First Interstate BancSystem of Montana, the first bank company denied the right to merge solely because of a subsidiary's failure to comply with the Community Reinvestment Act, has put on hold its appeal of the decision.

The Billings-based company, which is not related to First Interstate Bancorp of California, asked the U.S. Court of Appeals for the District of Columbia last fall to overturn the Federal Reserve Board's denial of its application to merge with Commerce Bancshares of Wyoming Inc.

Both companies are controlled by the Scotts, a family of ranchers and bankers who argued that the merger would create operating efficiencies.

Unit |Needed Improvement'

But last October the Fed rejected the merger by a vote of 3 to 2 because one of First Interstate's seven unit banks received a low rating of "needs to improve" under the federal legislation that requires banks to offer services to low-income people in their areas of operation.

The Fed's ruling was considered significant because it sent a strong signal that regulators are determined to enforce the community lending law even at the expense of efficiency. It also reinforced the Fed's determination to keep a holding company hostage, if need be, to the CRA practices of its subsidiaries.

Last week, for only the third time, the Fed turned down another bank merger solely on CRA grounds. The agency rejected a bid by Gore- Bronson Bancorp. of Illinois to acquire the Water Tower Trust and Savings Bank of Chicago, saying that CRA performance is "an important and often controlling factor" in gaining regulatory approval for mergers and acquisitions.

First Interstate said it decided two weeks ago to put the appeal on hold because of a planned restructuring that would convert seven of its unit banks in Montana into branches. Neil Klusmann, a bank spokesman, said First Interstate expects to reapply for the merger with Commerce Bancshares after the restructuring. If the Fed doesn't approve the restructuring, the bank may go forward with the appeal.

Banking lawyers who closely follow CRA developments said they were not disturbed by the withdrawal of the appeal because First Interstate's case was not particularly strong.

"Nobody was very optimistic about how the appeals court was going to decide," said Warren Traiger, a New York City-based attorney.

First Interstate has $681 million in assets, and Commerce Bancshares has $285 million. The Fed rejected the merger after a community group, Native Action, protested that a $13 million-asset subsidiary,- First Interstate Bank in Colstrip, Mont., was not lending on the Northern Cheyenne Indian Reservation.

First Interstate said that it has tried to improve its community reinvestment activities. The Colstrip bank recently appointed a Cheyenne Indian, Clara Spotted Elk, to its board of directors and expanded its delineated community to include the reservation.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.