Two More Former Credit Unions File to go Public; Mutual Holding Company Structure Proving Popular

ARLINGTON, Va. -The parade of former credit unions raising capital through stock offerings has continued, with former credit unions in New Hampshire and Georgia declaring their intent to issue stock. The two former credit unions expect to make their initial public offerings sometime in the third week of May, 2004. The two companies are both stock issuing subsidiaries owned by holding companies that bank depositors in turn own as mutual institutions. Monadnock Community Bancorp is the stock issuing owner of Monadnock Community Bank, a $44 million bank headquartered in Peterborough, New Hampshire. The bank used to be the AWANE Credit Union and converted to a federal bank charter in 1996. The former credit union turned bank plans to offer between 358,000 and 558,000 shares at a starting price of $8.00 per share, according to the company’s filing with the Securities and Exchange Commission. The bank’s officers and directors have pledged to purchase shares worth at least $493,600. Combined with the employee stock option plan, the directors and officers will purchase between $608,000 and $649,000 of the total offering. The corporation’s employee stock offering plan will purchase 4% of the total offering, according to the filing. Directors Richard Wargo, Samual Hackler, Kenneth Christian, Kenneth Simonetta, William Pierce and Jack Goldstein have each committed to purchasing 8,750 shares of the offering at $70,000 apiece. Director Thomas LaFortune has pledged to purchase 3,200 shares at $25,600. Vice president and treasurer Donald Blanchette pledged to purchase 2,000 shares, and senior vice president David Reilly has pledged to purchase 4,000 shares. None of the former credit union’s other officers were listed in the SEC filing as stock investors. Atlantic Coast Federal Corporation is the stock issuing arm for Atlantic Coast Federal Bank, a $499 million bank headquartered in Waycross, Georgia. The bank which used to be the Atlantic Coast Federal Credit Union converted to a federal bank charter in November 2000. The former credit union turned bank has told the SEC that it will offer between just over four million shares and 6.3 million shares at $10.00 per share. The bank’s officers and directors have pledged to purchase between 668,000 and 784,000 shares of the offering and the employee stock offering plan will purchase 8% of the offering, according to the company’s filing with the SEC. According to the filing, directors Robert Larison and I. J. McGahee each pledged to purchase 50,000 shares. Director Jon C. Parker pledged to buy 40,000 shares, while others opted to purchase smaller amounts: Forrest Sweat, Jr., 35,000, Robert Smith, 15,000, Denise Woods and John Hinson, 12,500 and 12,400 respectively, Charles Martin, 11,000 and Cyril Morris, 5,000. Treasurer Phillip Hubacher pledged to purchase 40,000 shares; senior vice president Herman Klinger, 25,000; senior vice president Diane Wade, 22,000; senior vice president Marsha Boyette, 15,000; senior vice president, Joeanne Heinrich, 9,000. AWANE Credit Union was chartered in 1971 to serve the Automobile Wholesalers Association of New England. Atlantic Coast was chartered in 1939 to serve the employees of the Atlantic Coast Railroad. Richard Garabedian, a partner with the Washington D.C. law firm of Luse Gorman Pomerenk & Schick who has helped five former credit unions go on to issue stock, explained that a mixture of the institution’s need for capital and the perception of how the market might greet a new stock offering played into the timing of an institution’s IPO. “It’s a little bit of both that plays into the timing,” he said. “When do we need to use the money and what’s the environment like for raising it?” Although a great deal of attention has focused on former credit unions that have moved through the two-step process to become stock issuing banks, Monadnock’s and Atlantic Federal’s IPO make it clear that a majority of former credit unions have opted to structure themselves as part of a mutual holding company (MHC) rather than as a stock issuing bank. According to CU Financial Services, a leading consulting firm that helps credit unions change to banks, once the IPOs are complete, nine former credit unions will have opted to become banks which are part of MHCs rather than issue stock on their own, a trend CU Financial’s Theriault predicted will continue. In a mutual holding company arrangement, 100% of the former credit union is owned by a stock issuing company which is, in turn, owned by a mutual holding company that does not issue stock. This company at the top of the pile is where the depositors to the credit union still have the right to vote for their board of directors and on some other major structural changes like a further change of charter (See chart). There are a lot of benefits to adopting a mutual holding company structure, particularly for credit unions that are above a certain size and which don’t have a lot of competitive pressure from surrounding banks, Theriault explained. First, under an MHC, credit union members maintain control over the boards of directors of the MHC and can even do so on the one member, one vote standard that credit unions use now, Theriault explained, although he admitted that none of the nine that he was aware of had done so. Instead, the membership standards the MHCs have adopted have granted members one vote per every $100 in deposits, up to 1,000 votes, Theriault explained. He defended increasing the votes by the amounts of the deposits, up to the 1,000 vote cap, by noting that this approach weights control of the institution towards the people who have the greatest stake in it. “You know the phenomenon of the vast majority of credit union members not really paying attention to how their credit union is run, as long as things are going alright,” Theriault said. “This helps focus the attention of the people who run the institution on the people who have the largest amount of money at risk with it,” he added. Theriault also added that nothing in law or regulation prevents an MHC from allowing one vote per each depositor even though none had done so as of yet. Another big advantage of the MHC over a straight stock issuing bank is that the ownership of the institution has to remain with the MHC, a fact which effectively acts to protect the institution from the sorts of mergers that have swept the banking world in recent years. Under an MHC structure, the mutual company at the top has to own no less than 51% of the stock issuing company which, in turn, owns the bank. This can also be a disadvantage as well since the requirement effectively prevents the institution from raising as much capital in an IPO as it might otherwise. “In practice, many of the IPOs offer less than 49% of their available stock to the public,” Garabedian added, “some of them might issue 45% or less to leave them a cushion to use the stock for something else like an employee stock option plan.” Ironically, Theriault explained, it is often the smaller credit unions that change their charters which are more likely to become straight stock issuing institutions. The MHC limit on how much stock they can offer, combined with fixed costs in issuing an IPO, can mean a MHC doesn’t fit the smaller institution, he added. [email protected]