Carver Bancorp Inc. and Independence Federal Savings Bank in Washington seemed to be a perfect match.
By acquiring Independence, Carver, of New York, would have achieved its goal of creating a multicity, black-owned franchise and would have gained a foothold in one of the nation's most affluent African-American markets.
But the deal was even more important for Independence, a struggling $195 million-asset thrift that had been looking for a buyer for a year and a half. It lost $2.6 million in the last year, was labeled "a problem association" by regulators, and has faced several challenges from dissident shareholders.
Now that the deal is apparently off, questions are being raised about what's next for two of the nation's most prominent black-owned thrifts.
Carver, which had never attempted a deal until this one, will continue with its original plan of building branches throughout New York City's boroughs. And Independence says it plans to remain independent, though some say an acquisition might be its only hope for erasing its problems.
The Office of Thrift Supervision's decision last week to reject Carver's $30 million deal for Independence was a blessing in disguise for Carver, according to some observers, since a few weeks earlier the $554 million-asset company had expressed concerns about the price. It had said it was no longer willing to pay $21 a share, since Independence's financial situation had significantly deteriorated since the deal was announced in March.
Joseph Gladue, an analyst with Cohen Bros. & Co. in Philadelphia, said Carver would have looked careless if it had backed out on its own.
The OTS decision gave Carver the out it needed, he said. "I don't think Carver's reputation will suffer, since the regulators disallowed it."
Deborah Wright, Carver's president and chief executive officer, declined interview requests but wrote in an e-mail Thursday that her thrift would continue "to grow organically in its large home market, and we will continue to pursue that strategy to the benefit of our constituents - while remaining open to other growth opportunities that make sense for our franchise."
Mr. Gladue predicts that Carver will stay away from acquisitions and move ahead with its branch-building. Four months before announcing the Independence deal, it raised $13 million of trust-preferred securities to support its plan to build new branches and automated teller machines in Harlem, Queens, and the Bronx.
Carver intends to keep the 9.66% stake in Independence it acquired between July 2003 and April 2004. However, the value of that investment has declined sharply since Carver announced the OTS decision Monday. Independence's stock dropped 11%, to $15.14 a share, the following day and was trading at $13.64 midday Thursday.
Without the Carver deal, Independence says it is looking at growing on its own and will concentrate on stopping the asset drain that has been occurring since 1998, when its founder, William B. Fitzgerald 3d, died and his daughter, a nonbanker, took over.
Thomas L. Batties, Independence's current president and CEO, said that it plans to restructure itself and focus more on small-business lending. The changes will include working to increase its commercial real estate and multifamily loans while also maintaining its position as a mortgage lender to all income levels. The company also plans to eliminate non-traditional banking activities, like its lock box program for parking ticket payments, which were not profitable.
"We are prepared to forge ahead as an independent organization," said Mr. Batties, who succeeded Donna F. Shuler in June 2003. "We are taking action to resolve some issues and plan to reposition the bank in the market as a more typical community bank."
Still, Independence has to deal with a host of legal troubles, along with its financial woes. It is a defendant in three pending civil lawsuits, all of which are related to Washington Teachers Union officials who allegedly misappropriated and embezzled funds with the help of Independence employees.
And in May it sued Morton Bender, a real estate mogul and the primary owner of a Maryland bank, to try and stop him from interfering with the Carver deal. Mr. Bender, Independence's largest shareholder, with a 21% stake, announced that he would try and stop the deal, because he did not believe Carver's management was strong enough to restore Independence to health.
During the second quarter, Independence lost $1.1 million and incurred $1.9 million of legal expenses, compared to just $172,000 in the same period last year. Mr. Batties said that so far this year it has racked up $4 million of legal expenses, the majority of it going to the suit against Mr. Bender.
Observers said that with these problems, along with the expense of restructuring on its own, Independence would be better off selling itself to any willing buyer that could easily absorb the costs.
"The bank is still in trouble, and I think they are going to have to think about going back and shopping themselves around to someone with deeper pockets than Carver," Mr. Gladue said.
Mr. Batties would not discuss whether Independence would consider other buyers. But according to Arnold Danielson, the founder of Danielson Associates Inc. in Rockville, Md., Independence might have trouble finding a buyer that would maintain its local, minority status.
The only local bank to publicly express interest in buying Independence - Colombo Bank, which Mr. Bender owns - no longer has permission to do so.
The Rockville bank had approval from the OTS to, among other things, acquire a controlling interest in Independence. But this past summer Colombo was slapped with a cease-and-desist order for Bank Secrecy Act violations, and the OTS prohibited Mr. Bender from acquiring any more shares of Independence and refused to extend the change-of-control approval, which expired Oct. 14.
Mr. Bender said that he has cracked down at Colombo to address these problems and that it will likely be "squeaky clean" in a month.
In the meantime, he says he is supportive of Independence's restructuring and its new interest in building the balance sheet, but he is calling for new management to do so.
A restructuring "is what I have been yelling about for two years, but they have the wrong people in charge," Mr. Bender said.
