DOTHAN, Ala.—Five Star CU, a credit union in line to become the first-ever to purchase two banks, says it will look at buying even more FDIC-insured institutions.
The $318-million CU that serves low-income residents in rural areas of Georgia and Alabama believes buying small banks in trouble is a good expansion strategy for the right credit unions.
The approach has turned out well with the CU’s initial bank buy, picking up the troubled $23-million Flint River National Bank in Camilla, Ga. In the six months that followed Five Star taking over operations last June, the former location of the one-office bank has grown deposits by 40% and membership by more than 11%.
CEO Bob Steensma expects much the same results with its intended purchase of Farmers State Bank. The CU has signed an agreement to purchase the $47-million bank based in Lumpkin, Ga.
Farmers State Struggling
Like Flint River, Farmers has struggled in turning a profit, losing $249,000 last year, some of that due to problem loans. Steensma says buying these kinds of small banks can be a better expansion strategy than acquiring a credit union or building a new office.
“When we merge in a credit union we pay 100% (of the value),” said Steensma. “When we buy a troubled bank, we don’t. If we build a branch, it can cost us 50% more than buying a bank—but again, that is only the case if the bank is not healthy. The deal has to have some hair on it for the bank sell (at the lower price)—the bank has to be at a point where they are ready to give up.”
Steensma sees greater regulatory demands, and even assessment pressures during the recession, putting many small banks in the difficult position of not being able to grow—not being able to add services necessary to compete.
“We also were contacted by another bank last week, about the same size as Farmers State Bank, but that deal would have cost three times as much as the one we just signed,” said Steensma, who explained that FSB reached out to Five Star.
What makes the acquisition of a struggling small bank work, asserted Steensma, is that a well-run CU with greater scale can step right in and offer residents products and services the bank could not afford to deliver.
“For example, immediately we will give these former bank customers a mobile banking app and a Visa program that the bank could not offer,” noted Steensma. “Just take the IT side of this conversion. We already have an excellent core system, so we just set up a server and put some terminals in. Now the former bank has a state-of-the-art computer system. We spread these kinds of costs across 16 branches, opposed to the bank spreading it over three.”
Bank Customers Interested In CU
In choosing banks to buy, Five Star picks rural areas in which there are no other credit unions, and in the case of Farmers State Bank, no other banks in the local area.
“As we know, credit unions are different than banks. We care about our members. I think people in these small towns appreciate that and are very interested in finding out what a credit union is all about.”
Results from Flint River support that position, the CEO contended.
“We did not do any membership drives in Camilla. We did not reach out to any SEG groups. We didn’t do much advertising,” explained Steensma. “We have grown membership there by more than 11%, and that is all organic. That tells you these people think a credit union is worth a look—and the 40% growth in deposits at the new branch tells you they trust us.”
But Steensma acknowledged that Five-Star’s formula is not right for all credit unions. The CDFI certified, low-income designated Five Star is very comfortable doing business with low-income members in small towns that often have less than 3,000 people.
“If you look at the counties in which the three FSB offices are located, you might think that the deal does not look promising from a population standpoint,” said Steensma. “But this is what we deal with on a daily basis at Five Star, and we grow. We don’t grow quickly, but we grow steadily. I might not hold our credit union’s perspective on these deals if I were a $320-million CU from suburban Atlanta.”
Right Size
Flint River and Farmers State also fit within the asset size of Five Star’s expansion plans.
“We have an (acquisition) asset size that is in our wheel house, and we base that asset size on the credit union’s own asset size. We don’t want to buy something too big, but as the credit union expands and grows, the asset size of our acquisitions grows as well.”
Steensma added that the sale price of Farmers State, which he would not disclose, accounts for assuming the troubled loan portfolio.