In early December, Gardner-based GFA Federal Credit Union was approached about whether it would like to bid on the assets of failing Monadnock Community Bank of Peterborough, N.H.
Right away, they were attracted to the deal.
“It’s very intriguing and exciting,” GFA President and CEO Tina Sbrega told Banker & Tradesman. “That’s a market we’ve wanted to serve for a couple of years.”
The opportunity to enter a market GFA has had its eyes on covers the excitement. The intrigue is provided by the fact that should the deal go through, GFA’s acquisition of Monadnock will be the first purchase of a stock bank by a credit union.
Ever.
In a fitting case of symmetry, Monadnock – which began its life as the Auto Wholesalers Association of New England (AWANE) Credit Union – was the first credit union to convert to a bank. It did so in 1996, two years after beginning the process.
At the time, AWANE’s management was plain in its justifications for the changeover. “We would rather focus on providing quality services to our members than waste our energy debating field of membership issues, making excuses for our tax exemption, and confronting regulators unaccustomed to business and real-estate lending. Converting solves these problems,” it said, according to reports at the time.
Sixteen years hence, things haven’t worked out as planned for tiny Monadnock Community Bank.
Small Potatoes
In November, the one-branch, $82 million bank was served with a cease-and-desist order from the Office of Thrift Supervision detailing its every shortcoming, from inadequate capital levels to too many bad loans and not enough cash to cover them.
It’s not surprising for such a small bank. Banks of less than $100 million in assets, even stock banks, have a hard time building any economies of scale. Compliance costs, technology costs and other overhead simply outstrip the ability to retain earnings or raise capital by issuing stock.
William M. Pierce Jr., Monadnock’s president and CEO, said “strategic discussions” about what to do about the struggling bank began three years ago.
At that time, Monadnock deregistered from the U.S. Securities and Exchange Commission to save money on complying with Sarbanes-Oxley. But, Pierce said, “we still had concerns about the increasing cost of compliance, and then the financial crisis occurred, and Dodd-Frank. The OTS was going away, and we didn’t know how OCC would look at a small bank like us. There are thousands of pages of new legislation that is three- to five years out, and it gave our board concern. How does a bank survive at $82 million?”
The simple answer is: it doesn’t.
“There’s no viable way to raise capital,” Pierce said. “When we were a $10 million credit union, we’d say, ‘If we could only get to $100 million. Today, (the minimum for viability) is $250 million, and we say a small bank has to be $500 million in assets to be a viable community institution.”
Flexible Regulation
In the fourth quarter – by which time Monadnock had essentially stopped doing business – net interest income was $398,000, but the bank had set aside $380,000 in provisions for loan losses, according to its financial statements. Its non-interest income totaled only $48,000.
Late in 2010, Monadnock closed its branch in Winchendon. It had been open for just six years.
“Our industry, for all financial institutions, is under enormous pressure, and only the larger institutions can open the door for more opportunity,” Sbrega said.
She said a credit union proposing the purchase of a stock bank is an attempt to broaden GFA’s influence.
“We’ve always looked at who our partners might be with a narrow focus, and this opens that window a little bit,” she said. “We don’t have to be pigeonholed into how we go about conducting our business.”
When the acquisition agreement was announced, banking attorney Stanley Ragalevsky, a partner at law firm K&L Gates in Boston, predicted GFA would have to buy Mondadnock’s stock with cash. He also said regulatory hurdles would be relatively low, despite the new ground it proposes to tread.
“The [National Credit Union Administration (NCUA)] will be flexible, but I assume there will be some complications on the OCC end, and getting depositors from FDIC insurance to NCUA,” Ragalevsky said.
Neither the OCC nor the NCUA responded to requests for comment.
Details, Details
Peterborough is already within GFA’s field of membership, and the credit union has an office in nearby Rindge, Sbrega said. Because GFA would be buying Monadnock’s stock, assets and liabilities, Monadnock would not have to convert to a credit union in order for the transaction to take place.
Under the terms of the agreement, GFA – originally Gardner Franco American – will acquire Monadnock for $6.4 million in cash. The purchase price covers “substantially all” of Monadnock’s assets and liabilities.
The purchase price works out to be about $5.50 cash for each of Monadnock’s 1.164 million outstanding shares of common stock. The price represents 119 percent of tangible book value, 13.1 percent price-to-deposits and a 2.73 percent premium on core deposits as of Dec. 31.
The Monadnock office will become a branch of GFA, making it GFA’s ninth full-service branch.
GFA has assets of about $429 million.
Pending approvals from the shareholders of Monadnock and both entities’ regulators, as well as satisfaction of customary closing conditions, including the repayment of TARP funds by Monadnock, the transaction will close in the fourth quarter of 2012.
Monadnock reported a $1.8 million loss for 2011, according to regulatory filings.
It is anticipated that all of Monadnock’s board members will join the GFA advisory board.
Pierce will act as a temporary consultant during the acquisition process, he said, but once the deal is closed, he’ll be out of a job. Most of Monadnock’s 18 employees will be retained by GFA, he said.
He said he and the Monadnock board didn’t think a credit union would be its acquirer, but said small, community banks and credit unions are more similar than different.
“It’s a community focus and a personal approach to banking,” he said.
