WASHINGTON - Sovereign Bancorp abandoned its controversial bid to acquire Patriot Savings Bank during a closed-door meeting of the Federal Deposit Insurance Corp. on Tuesday, government sources said.

Wyomissing, Pa.-based Sovereign and Pottstown, Pa.-based Patriot withdrew the deal from consideration after it became clear from hours of debate that the Federal Deposit Insurance Corp. board would vote against the transaction.

The deal's demise suggests that other would-be thrift suitors will have a hard time getting regulatory approval for merger-conversions. Those deals are attractive because acquiring institutions get a thrift essentially for free.

"I don't think merger conversions have a bright future, at least in the short run," said John J. Spidi, a partner at Malizia, Spidi, Sloane & Fisch, a Washington law firm.

For most thrifts "it is going to be very difficult - if not impossible - for them to get approval for merger conversions," Mr. Spidi said.

Merger conversions "are going to face some tough hurdles," said Gary G. Gilbert, a regulatory analyst for the thrift trade group, America's Community Bankers.

However, he added, "this doesn't mean the end of merger-conversions."

In merger-conversions, a stockholder-owned institution acquirers a depositor-owned institution as it goes public.

FDIC Vice Chairman Andrew C. Hove Jr. was the only board member who supported the Sovereign-Patriot deal, sources said. Chairman Ricki Tigert Helfer was said to have opposed it, along with Office of Thrift Supervision acting director Jonathan L. Fiechter and Comptroller of the Currency Eugene A. Ludwig. The FDIC refused to comment on the matter.

"We were very disappointed," said Jay S. Sidhu, Sovereign's president and chief executive officer. "We just thought that maybe logic would prevail." Sovereign has $6.5 billion in assets and Patriot has $222 million.

The merger "was a very good deal for the local community and the depositors," Mr. Sidhu said.

That was part of the problem, thrift lawyers said.

The deal was controversial because Sovereign had proposed to give Patriot depositors a 40% discount on new stock issued by Sovereign, a far higher percentage than has been allowed in past deals.

In addition, Sovereign promised to contribute $1 million to local charities and to make $100 million worth of additional local low- and moderate-income housing loans, Mr. Sidhu said.

In effect, Sovereign had promised to issue $46 million worth of stock but to sell it for just $27.6 million because of the 40% discount. The details in the complex deal would depend on how many depositors signed up to buy shares.

The problem is that the deal is reminiscent of others in which mutual thrift depositors have been promised cash or stock awards if they allow their institution to be acquired by another. Some mutual thrifts told regulators they fear they would be forced to sell stock if depositors demanded to take advantage of such deals.

Bank and thrift regulators rewrote their rules on initial public offerings of mutual thrifts earlier this year to address concerns about insider profits and regulatory competition rampant in a wave of conversion deals over the past few years.

The Sovereign-Patriot deal would not have been allowed under new Office of Thrift Supervision rules on so-called merger-conversions. The rules, which took effect Jan. 1, allow merger-conversions only for troubled or small institutions.

The FDIC also adopted new rules, which did not contain a ban on most merger-conversions. The FDIC had said it would consider the deals on a case-by-case basis. The Sovereign-Patriot deal is the first to be decided since the new rules took effect, according to Philip C. Colaco, a senior research analyst at Charlottesville, Va.-based SNL Securities.

Regulators' reluctance to approve the deal means "they are still struggling with what is the right method" for merger-conversions, said Douglas P. Faucette, a partner at Muldoon, Murphy & Faucette in Washington.

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