Union Federal Bank's Fort Wayne-based parent is locked in a dispute that could put in peril the Indianapolis financial institution's $330 million sale to Bowling Green, Ohio-based Sky Financial Group Inc.
A new U.S. Securities and Exchange Commission filing says parent Waterfield Mortgage Co. is fighting with the buyer of its mortgage-origination business, Long Island-based American Home Mortgage, over whether it must return $29 million of the $450 million purchase price.
"Sky Financial has advised Waterfield Mortgage that it believes these disputes with American Home may result in a failure to satisfy a closing condition in the merger agreement between Sky Financial" and the bank, the filing says.
The 100-page filing doesn't specify which condition Sky is citing. Sky's agreement, struck in February, includes more than a dozen closing conditions. Under the pact, Sky technically would buy both Union Federal and Waterfield, though by closing Waterfield was to have shrunk its mortgage-related liabilities to almost nothing.
In the SEC filing, Waterfield says Sky's interpretation is wrong.
"Waterfield … advised Sky Financial that the disputes with American Home provide no basis for any failure or refusal by Sky Financial to close the merger," the filing said.
Further, Waterfield said "that if Sky Financial refused to close the merger with Waterfield Mortgage because of the disputes with American Home, Waterfield Mortgage may take any action necessary and desirable to enforce the merger agreement."
Union Federal CEO Alvin "Kit" Stolen and Sky Chief Financial Officer Kevin Thompson were not immediately available for comment. Outside shareholders in privately held Waterfield Mortgage, including Oxford Financial Group CEO Jeffrey Thomasson, also could not be reached.
Mike Renninger, principal of Carmel-based banking consultancy Renninger & Associates LLC, thinks the squabbles are unlikely to sink the sale of Union Federal, Indianapolis' largest locally owned bank.
"I think it's in everybody's interest for all issues to just be resolved," Renninger said, noting that both Sky and Union Federal are far along in efforts to assimilate their companies.
Indeed, Renninger said, the worst-case scenario for Waterfield shareholders might be to acquiesce to American Home's demand for $29 million, leaving them with a smaller return on their investments.
"The amount of the dispute, relative to the size of the transaction, doesn't seem large enough to put the overall deal in jeopardy," he said.
Waterfield and Sky officials have made no public comments about the behind-the-scenes tangle. In a conference call with analysts July 19, Sky CEO Marty Adams said integration plans "remain on track" and sounded as enthusiastic as ever about the deal, which would give Sky its first central Indiana presence. He said Sky planned to complete the purchase by the end of the third quarter.
"We love the Indianapolis market," Adams said on the call. "What we did find was the talent depth [at Union Federal] is very significant. Several years ago, Union Federal really turned [around]," in part by hiring experienced bankers from big financial institutions.
This isn't the first time liabilities related to Waterfield's mortgage operations have complicated efforts to sell Union Federal.
The U.S. mortgage industry was sizzling a couple of years ago. But like many mortgage lenders, Waterfield last year saw originations slide as interest rates increased.
The performance of mortgage lenders in general is far more volatile than that of banks. Waterfield also has had to grapple with a few surprises, including a larger-than-expected number of homeowners paying off their mortgages early, which caused a big loss in the company's investment portfolio.
An SEC filing this spring said publicly traded Sky's negotiations to buy Union Federal dragged on more than six months, in part because it was pushing to minimize its exposure to the mortgage business.
In August, Sky said it was prepared to pay $440 million to buy Union Federal. But by February, it had chopped some $100 million off its offer. In that span, the mortgage operations had posted disappointing performance, shrinking Waterfield's net worth.
Selling those mortgage operations also proved tricky. To seal the American Home deal, Waterfield agreed to put $55 million of the purchase price in escrow. The money would be available to American Home "for breaches of representations and warranties."
In April, American Home told Waterfield that it believes it's entitled to tap that account, and is now seeking $29 million, according to the new SEC filing.
The filing doesn't disclose on what grounds American Home is making its claim. Waterfield denies it owes the money and contends American Home "failed to perform a number of continuing obligations," including repurchasing certain loans.
"We cannot assure you that these disputes will be resolved amicably, the filing said, or that they "will not result in costly litigation."
If Waterfield can complete the Sky deal, the company's shareholders will be in line for a handsome payday. They ultimately are likely to receive $215 a share to $235 a share from the sale of the company's businesses, according to the SEC filing, which doesn't disclose what investors paid for their stock.
Returns would be on the low end of that range if American Home prevails on its $29 million claim, the filing says.
The company's shareholders include a who's who of Indianapolis business. Thomasson owns 48,832 shares. At $215 apiece, those would be worth $10.4 million. Other investors include former Indianapolis Mayor Steve Goldsmith and former dean of the IU Kelley School of Business Dan Dalton.