Putnam County deal shows way forward for mutual banks

Author: Zoe Thomas | Published: 13 Oct 2014
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Putnam County Savings Bank has taken the unusual step of purchasing a Nasdaq-listed competitor in an effort to protect its core business and meet growing regulatory demand.

The deal was an all-cash transaction because Putnam is a mutual savings bank, where the depositors are the beneficial owners. Given this inability to raise capital through stock offers, it is rare for mutual banks to be in a position to make strategic acquisitions.

The deal demonstrates how some community banks are remaining viable despite regulatory challenges by shaping long-term plans that aren’t subject to quarterly shareholder scrutiny.

"There are some limits on mutual banks, but they can implement a strategic business plan without being subject to the short-term demands of shareholders," said V Gerard Comizio, a partner at Paul Hastings who acted for the target. "They don’t have to live quarter to quarter because they don’t have same demand on dividends and performance."

The deal was structured to allow Putnam to strategically merge with CMS, combining branches, employees and bringing CMS’s director into the Putman board of trustees.

Each of CMS’s shareholder received $13.25 in cash per share. The total value of the transaction $25.4 million is lower than other bank mergers, but impressive given that Putnam needed to have the cash available to complete the deal.

KEY TAKEAWAYS

  • Putnam County Savings Bank has made a strategic purchase of Nasdaq-listed competitor CMS;
  • The deal was an all-cash transaction because Putnam is a mutual savings bank, where the depositors are the beneficial owners;
  • The deal demonstrates how some community banks are remaining viable despite regulatory challenges by shaping long-term plans that aren’t subject to quarterly shareholder scrutiny.

Market consolidation
That Putnam had enough spare capital to make this acquisition is rare.

There are still around 7000 community banks in the US including commercial banks, thrifts, stock and mutual savings banks, most of which hold $1 billion or less in assets. In the early 1980s there were 18000 banks in the US.


The challenge for community banks will be surviving the regulatory and competitive environment in the next few years


"The challenge for community banks will be surviving the regulatory and competitive environment in the next few years," Comizio said.

There has been ongoing consolidation in the US banking market since the 1980s. The financial crisis and subsequent increase of regulation has expedited that process making it hard for smaller community banks to complete while meeting increased capital requirements.

Regulatory strain
Mutual banks have been offered some reprieve in Dodd-Frank regulation such as exemptions in the mortgages reform rule that will position them to grant more loans outside the qualified mortgage framework. This should allow these banks to continue to grow within the local communities where they have traditionally been strong.

The purchase is expected to close in the first half of 2015.

Further reading

Volcker loophole drives new loan partnerships

US regulatory review: what to expect

Volcker’s biggest losers

 


 

 

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