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Seller open to alternatives to long-delayed 363 bank deal

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Seller open to alternatives to long-delayed 363 bank deal

Stonebridge Financial Corp. remains in a "low-cost holding pattern" as it pursues the divestiture of its West Chester, Pa.-based banking unit 19 months after it filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code to facilitate such a transaction.

Materials filed Jan. 10, by Stonebridge Financial's bankruptcy counsel indicate the proposed acquirers of Stonebridge Bank, an investor group that includes former Pennsylvania State Rep. Gordon Denlinger, have yet to obtain the requisite regulatory approvals to complete the $570,000 transaction.

A judge approved the sale on Nov. 9, 2015, after the investor group emerged victorious in an auction process conducted pursuant to Section 363 of the U.S. Bankruptcy Code. The parties' original stock purchase agreement contained a May 31, 2016, termination date so as to provide the purchasers with "sufficient time" to obtained the necessary approvals. But a series of complications emerged, leading the proposed purchasers and the seller to push back the termination date on four separate occasions, the most recent of which would allow for a deal completion as late as May 31, 2017.

For starters, Stonebridge Financial informed the bankruptcy court in March 2016 that it and the investor group did not agree as to whether the manner in which the bank had addressed an issue related to a U.S. Small Business Administration loan that had defaulted "several years" prior to the initiation of the Chapter 11 proceedings. The buyer and seller had purportedly agreed that the investor group's obligation to close the deal would be conditioned upon the resolution of the SBA loan issue. While Stonebridge Financial believed it satisfied that condition after the bank remitted a payment to the SBA, the investor group did not agree.

When the investor group informed Stonebridge Financial in May 2016 that it would be unable to timely obtain the necessary regulatory approvals, the parties agreed to amend their stock purchase agreement to allow for a 30-day extension to the termination date. The amendment included the formal acknowledgment by the investor group that the SBA closing condition had been satisfied. It also waived a "no-shop" provision of the original pact.

Shortly thereafter, the investor group allegedly informed Stonebridge Financial that the Pennsylvania Department of Banking and Securities accused them of violating the Pennsylvania Securities Act of 1972. A July 2016 consent order and agreement indicated that the investor group had raised approximately $3.3 million in subordinated debt and $7.5 million in stock for purposes of recapitalizing Stonebridge Bank, but neither the notes nor the shares had been properly registered. The order required the group to collectively pay a $190,000 administrative assessment. It also set the stage for the investor group to create Hamilton Bancorp Inc., a new bank holding company to raise the necessary capital and execute the acquisition.

Stonebridge Financial agreed to extend the termination date to Sept. 30, 2016. And while it posited that Hamilton Bancorp's ability to close by that date remained uncertain, provisions of that agreement included the payment of a $15,000 extension fee. The parties later entered a third amendment to their stock purchase agreement that extended the termination date to Dec. 31, 2016, in exchange for the purchasers' payment of a $25,000 fee.

The fourth amendment, as discussed in the Jan. 10 filing, includes a new termination date of March 31 and requires the payment of a $30,000 extension fee and facilitates two optional month-long extensions that would require payment of separate $10,000 fees.

Stonebridge Financial said in the Jan. 10 filing that it intends to continue discussions with other parties that might be interested in buying the bank, and it informed the court that it "may be in a position to consummate an alternative Sale or other transaction in advance of the new Termination Date." With $85.7 million in deposits as of June 30, 2016, the bank ranked No. 23 in Chester County, Pa., a market led by banking units of Wells Fargo & Co., BB&T Corp., PNC Financial Services Group Inc., Toronto-Dominion Bank and Citizens Financial Group Inc.

The latest amendment calls upon the purchasers to file the applicable applications to state and federal banking regulators by Jan. 23. Previous applications filed by Hamilton Bancorp to the Pennsylvania banking regulator on Nov. 8, 2016, were withdrawn on Jan. 5, according to a recent version of the department's weekly summary of activity reports.

Even to the extent the sale continues to be held up and no alternatives emerge, Stonebridge Financial argued that the process has been beneficial to the company's estate.

Stonebridge Financial reported the receipt of just over $70,000 in extension fees on a cumulative basis through Dec. 31, 2016, which accounted for essentially all of its cash on hand. It maintained less than $3,000 in cash as of May 31, 2016.