Fed Delay of Firstbank Deal Adds to Stalled Takeovers

Firstbank Corp. and Mercantile Bank Corp. extended their merger deadline by three months, adding to the tally of financial industry takeovers stalled by extra scrutiny from regulators.

Firstbank, the Alma, Michigan-based company with $1.5 billion in assets, pushed back the date for its acquisition by Grand Rapids-based Mercantile to June 30 from March 31, according to a regulatory filing today. The firms agreed to the $151.5 million deal in August.

“It’s very unlikely that we can get the approval from the Federal Reserve and get the deal consummated by that March 31 date,” said Chuck Christmas, Mercantile’s chief financial officer, in an interview. “We were too aggressive and as we’ve gone through the regulatory process, specifically with the Federal Reserve. It’s just taken longer than we thought.”

Regulatory reviews are holding up U.S. regional bank deals of all sizes and discouraging new ones, according to bankers and analysts. M&T Bank Corp.’s offer for Hudson City Bancorp Inc., the industry’s biggest and longest pending merger, has been delayed twice amid Fed probes into M&T’s money-laundering controls. The $3.7 billion bid dates back to August 2012.

The average time it takes to close a bank deal has been increasing since the financial crisis, according to Jeff Davis, managing director for the financial-institutions group at the Mercer Capital advisory firm in Nashville, Tennessee. It took an average of 5.5 months to close a deal announced in 2006 and eight months for deals made public in 2011, his figures show.

Hot Button

“It’s another data point as to why bank M&A is not nearly as robust as one would expect given the challenging operating environment,” Davis said in an interview. “There seems to be a hyper-sensitivity to any issue that might be viewed as contentious, such as fair lending or hot-button issues such as bank secrecy.”

Investors Bancorp Inc., based in Short Hills, New Jersey, completed its purchase of Roma Financial Corp. in December, a year after announcing the deal and about three months after its initial deadline. United Bankshares Inc., based in Parkersburg, West Virginia, delayed its acquisition of Virginia Commerce Bancorp Inc. for two months in November after announcing it would buy the Arlington-based lender on Jan. 30, 2013.

Mercantile rose 0.5 percent to $20.41 at 4 p.m. in New York, while Firstbank slid 0.1 percent to $18.37.

Higher Costs

“We have not been told when to expect approval,” Firstbank CFO Sam Stone said in an interview. While the Fed hasn’t specified what’s holding up approval, the CFOs at both firms point to activists’ allegations of unfair lending practices at Mercantile. As part of the Community Reinvestment Act, the public is allowed to submit comments to the Fed about bank takeovers that are being reviewed.

“We don’t know that for sure, but we suspect it,” Mercantile’s Christmas said, adding that he doesn’t agree with the complaints. “There’s nothing that has come up as far as we know in our communications that could cause us any angst.”

Eric Kollig, a spokesman for the Fed, declined to comment.

Banks are seeing costs of their deals escalate as they are compelled to invest in technology and personnel to address regulatory concerns and as expansions that could boost revenue are put on hold. Spending to mollify the Fed’s concerns added to a 17 percent decline in M&T’s fourth-quarter profit.

‘Billable Hours’

Moody’s Investors Service amended its outlook on M&T to negative, citing the “unprecedented delay and heightened uncertainty” over the Hudson City deal, according to a statement today.

Large firms such as U.S. Bancorp, the biggest U.S. regional lender, are avoiding bids for entire companies and just buying units or branches. Chief Executive Officer Richard Davis said last month he’s concerned about “picking up the problems and the legacy issues that you may not ever be able to know at due diligence and you simply can’t price for.”

While longer timelines create more hurdles for expansion-minded executives, not everyone involved is complaining, according to Mercer’s Davis.

“If you’re a corporate securities attorney, it’s not all bad news,” Davis said. “It just means more billable hours.”

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