about such a transaction. CUs need to examine field of membership, safety and soundness and the type and amount of impermissible assets involved in the proposed transaction."
All three have to be vetted to determine if the transaction has a likelihood of success in general terms for the CU and in specific terms for regulatory purposes, according to Bell.
Garabedian also stressed that the capital of the continuing institution and its size relative to the bank being merged must be sufficient.
As the GFA-Monadnock merger application moves forward, all of the attorneys involved have said they feel confident the bank regulators and the NCUA can be made comfortable with the transaction.
However, Garabedian pointed out, “There are political and shareholder considerations to be dealt with,” noting the acquisition of a bank by a nontaxed entity and the tax treatment of the stock.
So far the transaction appears to be well received locally in Peterborough and in Gardner, said Garabedian.
Sbrega, the CEO of GFA, told Credit Union Times she is hopeful there will be no roadblocks based on the advance work though the deal still must win bank shareholder approval. The plan is to complete the merger in the fourth quarter.
"We remain very excited about our plans, and we believe it does show what can be done when you believe in the credit union model," Sbrega said.
The GFA CEO said she recognized that the purchase by her credit union of a mutual bank stands in contrast to the conversion plans of the $1.8 billion HarborOne CU of Brockton, Mass., to a mutual bank.
Sbrega observed that HarborOne apparently sees the CU landscape quite differently from GFA. When asked about HarborOne’s Feb. 16 move, she said she regrets the loss to the industry of a strong credit union like HarborOne and its president/CEO, James Blake. HarborOne has already left CUNA and the Massachusetts Credit Union League. Blake is the former chairman of the Massachusetts league and a past CUNA board member.
"I will miss Jim Blake because of the contributions he has made but each of us has to decide what is best for our members," said Sbrega.
"We all have challenges but we have to decide what is best for our individual franchise," she said.