Mutual banks planning to merge and convert to stock ownership have a mystery to unravel: What did the regulators dislike about a recently scuttled deal in Pennsylvania?
Huntingdon Valley Bank and Victory Bank called off a planned merger last week, saying that the Federal Deposit Insurance Corp. objected to the deal on policy grounds without providing any specifics. The $167 million-asset Huntingdon Valley had planned to convert from mutual to stock ownership and simultaneously absorb Victory, a $153 million-asset stock-owned bank in Limerick.
The FDIC, however, indicated that it would not accept the merger application due to "policy concerns regarding mutual conversion/mergers that" surfaced during a review of the paperwork. The banks have been left scratching their heads over what specific policy concerns doomed the application.
"We were told repeatedly, up and down the ladder inside the FDIC, that there was no objection to the merger on a business or safety-and-soundness matter, and that if we were both stock banks nobody would raise an eyebrow about it," said Joseph Major, Victory's chairman.
"At the end, we were just told that they were not going to accept the merger on policy grounds, and that's as much as we were told," Major said, adding that the rejection wasn't due to a problem at either bank.
The FDIC did not immediately respond to questions about the decision.
Uncertainty about the FDIC's objection could chill the market for mergers between mutual and stock banks. Such deals, in which a former mutual uses money raised in an offering to fund an acquisition, are unusual, though a handful usually take place each year.
The FDIC's rejection is another headwind for mutual conversions, which have been facing increasing scrutiny from depositors and regulators. A growing number of skeptical depositors are starting to view such conversions as a prelude to a sale. Depositors at Beverly Bank in Massachusetts, for instance, voted against a mutual conversion in August.
Other industry observers are scared that conversions threaten the shrinking niche industry.
Media reports have added fuel to the fire. The Boston Globe reported in April that Peoples Federal Savings Bank in Brighton, Mass., had paid out more to its directors and management than it earned in the three years between its conversion and its sale to Rockland Trust.
Regulators have also started to scrutinize conversions more closely, banking lawyers said. In December, Kearny Financial in New Jersey withdrew a conversion application after consulting with the Federal Reserve Board.
"You can certainly sense that regulators are getting a little bit more nervous about the process," said Stanley Ragalevsky, a lawyer at K&L Gates. "My sense is that people are starting to ask more questions."
The Huntingdon Valley-Victory merger was conceived as a way for similarly sized banks that operate in the same county to gain scale and cut costs. The banks also have complementary business models: Huntingdon focuses on mortgages, Victory on business loans.
The match may look logical on paper, but lawyers said such deals can easily hit snags. The most common reasons for regulators to object to merger conversions are an overly high sale price, excessive stock awards or compensation and a deal structure in which it looks like the stock-owned company is taking control of the converting bank.
"There is sometimes concern in these cases that there's too much control going to the seller," said Kip Weissman, a lawyer at of Luse, Gorman, Pomerenk & Schick.
Without details from the FDIC, it's impossible to tell which of these factors, if any, contributed to the rejection. Mark McCollom of Griffin Financial Group, who advised Huntingdon Valley, said his client addressed all of these potential pitfalls early on in its discussions with the regulator.
"We had discussed the structure of the transaction early and often with the FDIC," McCollom said.
These talks convinced the banks to go through with the deal, a decision that ultimately proved costly and time consuming. The banks first presented the deal to the FDIC in the summer of 2013, and filed the merger documents last May.
McCollom said the FDIC seemed willing to approve the deal during preliminary talks. The sale price, compensation and deal structure were extensively discussed before the merger was filed, McCollom said. He said neither he nor Huntingdon Valley was given any specifics on why the deal was squashed.
Huntingdon Valley did not respond to a request for comment.
"While we understand that early discussions with the regulator do not take the place of a formal regulatory process, neither company would have expended the money in legal fees and accounting expenses had they not felt that those discussions leaned in the direction of the merger being acceptable to the regulators," McCollom said.
Huntingdon Valley and Victory will amicably go their separate ways.
Major said his bank plans to raise common stock in the near future so it will have more options to gain scale. Major said he has nothing but respect for Huntingdon Valley's management team, despite the long and ultimately disappointing merger process.
"I've really become close to them," he said. "I wish them nothing but the best, and I'm disappointed we're not going to work with them."