WASHINGTON — The merger agreement between the Federal Home Loan Banks of Seattle and Des Moines contains a little-noticed provision that would force one of them to pay a $57 million penalty if it break off talks.

The Home Loan Banks announced last week that their boards have agreed to a merger, which still must be approved by the Federal Housing Finance Agency and each bank's members.

The agreement gives the banks until June 30, 2015 to consummate the deal. Within the details of the merger is a provision that says that if one of the banks backs out prior to June 30, it would pay the other a $57 million "break-up fee."

The provision was first highlighted by Federal Financial Analytics, an analysis and advisory firm in Washington D.C. It noted that a break-up fee would be difficult for the Seattle bank to pay.

For the Des Moines FHLB, the breakup fee is "less than six months of net income," the firm wrote in its analysis of the deal. "For Seattle, it's a year's worth of net income."

In its note, the firm said it was a little "puzzling" to see such a hefty breakup fee in the merger agreement. They speculated it might be designed to deter another Home Loan Bank, such as the one in San Francisco, from proffering an alternative merger proposal.

"We'll never know since the transaction is likely to come off as contemplated and, with it, no break-up fee will be handed over," the report says.

In a joint statement, the banks said a breakup fee "is standard in a merger agreement, and the size of this fee is consistent with market practice."

"Now that both boards have unanimously approved the merger, both banks are committed to proceeding," the banks said. "At the same time, if either board receives an offer from another bank, it is bound by its fiduciary duty to consider it. The $57 million fee becomes part of each bank's consideration of any other merger or acquisition discussions."

If successful, the Des Moines-Seattle merger would be the first voluntary combination of Home Loan Banks in the system's history. The Dallas and Chicago banks attempted to merge more than six years ago, but talks eventually broke down.

The FHFA has signaled it will be supportive of the merger, but the agency may "look carefully" at this breakup fee, according to the Federal Financial Analytics, since it could set a precedent for future mergers.

If the merger goes through, the combined institutions will be headquartered in Des Moines.

 

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