Four Key Considerations for Mutual Bank M&A

By Evan Sparks

Going through a bank merger or acquisition is a fraught experience for any bank’s employees, directors and management—but the challenge can be amplified when two mutual institutions are combining, according to bankers speaking at ABA’s Mutual Community Bank Forum earlier this year. Mutual ownership is special to bank depositors, and engaging in a major business deal sometimes raises concerns about what incentives are being created. Moreover, mutual banks have unique cultures that celebrate their mutual heritage but have distinct local expressions.

1. Understand the difference between culture and values
Charles Peterson of Biddeford Savings Bank in Biddeford, Maine, recently led his bank into a combination with another Maine mutual, Mechanics Savings in Auburn. Together, Peterson and Mechanics leader Rick Vail are co-CEOs of Maine Community Bancorp, a mutual holding company.“Culture is a big issue for most of us in the mutual bank industry,” says Peterson. While he and Vail spent a lot of time in due diligence, including cultural fit issues, they found their corporate cultures didn’t mesh as much as they had anticipated. “Sometime between closing and now came the realization, ‘Maybe our cultures weren’t as similar as we thought,’” recalls Peterson. “Our values were the same, but our cultures were different.”

They found meaningful differences in everything from risk appetite and processes and training practices to meeting frequency and board participation expectations. “Those things have challenged us,” Peterson says. Vail adds that 80 percent of the challenges they faced are pretty straightforward, but that 20 percent are pretty difficult. “And 20 percent of the 20 percent will take the next leadership group to figure it out. It takes the passage of time.”

But in M&A between two mutuals, leaders on both sides place a priority on protecting mutual values. For example, to keep future management and board members committed to mutuality, First Federal Lakewood and Belpre Savings included several key provisions in their 2016 deal, including forbidding the CEO from owning stock for a five-year period if a future board decides to convert, removing directors for promoting stock conversion and limiting the number of deposit shares any one depositor can hold. “We embedded in our charter an obligation to keep our company mutual,” says Tom Fraser, president and CEO at First Federal Lakewood.

2. Communicate the commitment—to everyone
Once mutual bank leaders working on a combination have a shared commitment to protecting mutuality and wisely integrating corporate cultures, the task turns to communication. “Anything we say we’re going to do together, we have to do it,” says Fraser. Employee communication is key. First Federal provided welcome kits and explanations of benefits on day one for Belpre Savings employees that “defined and demonstrated” the combined bank’s commitment to mutuality.Employees are especially concerned about whether—or how many—jobs will be lost in the merger. And since employees’ confidence about their future in the combined company will affect the way they relate to or talk to customers and members of the community, bankers say it’s essential to be as upfront as possible.

“The unknown and change can be very frightening,” says Jim McQuade, CEO of Pittsburgh-based Dollar Bank. McQuade came from Bank @LANTEC in Virginia Beach, which Dollar acquired in 2016. He suggests “guaranteed contracts” for a period of time to get concerned employees over the hump of the deal.

As for customers, Peterson emphasized that the message needs to be that “the people you’re dealing with aren’t going to change.” Customers have few concerns about a merger as long as they can continue to work with the same lenders, customer service representatives and branch managers—so Maine Community Bancorp provided employees with FAQs to communicate that message to the public.

3. Leverage efficiencies to preserve the thrift model
However, finding efficiencies in operations—including personnel—is an unavoidable part and, for many banks, an irresistible appeal of M&A. “The nature of banking today lends itself better to centralizing certain functions in a holding company,” says Fraser, pointing to risk, audit, governance and compliance. “It’s really hard to find white-collar professionals to fill those professions” in certain areas, especially the countryside, which makes the costs of running the thrift model higher. “You have to spread that across a broader base.”First Federal found “immediate economies” in its merger by moving the core processing contract to the holding company and taking advantage of minimum 15 percent cost reduction offered when a company merges with another on that same provider. The combined bank saw $150,000 in savings, “which is the difference between break-even and a pretty good ROA just from one contract,” says Fraser.

Likewise, Maine Community Bancorp expects to see $2.6 million in efficiency-related savings in its first three years, mostly on the core side. The “merger of equals” model Peterson and Vail used allowed them to transfer 67 of 155 employees—including risk management, IT and finance—to the holding company and end up, over time, with “functions being focused in one location or the other.”

4. Design a structure to build a united board
Bringing two mutual boards together can be a challenge. At Maine Community Bancorp, Vail and Peterson moved the banks’ boards to the new MHC and, to ensure one bank’s representatives wouldn’t roll over, adopted a supermajority voting requirement for major decisions like bylaws, officers, M&A, names and the removal of directors.“There is a lot of sensitivity around relationship building in the first two years,” Vail adds, so Maine Community Bancorp adopted a participation requirement allowing only one excused absence and one phone participation in a board meeting each year.

Above all, Dollar’s McQuade urges mutual bank boards large and small to consider their mutual identity and culture when evaluating a potential deal. “If you don’t fit into that culture, you’re going to chafe.”


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