Bank merger was sparked by fed, state investigation

John Ruch

Depositor meeting will be Sept. 23

JP CENTER—Mt. Washington Bank’s proposed merger with an East Boston bank was inspired not only by the bad economy, as was originally announced in July, but also by a federal and state investigation that found “unsafe or unsound banking practices.”

“The regulatory pressure was a big factor in the bank’s decision to merge,” Edward Merritt, Mt. Washington’s president and chief executive officer, acknowledged this week to the Gazette.

South Boston-based Mt. Washington, which runs the local Roxbury Highland branch at 515 Centre St., is now operating under a consent agreement with the Federal Deposit Insurance Corporation and the state Division of Banks. Merritt said most of the agreement’s requirements have been met, and that “the order will cease to exist” if the merger with East Boston Savings Bank (EBSB) goes through.

Richard Gavegnano, EBSB’s chairman and chief executive officer, agreed that the regulatory pressure was a “major factor” in the merger decision and confirmed that the consent agreement would “go away” after a merger.

Mt. Washington’s depositors must approve any merger. A depositors meeting to vote on the plan is scheduled for Sept. 23 at 4 p.m. at the Boston Teachers Union Hall in Dorchester.

EBSB is a publicly owned bank, not depositor-owned, so there will be no vote on its side of the deal.

Banking regulators discovered problems with Mt. Washington early this year during a routine, periodic review, according to Merritt and David Cotney, chief operating officer at the Division of Banks. On July 13—a week before the merger was announced—state and federal regulators issued a “cease and desist” order to Mt. Washington about various practices.

The regulators said Mt. Washington was operating with far too little money to cover its activities, and was “engaging in speculative or hazardous investment practices.”

The regulators also cited management problems: lack of “adequate supervision and direction” from the bank’s board of directors; “operating with inadequate written policies and procedures”; and the lack of a system to identify problem assets.

In the consent agreement, Mt. Washington agreed to make various changes “without admitting or denying” any problems. The 11-page consent agreement is filled with detailed requirements, including hiring an outside consultant to review the bank’s management and staffing needs.

“We’ve completed virtually everything that needs to be done,” Merritt said. “It’s not like there’s a tremendous amount of heavy lifting.”

“I never made any bones about the fact we were facing some regulatory pressure,” Merritt told the Gazette this week. But when the merger was first announced, Merritt and Gavegnano made no mention of the regulatory action, citing only the bad economy and the problem of the bank having too little money.

The merger will take care of such problems as the lack of money, Merritt has said, because EBSB has hundreds of millions of dollars in capital. Merritt said that the reviews have led to some internal changes, but that management and staff at the branches will remain the same, as EBSB intends.

Mt. Washington will survive as a wholly owned subsidiary of EBSB, with Merritt in place as its president. Its seven branches will stay open with the same staff and retain the Mt. Washington name, Gavegnano has said.

Gavegnano said he continues to have faith in Mt. Washington’s leadership. “I just think Ed Merritt is an important part of this,” he said of Mt. Washington’s future.

Cotney said the Division of Banks has no current “enforcement actions” against EBSB.

Roxbury Highland was a single-branch, independent bank for nearly 120 years when modern times forced merger discussions. A proposed merger with Peoples Federal Savings Bank in 2003 was shot down by a crowd of chanting protestors. The merger with Mt. Washington was approved last year, largely because of Mt. Washington’s own history as an independent community bank.

EBSB also considers itself a community bank, though it has grown bigger in its 164 years, now including 13 branches. Gavegnano emphasized that both EBSB and Mt. Washington have similar histories and “cultures.” The merger would provide more stability for both employees and customers, he said.

Merritt said that documents for the proposed merger were filed with the state on Aug. 31. Banking regulators also must approve the deal.

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