It had been eight months since Washington Banking Co. in Oak Harbor had made a deal to sell itself to Frontier Financial Corp. in Everett, but no closure was in sight.
The $893 million-asset Washington Banking had begun to lose some employees and customers, and with regulatory delays likely to push the completion date past the original June 30 deadline, the company's board decided it had no choice but to call the deal off or risk mass defections, said Michal Cann, its chief executive.
"We were in limbo," Mr. Cann said in an interview Wednesday. "We were reaching a point where we could potentially lose more employees and customers, which would have weakened the company."
On May 29, Washington Banking informed the $4 billion-asset Frontier that it was terminating the $191 million deal. On Tuesday, Washington Banking said the regulatory delays were Frontier's fault.
Mr. Cann would not elaborate, but analysts who spoke with both companies said they were told the Federal Deposit Insurance Corp. had been holding off on approving the deal until it had the results of Frontier's latest compliance examination, completed in February.
Each company now says the other one breached the agreement, and they are preparing for a fight for a possible $5 million breakup fee.
Whatever the outcome, observers say the uncertainty created by regulatory delays can put a serious strain on sellers' operations.
"When is deal gets dragged out, more employees start jumping ship," said Jeff Rulis, an analyst at D.A. Davidson & Co. Moreover, "the bank is kind of like a lame duck without a strong mission, and it often loses franchise value."
This is at least the second deal recently terminated by a seller as a result of regulatory delays. In December, North Valley Bancorp in Redding, Calif., called off its deal with Sterling Financial Corp. in Spokane, because of concerns raised by the FDIC about Sterling's internal controls.
In the last 12 months 24 bank or thrift deals have been called off by the buyer or the seller, including 13 so far this year, according to SNL Financial LC. In the previous 12 months only 11 deals were terminated.
Bert Ely, a banking consultant in Alexandria, Va., said more deals could be delayed as a result of the credit crisis, particularly as regulators address safety and soundness.
In their agreement, Frontier said that it was in compliance with consumer regulations, but according to analysts, Washington Banking contends that Frontier was in breach of their agreement, because of its apparent compliance issues.
Frontier said Tuesday that it did not breach the agreement, and that Washington Banking's repudiation of the deal constituted a breach. Consequently, Frontier said, it is entitled to the breakup fee.
John J. Dickson, Frontier's chief executive, said Tuesday that he could not discuss the matter, because of possible litigation.
Washington Banking investors were not pleased by news of the deal's collapse. Its shares plunged 21% Wednesday, to $9.69, and had recovered only slightly by late Thursday.
Still, Matthew Clark, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said that the decision to walk away from the deal might not be the worst thing for Washington Banking's shareholders.
In March, Washington Banking's shareholders voted to consummate the deal, even though Frontier's shares had lost roughly 27% of their value since the deal was announced in September. Mr. Clark said that the shareholders likely were not too bothered at the time, but the stock has fallen another 18% since then, further diluting the deal's value.
"Looking at [Washington Banking's] first-quarter numbers, maybe they had increased confidence in their outlook as a stand-alone company," Mr. Clark said.
Washington Banking's first-quarter net income rose 3% from a year earlier, to $2.3 million, but Mr. Cann said the results were good in comparison with community banking companies in the Pacific Northwest with heavy exposure to residential construction lending. (Frontier's net income fell 11.5%, to $15.5 million, because of a $9 million provision for losses on such loans.)
Mr. Cann agreed that Washington Banking could operate better as an independent company — for the time being. In the coming months it will determine whether to continue going it alone or sell itself to another company, he said. It is also exploring how it could improve its internal operations, including whether to change its portfolio mix. About a quarter of its loans are consumer loans.
