Advance And Survive

How one state-chartered institution joined forces with a bank, opened the doors to a new generation of business acquisitions, and preserved an important Baltimore tradition.

Before last year, no state-chartered credit union and only four federally chartered credit unions in the history of the cooperative movement had ever acquired a bank. Yet that all changed in December 2013, when MECU of Baltimore, Inc. ($1.2B, Baltimore, MD) under the guidance of now retired CEO Bert Hash successfully completed the purchase and assumption of Advance Bank, a local mutual savings institution. A purchase and assumption agreement meant MECU assumed the bank’s liabilities along with its assets.

With three credit union acquisitions under his belt already, Hash was no stranger to the advantages a good strategic partnership could provide.

But when John Hamilton, Advance’s CEO, phoned him out of the blue in 2010 to ask about a possible merger between the two institutions, Hash and his team needed to do some serious soul searching to determine whether or not MECU had the will and wherewithal to seize the opportunity and make cooperative history in the process.

Even after deciding to move forward, it took both institutions three years to hit on the best way to structure the actual transaction and sign an agreement.

Getting approval from regulators took another eight months, during which the deal morphed from a straightforward merger into a purchase and assumption that has already boosted MECU’s performance.

Below, the credit union shares the specific strategies and best practices that saw it through this monumental accomplishment.

Ensuring A Good Fit

For Hash, the first step in weighing a potential merger or acquisition was to identify any shared traits or similarities between the two businesses that could signal a good match.

Though smaller and younger, Advance was in many ways a kindred spirit to MECU. Established in 1957 to primarily serve Baltimore’s African American community, the bank was successful in this endeavor for decades until the economic downturn forced it to seek out new ways to meet the growing needs of its customer base.

Both institutions also had a personal connection: Advance’s founder had been one of Hash’s college professors.

And as a mutual savings bank, Advance answered to members rather than shareholders, just like a credit union. This meant there were no shares of stock that would have to be bought out. With $60 million in assets, the bank was also well capitalized for its size, and it had only two branches, 3,500 members, and roughly 20 employees, making it both affordable and easy for MECU to absorb.

Even the people that both organizations served were similar. For example, about 25% of MECU’s members are designated as low income, according to the market research firm Raddon, so purchasing a community development bank like Advance would clearly fit in with MECU’s mission to help the city’s underserved. Many of Advance’s customers were also very familiar with the MECU brand, and some were already members, greatly increasing the odds that the credit union would be able to retain these individuals after the two groups joined forces.

Building A Business Case

Although compatibility is crucial, merging institutions also need to be sure they are not so similar that they cannot complement one another from a business perspective. To fully assess the value of this deal, MECU decided it needed a full accounting and understanding of how Advance’s operational resources and book of business could enhance its own portfolio priorities.

For example, a merger or acquisition with this particular institution would offer MECU the opportunity to expand its presence and product offerings in Baltimore, the city that both financial institutions called home. And because both the credit union and the small community bank were facing an increasingly complex and costly regulatory burden, this approach would allow them to share that burden in a cost-effective way.

Advance also had an attractive FHA product and a number of faith-based loans that were enticing to MECU. And because the bank offered few retail loan products, which were essentially MECU’s specialty, a partnership here would provide a new, captive audience for the cooperative to pitch these products to.

We saw so much growth potential because a lot of Advance’s customers didn’t have car loans, unsecured loans, or credit cards, says Adrian Johnson, MECU’s chief financial officer. They may have had them somewhere else, but they didn’t have them with Advance.

Lastly, the credit union paid close attention to the amount and type of employee talent that it could gain from the bank.

They had commercial lending expertise that we didn’t have, Hash says. So potentially bringing that expertise over to help us on the commercial side was a huge attraction.

As it turned out, 17 of the 20 Advance employees eventually acquired by MECU chose to stay on with the cooperative. This included Hamilton, the bank’s former CEO, who became MECU’s vice president of lending.

Post completion, the impact of this new expertise has been well documented in MECU’s performance data. According to Callahan Associates’ Peer-to-Peer analytics, as of March 2013, just before the purchase was announced, the credit union held $4.9 million in member business loans out of a $715 million total loan portfolio. Today, six months after the acquisition, member business loans at MECU total $6.8 million.

Rolling With The Punches

Assessing potential and agreeing to a deal is often the easy part, MECU advises. The real hurdle with any merger or acquisition particularly of a type that has never been seen before is securing regulator approval.

Although confident the deal was possible, both institutions knew they were entering an unknown regulatory quagmire, where their lack of experience with the legalities posed a potential risk. In an attempt to minimize those risks, each organization found respective counsel that specialized in mergers and purchase agreements, and while Advance Bank’s lawyers tackled the Office of the Comptroller of the Currency (OCC), the credit union’s attorney consulted the National Credit Union Administration (NCUA) before drafting an initial agreement.

Despite their preparations, the plan quickly encountered a significant roadblock once submitted for approval. That’s because even though shared cultural, financial, and community values abounded between the two organizations, when it came to their regulatory structure nothing was a neat fit, Hamilton says.

Because of their different charters, a merger would have ultimately presented too many regulatory hoops to jump through. Instead, both sides opted for a purchase and assumption agreement, which posed far fewer issues.

Even with this compromise, the process was not quite a cakewalk. Because the transaction wasn’t a straight merger, it had to be structured within the appropriate regulatory context, Hamilton adds.

Four regulatory bodies the OCC, the NCUA, the Federal Deposit Insurance Corp., and the Department of Labor, Licensing, and Regulation ultimately needed to approve the purchase agreement. Had MECU been a federally chartered credit union, it would have avoided an extra layer of regulation.

The acquisition also required the approval of members, yet this proved a much easier process. Members on both sides were extremely open to the idea, says Herman Williams, MECU’s board chairman. And after eight months, regulators also finally gave the green light.

With Advance’s two branches now rebranded in MECU’s colors and the bank’s former employees fully trained in the credit union’s products, services, and internal processes, the final melding of these two institutions is complete. And despite the many seemingly insurmountable obstacles faced, when reflecting back on the approval process, Hamilton describes it as relatively painless.

Best of all, an important part of Baltimore’s culture was preserved in the process. In a sense, Williams says, this acquisition saved the tradition that we have here in Baltimore of people helping people.

June 27, 2014

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