With three weeks left in the third quarter, already more bank and thrift mergers have been called off this year than in the last two years combined.

The latest to collapse was Capitol Bancorp Ltd.'s deal to sell four of its western Michigan banks to Northstar Financial Group Inc. of Bad Axe, Mich., which was supposed to close by June 30. In a brief Securities and Exchange Commission filing in late August, the $5.3 billion-asset Capitol, a multibank holding company in Lansing, Mich., said the decision to terminate the $52 million deal was mutual.

It was the 26th bank or thrift deal to dissolve in 2008, according to SNL Financial LC, versus 12 in each of the last two years.

Mergers and acquisitions are falling apart for a range of reasons, all related to the weakening credit markets. In some cases the buyer walked away because it did not like what it saw when it inspected the seller's real estate loan portfolios. In others the buyer did not raise enough money in stock sales to fund the acquisition. And several deals were called off because sellers were unwilling to renegotiate the terms after buyers' stock prices tumbled.

In the Capitol-Northstar case, the companies called off the deal because it had yet to receive approval from regulators and "all appearances pointed to the deal staying in regulatory limbo for some time," Michael Moran, Capitol's chief of capital markets, said in an interview Thursday.

Mr. Moran said that he believed federal regulators were skeptical that Northstar, with just $500 million of assets, could take on banks that have had asset-quality problems lately.

"With all the issues in the Michigan economy, I think the regulators had a higher level of comfort if the banks remained under a $5 billion umbrella," he said.

Given widespread credit problems, regulators have become more stringent with applications. They are taking more time with examinations and in reviewing proposed mergers and acquisitions, industry watchers said.

Officials with the Federal Reserve Board and the Federal Deposit Insurance Corp. did not return calls by press time, but they typically do not comment on merger applications.

The four Capitol banks on the block were fixer-uppers, but Northstar said in April that it was prepared to take them on and that it planned to bring in workout experts to help wade through the problem assets, as well as add more retail services and possibly expand into agricultural lending. Calls to the company were not returned.

Of the four, only Grand Haven Bank has turned a profit this year, earning $176,000 in the first half, according to FDIC data. The other three — Kent Commerce Bank, Muskegon Commerce Bank, and Paragon Bank and Trust — have lost a total of $1.35 million this year. All have high levels of credit problems, though Mr. Moran said they are starting to show signs of stability.

In March, when the deal was announced, Mr. Moran called it an "opportunistic situation" for Capitol to reduce its disproportionate exposure in arguably the country's most battered economy. Of Capitol's 64 bank and thrift charters across the country, 13 are in Michigan, and 40% of its loan portfolio is in the state. So are 60% of its troubled assets.

Capitol's plan was to use the proceeds from the sale to beef up in faster-growing markets outside of its home state.

Terry McEvoy, an analyst at Oppenheimer & Co., said he is disappointed the Capitol-Northstar deal fell through.

"I was very happy this transaction was happening, I saw this as a positive for" Capitol, he said. "This just creates one more challenge for the company. By simply keeping those assets and keeping those nonperforming loans directly impacts capital levels."

Mr. Moran said Capitol has "adequate resources on hand" to absorb credit losses. Its risk-based capital stood at 12.87% as of June 30, he noted.

Though Capitol does not have "For Sale" signs out, it would consider another deal, Mr. Moran said.

But Christopher McGratty, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., said Capitol would have a hard time finding another buyer right now.

Additionally, Capitol's business model of expanding into high-growth territories in rapid succession — 15 new affiliate banks in the last 18 months — to offset weaker ones is entering a "harvest phase" where the expansion will slow as the company focuses on building the new banks, Mr. McGratty said.

Still, Capitol would have benefited from getting those assets off its books, he said.

"I think its earnings power is going to be under some pressure because of it," he said. "This was an opportunistic sale for some of its underperforming legacy banks. It would have been nice for it to have gone through."

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