When executives of Jade Financial Group, parent of IGA Federal Savings Bank, announced a deal to be acquired by nearby PSB Bancorp. in October 1999, officials of both banking companies revealed to investors they had been conducting merger discussions for about six months, typical for banking transactions of that size.
The deal was closely watched by the credit union movement because IGA, founded in 1975 as IGA FCU, was the first credit union to convert to a mutual savings bank, and then to go public in an initial public stock offering.
But documents uncovered recently in an unrelated lawsuit in nearby Philadelphia show that investors may not have been told the whole story of the merger, which reaped millions of dollars in stock profits and other benefits for insiders of the former credit union, as well as its new merger-mate, while leaving most of the former credit union members out in the cold.
The documents, part of a lawsuit over options in PSB Bancorp, parent of First Penn Bank, show that merger negotiations between executives of PSB and IGA actually began as early as February of 1999. That was just two months after the $200-million credit union had completed its conversion to mutual savings bank, and more than 18 months before it went public in its landmark IPO.
Neither officials of PSB Bancorp. nor their lawyers would return phone calls from The Credit Union Journal, but a series of stories appearing in last week's Philadelphia Inquirer and confirmed by The Credit Union Journal through review of court and financial records, shows how insiders of the former credit union engineered this lucrative deal that few of the credit union member/owners were able to get in on.
Immediate Windfall
At the time of the IPO, stock offerings by small thrifts were a hot commodity, with investors fighting to get in as many thrifts were being sold at hefty premiums. As a result, the 10 senior officers and directors of Jade/IGA who had engineered the 1998 conversion from a credit union reaped an immediate windfall profit of $650,000 as the stock shot up more than 50% on its first day, from $8 to $12.75. Takeover rumors, fueled by the purchase of a 10% stake by a Wall Street speculator, helped push the stock even higher.
Among those profiting were John O'Connell, chairman and CEO, who helped charter the credit union in 1975. O'Connell earned an immediate profit of $178,125 on his shares. Also, Mario Incollingo, Jr., president and chief operating officer of the credit union and then the thrift, earned $118,750; Dennis Wesley, a director, who earned $60,000; Edward McBride, director, $47,500; and Dorothy Bourlier, chief financial officer, $45,000.
But even as the ink on the IPO was drying, those executives were apparently proceeding on their own with a possible takeover by PSB, the court records show.
Officials of the two institutions knew each other well because they were partners in an ill-fated project to deliver Internet services to community banks known as Bankzip, which lost each institution $2.5 million, according to the court records.
By March 2000, five months after Jade/IGA had gone public, the two sides had already prepared a written merger agreement. Court records indicate the board of PSB was scheduled to meet on March 28 to sign a definitive merger agreement.
But regulators, specifically the federal Office of Thrift Supervision, which requires that newly public thrifts wait at least a year before selling themselves, got wind of the deal and stopped it in its tracks.
The reason for the year cooling-off period, according to one long-time thrift lawyer in Washington, is to ensure that the capital built up over many years by these newly public institutions-in the case of Jade/IGA more than $15 million, plus the $14 million earned in the IPO-is not susceptible to speculators.
Meantime, top executives at Jade/IGA, were holding out for a better deal. According to a draft of the March 2000 merger agreement, top Jade executives were insisting that "PSB shall have adopted a stock compensation plan covering blank shares of PSB common sock, reserved for stock and options to be awarded to officers and directors," of Jade Financial.
PSB responded that it would make a "best efforts attempt for a stock option plan for Jade officers and directors," the court records show.
Eventually, the deal was approved by both sides. A filing with the Securities and Exchange Commission insisted that the discussions had commenced in June and were completed in October.
$29 Million Sold For $24 Million
For a little more than $24 million, PSB bought control of Jade/IGA and its more than $29 million in depositor capital.
The deal, at $13.55 per Jade/IGA share, not only proved lucrative for top Jade/IGA officials, but also for many state lawmakers who were close acquaintances of O'Connell, a long-time lobbyist for PECO Energy, the credit union's original sponsor.
Documents filed with the SEC show that under the merger deal, O'Connell was hired as vice president of marketing for PSB at $170,000 a year with a $40,000 annual bonus, roughly twice what he was earning at the credit union-turned-thrift. But just as interestingly, the credit union founder ended up retiring in January 2004 with a million-dollar payday, courtesy of PSB Bancorp. That included 43,890 PSB shares worth $580,000 at the time, and a severance agreement that paid him $450,000 in cash and 15,000 stock options valued at $75,000.
Incollingo, who worked after the merger as PSB's chief operating officer, made out almost as well when he left the bank at the same time, according to SEC filings. He retired with 57,558 shares valued at $765,000 and a severance package that paid him $320,000, the proceeds of a life insurance policy, 10,000 stock options valued at $50,000, as well as the Mercedes Benz the company had been leasing for him.
But the two former credit union executives weren't the only insiders to milk the Jade/IGA deal. The Philadelphia Inquirer reported that four directors of PSB, including State Sen. Vincent Fumo, the banking company's CEO whose family founded the bank in 1926; President Anthony DiSandro, and two other directors qualified to buy shares in the Jade/IGA IPO. Another bank official, a top political aide to Fumo, also bought stock in the IPO.
Also On The Ground Floor
Fumo was able to get in on the ground floor, reserved for Jade/IGA depositors, by opening an account there, then bought the maximum allowable 37,500 shares, on which he eventually earned a $208,000 profit.
Others shared in what was an almost-sure thing. Financial disclosures filed with the state legislature in Harrisburg show that at least eight other lawmakers, believed to be O'Connell friends from his lobbying days when he was known at the Capitol as "Mr. Peco," bought in on the Jade/IGA IPO. One influential lawmaker earned a quick $80,000 in one year on his Jade/IGA investment. Another earned $22,200. Another reported a $5,550 profit.
Though executives boasted at the time that former member/depositors of IGA FCU would have first crack at buying the stock, not everybody was able to share the profits from the sale of the former credit union.
Long-time members of IGA FCU were mostly left out of the money when IGA became the first credit union convert to sell stock, before being taken over by PSB. SEC records show that only 1,125 investors took part in the 1999 initial public offering for the credit union convert, many of them believed to have been recent depositors planning to take advantage of the IPO or outside investors.
That means that fewer than 5% of the 22,200 members of the credit union shared in the profits from the sale of the institution.
