For community banks looking to gain scale and improve efficiency, their options are generally to acquire or be acquired.
Two small Pennsylvania banks have come up with an alternative: they plan to unite under a new holding company but still retain their identities.
The $120 million-asset First National Bank of Marysville and the $85 million-asset Halifax National Bank are not calling their deal, which they announced last week, a sale, a merger, or even a merger of equals.
"We're calling it a business combination," said Robert M. Garst, the president of First National. "It's a way that we can retain our identity and yet create efficiency behind the scenes where you need to have it these days."
All the signs, stationery, products, people, and phone numbers would remain the same at both banks, Mr. Garst said. "It will be imperceptible to our customers that we are anything but what we've been for 100 years."
It is common for a bank that is sold to retain its name and operate as part of a multibank holding company. But Nick Bybel Jr., a partner at the law firm Bybel Rutledge LLP in Harrisburg, Pa., said that this deal — called "a statutory consolidation" — is unusual because "it is not an acquisition of one company by the other." Mr. Bybel represented both First National and Halifax in the transaction, which is expected to close by yearend.
Mr. Garst said once his new company gets under way it would look to add other banks that are similar in size and culture. "We feel, for smaller community banks, this is a wonderful choice that gives them an option besides a sale," he said.
The eventual goal is for the holding company, which is expected to be called Riverview Bancorp Inc., to reach $500 million of assets.
Kirk D. Fox, Halifax's president, cited greater efficiency as a key benefit to the combination. "We're in tough times right now," Mr. Fox said. "Why should banks be any different than the rest of America? Now is the time to tighten your belt."
Mr. Garst said that, besides cost cuts from merging back-office operations, the combination would allow for "significant" savings on management salaries.
He would become the new company's CEO and Mr. Fox would become its president.
The CEOs at both banks had been preparing to retire, with Mr. Garst and Mr. Fox to succeed them.
The new company would have just one bank subsidiary with two divisions — First National and Halifax.
First National has five branches, including one it opened this month. Halifax has two branches and plans to open a third in September.
Once the deal closes, customers of either bank would be able to go to the other's branches.
Mr. Garst said First National and Halifax have numerous similar features, from their operating systems to their medical plans. More importantly, though, he said they have similar cultures and the executives get along well. "Some of us have been peers and friends for 20 years," he said. "Our boards know and respect each other and work together beautifully."
The deal calls for each share in First Perry Bancorp Inc., First National's parent, to be exchanged for 2.4 shares in the new company, and each share in HNB Bancorp Inc., Halifax's parent, to be exchanged for 2.5 shares in the new company.
Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed that the deal is rare and wondered if investors would approve. "I can't say that I would be totally sold on it as a shareholder," he said. "Generally there is some premium involved in a deal."
In this case shareholders would be receiving stock in a newly formed company that does not have an established value, Mr. DelMonte said.
The benefits for the two banks are similar to those a traditional merger, including economies of scale and a larger capital base, he said.
But the challenges are similar too. Though the unusual deal structure allows for retaining the two banks' "heritage," the same discussion about who will get the top jobs would be necessary as in a traditional merger, Mr. DelMonte said.
"Generally speaking, cultural hurdles would make it difficult to put something like this together," he said. "I don't necessarily think this will be a trendsetting way to go."