Two Pennsylvania community banks that seemed bound to become competitors have decided to combine instead in a deal to create the largest locally owned player in the Lehigh Valley-Pocanos region.
The acquisition of the 106-year-old First Colonial Group Inc. of Nazareth by the 75-year-old Keystone Savings Bank would produce a company called Keystone Nazareth Bank and Trust Co. with 36 branches and $1.6 billion of assets. It would have an 11% share of the $10.4 billion deposit market in its four-county area of operation, second only to the Charlotte-based Wachovia Corp.'s 22%, according to Federal Deposit Insurance Corp. statistics.
Keystone has been trying to build its commercial loan portfolio for the past year, but market considerations were not the only thing that pushed the deal along. A year before it was announced, two of the companies' key executives - Scott V. Fainor, First Colonial's president and chief executive officer, and Eugene Sobol, Keystone's chief operating officer and treasurer - resumed a friendship that began nearly 20 years ago.
"Gene and I worked together at Merchants National Bank of Allentown in the 1980s," Mr. Fainor, 41, said Thursday, the day First Colonial, the parent of Nazareth National Bank and Trust Co., and Keystone, of Bethlehem, announced the deal.
After Mr. Fainor took the helm at First Colonial, he began bumping into Mr. Sobol at trade group functions and service organization meetings, he said. Though Keystone and First Colonial were not yet direct competitors, Mr. Fainor said he and Mr. Sobol realized that their expansion plans had them on a collision course.
"Both banks were starting down a path of growth and expansion," Mr. Fainor said. "We don't overlap now, but we were bound to conflict. Instead, we decided to expand strategically together."
Mr. Fainor would become Keystone Nazareth's president and CEO, while Mr. Sobol would be its chief operating officer. Frederick E. Kutteroff, Keystone's president and CEO, plans to retire at yearend.
To complete the deal, $1 billion-asset Keystone, a mutual savings bank, must convert to a stock-traded holding company and make its subsidiary bank a state-chartered thrift, Mr. Sobol said. After an initial public offering, it intends to buy First Colonial in a stock deal valued at $82 million.
The deal is expected to close in the fourth quarter. The merged company would have $300 million of capital left over but will wait until the deal closes before charting its future course, Mr. Sobol said. "Our first goal is to make sure we have a very tight integration and a very solid culture."
Robert Kafafian, the president of Kafafian Group Inc., a Parsippany, N.J., bank consulting firm that advised Keystone on the deal, said the course it must follow to acquire First Colonial is complicated and in at least one respect unprecedented.
"There have been four or five similar deals in the past," he said. "What is unusual about this deal is that it involves a commercial bank. As far as I know, all of the other transactions like this one were between thrifts."
