A Pennsylvania bank is planning to test uncharted regulatory waters by asking federal regulators to let it buy a tiny mutual thrift and turn it into a bank branch.

Allentown-based Ambassador Bank of the Commonwealth is following up on what amounts to an invitation from the Office of Thrift Supervision to propose merger-conversions involving extremely small mutuals.

In 1994 the OTS imposed a moratorium on merger-conversions, citing concern that insiders at mutuals were profiting from the transactions. However, the agency has said it will consider applications by mutuals with less than $25 million in assets on a case-by-case basis if they can prove that they're too small to sell stock.

Ambassador has signed a letter of intent to buy one-branch mutual Wilbur Savings and Loan Association in Bethlehem. A definitive agreement is pending, and no formal application has yet been filed.

The Federal Deposit Insurance Corp. got a similar application last April from $335 million-asset Raritan (N.J.) Bancorp, which wants to buy $15 million-asset Manville Savings Bank, a New Jersey mutual. No action has been taken on that application, although bank officials are still supplying information to regulators.

"For those who would like to sell out," the window for bank purchases of tiny mutuals is "a nice option to have," said Doug Faucette, partner with Muldoon, Murphy & Faucette in Washington. "For those who want to stay independent, it's not such a nice option, because it exposes them to acquisition by stock companies."

The FDIC does not have a moratorium but has not approved any merger- conversions since 1994. Manville is the only pending merger-conversion for the FDIC to consider.

The Wilbur deal would be the first such formal application to test the OTS, though the agency has rejected several informal inquiries so far. Wilbur has $18 million in assets and had been evaluating several possible offers before settling on Ambassador.

"Given the size of the institution and given the stated policies by OTS, the application should be approved," Mr. Faucette said. "However, since OTS has not approved one, I would expect that it would not be handled in a routine manner, since it is precedent-setting."

The Wilbur deal would give $165 million-asset Ambassador an office in downtown Bethlehem, satisfying a goal the bank has had since it was founded five years ago. The addition of Wilbur's capital plus the offering proceeds would also bolster Ambassador's own position.

The deal would include a subscription offering in which Wilbur's depositors would be able to buy Ambassador stock at a discount before the offering is opened up to the general public, including current Ambassador shareholders.

No price has been determined yet, and Ambassador officials declined to comment beyond a press release.

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