Four-Star General Leads Military Bank to Rare Management Buyout

Another insurer is leaving the banking industry, but this one says it is running toward a new opportunity and not away from regulators.

The Armed Forces Benefit Association, created in 1947 to provide subsidized life insurance to military members and their families, announced last week that it would sell its 5Star Bank in Colorado Springs, Colo., to its local management team for an undisclosed amount.

The sale is an attempt to harvest some capital and redeploy it into the association's insurance business, which is expanding by offering products to non-military first responders. It also reflects waning member use of the bank, says Ed Eberhart, chairman of the Alexandria, Va., association and the bank.

"We look for ways to invest money that might be of value to our members," says Eberhart, a retired four-star Air Force general. "We have a lot of capital tied up in the bank and now we need it to fuel our insurance business."

In the era of heightened regulation after the 2008 economic crisis, entities like insurers that owned banks have sold those holdings. Such entities say the cost of added regulation outweighs the benefits of things like the stability that deposit funding brings or the ability to offer a full suite of services to clients. Eberhart says that, while it wasn't the driving force, the regulatory overhang was a "peripheral" force.

"It is onerous to be a bank holding company when 99% of our activity is outside of banking," he says.

The association got into banking in the early 1990s when it bought an industrial loan charter in suburban Denver and moved it to Peterson Air Force Base in Colorado Springs. The idea was to offer credit cards to its members, Eberhart says. It was a business that did well for the bank initially but began to wane as larger banks and other card issuers began to offer more robust rewards programs.

"The bank couldn't keep pace," Eberhart says. "The customers thought, 'Why should I have your card when I could get one with better rewards elsewhere?'"

The ability to compete with rewards programs is one of the main considerations among community banks considering — or reconsidering — the credit card business as a source of fee income.

The bank converted its charter to a full-service bank in the mid-2000s. It hired Michael League in 2007 to diversify the bank's balance sheet. In 2010, it sold its $66 million credit card portfolio to UMB Financial (UMBF) in Kansas City, Mo.

The sale of the credit card business essentially halved the loan portfolio but, under League's leadership, the loan book has increased to $98.6 million at March 31 from $61 million at mid-2010, primarily through real estate loans.

Association members make up 25% to 30% of the bank's customers, Eberhart says. Although he couldn't give a specific percentage, he says it was significantly higher prior to the sale. The reduced use of the bank by its members helped sharpen the point of the sale, he says.

League is leading a venture called Little London Bancorp that has agreed to buy the bank. He deferred a request for an interview to Commerce Street Capital, a Dallas investment bank that is advising League in buying the bank.

"Mike League sees a community banking opportunity in Colorado Springs," says C.K. Lee, a managing director at Commerce. "The bank has grown since Mike has been there and they are planning to expand more into SBA lending and that dovetailed nicely with the association wanting to step back."

Commerce is also advising Little London in a community capital raise to complete the deal, but Lee declined to say how much the group is planning to raise. In an interview with the Colorado Springs Gazette, League said he plans to grow the $168 million-asset bank's assets to as much as $400 million within five years. The bank was overwhelmingly overcapitalized at March 31, with a 32.50% total risk-based capital ratio.

League's team was the association's preferred buyer given the existing relationship and his plan to keep the banking team intact, Eberhart says. There will likely be a plan to maintain some sort of relationship between the association and the bank. Still, the association hired St. Charles Capital, a Denver investment bank, to conduct a bid process for the bank.

"This is our members' money ... we had a good idea of what we thought the sales price would be, but it doesn't hurt to go to auction," Eberhart says. "Our preference was to go with the management-led team, as it would have meant less disruption … but first and foremost, this is a business and an investment."