CRA Report Trips Merger In Montana

The Federal Reserve Board has for the first time rejected a merger application solely on a bank's failure to satisfy requirements of the Community Reinvestment Act.

The Fed voted 3 to 2 Monday to deny First Interstate BancSystem of Montana Inc. the right to merge with Commerce BancShares of Wyoming.

Community groups applauded the long-awaited decision, but the banks involved said in a statement that it robs them of an opportunity to "create a more efficient organization positioned to better serve our communities."

Efficiencies Planned

Both companies have been controlled for more than 15 years by the Scott family, local bankers and ranchers. A merger, which was proposed about two years ago, would have let the banks eliminate duplicate departments and functions.

A spokesman for First Interstate, which is unrelated to First Interstate Bancorp in California, said the company is considering appealing the Fed's decision.

Shortly after the merger was proposed, a CRA protest was filed by Native Action, a group based on the Northern Cheyenne Indian Reservation in Lame Deer, Mont. It faulted First Interstate Bank of Colstrip, based 15 miles north of Lame Deer, for failing to lend on the reservation.

A Different CRA Denial

The Fed's long consideration of the CRA protest led to speculation that regulators were struggling to resolve a conflict between their duty to enforce the community lending law and the responsibility to help strengthen banks in a sluggish economy.

The only other time the Fed has denied a merger on CRA grounds was in 1989, when it turned down Continental Bank Corp.'s application to buy an Arizona bank. However, that case was complicated by the fact that the Federal Deposit Insurance Corp. was a major investor in the Chicago bank company. This required rejection of anything with even the faintest appearance of a conflict.

Lawyers knowledgeable about the intricacies of the Community Reinvestment Act said the Fed decision puts the smallest holding companies on alert to monitor the community lending records of all bank subsidiaries. First Interstate Bank of Colstrip has assets of $11 million.

"If you have one weak link, it can bring down a regulatory application of the holding company," said Warren Traiger, a New York lawyer specializing in bank compliance issues.

The law requires banks to meet the credit needs of low- and moderate-income people in local communities.

Merger Plans Withdrawn

In recent years, several banks have withdrawn merger plans rather than go through a drawnout CRA review.

Community groups, for their part, are becoming expert at pressuring banks to increase lending when they are in the merger spotlight.

First Interstate filed its merger application in 1989, shortly after Wyoming opened its borders to interstate banking. The company, with $629 million in assets, is the third-largest commercial bank in Montana. Commerce BancShares, the fourth-largest banking company in Wyoming, has $280 million in assets.

A spokesman for the Montana company said a merged holding company would have enabled elimination of a board of directors, as well as of duplicate divisions for credit administration, finance, human resources, auditing, and marketing.

Persisting in CRA Flaws

In rejecting the application, the Fed said that the Colstrip bank's poor performance continued through consecutive CRA examinations.

First Interstate said all its other banks have gotten satisfactory CRA ratings. It also said it has expanded its area of service to include the Indian reservation.

Gail Small, director of Native Action, said bank officials did not meet with anyone on the reservation until the protest was filed.

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