MB Financial's purchase of Chicago rival Taylor Capital (TAYC) could be delayed as regulators evaluate one of Taylor's former deposit relationships.
Regulators have notified the $5.7 billion-asset Taylor Capital that its Cole Taylor Bank may get cited for violating a section of the Federal Trade Commission Act that covers unfair or deceptive practices. Regulators are evaluating the potential infraction as part of approving the merger; ongoing evaluation could delay the deal beyond June 30, MB Financial said on Wednesday.
MB Financial (MBFI) views the situation as nothing more than an unfortunate delay, Mitchell Feiger, the $9.4 billion-asset company's chief executive, said during a conference call Wednesday to discuss quarterly results. "We are obviously disappointed by the delay but we fully expect to complete the transaction," he said.
"In case there is any doubt, we believe the transaction will be as good for MB and our shareholders as we anticipated or perhaps even better," Feiger added. "We are far along in our integration planning. We've made the hard decisions including the ones involving people, systems, products, process and policy. In other words, from an integration planning perspective, things couldn't be better."
Feiger doubled-down on the optimism later in the call, saying the delay could ultimately result in a smoother integration. "This gives us more planning time, more preparation time and increases the chances of the conversion going well, very well," he said.
Taylor's potential violation is believed to be tied to a relationship it established in April 2012 with Higher One, a group that provides electronic financial-aid disbursements and payment services.
MB and Taylor declined to comment about the delay; Higher One declined to comment about Taylor. Higher One's annual filing disclosed a probe by the Federal Reserve Board of Chicago into the company and one of its former bank partners. The filing also noted that Higher One had severed ties with Cole Taylor Bank last year.
Also, Brad Milsaps, an analyst at Sandler O'Neill, named Higher One in a note to clients on Wednesday.
In some ways, the potential delay is ironic because Taylor's relationship with Higher One and its sale to MB Financial were designed to address deposit issues at Cole Taylor that stemmed from its limited branch network.
"A $6 billion-asset bank with nine banking centers wasn't going to be enough," Mark Hoppe, Taylor's chief executive, said in July while explaining why the deal with MB made sense for his company.
Taylor disclosed the regulatory evaluation, but not the potential delay, in in its annual report filed with the Securities and Exchange Commission in March. In that filing, Taylor said a violation of the FTC Act could result in a civil money penalty and restitution to accountholders, but its "former counterparty" would be obligated to reimburse it due to an indemnification agreement.
"Given the preliminary status of the notification, we are unable to reasonably estimate a range of potential financial impact from this matter, if any," the filing said. "However, we do not currently expect that the impact of this potential regulatory violation will have a material impact on our financial position."
This potential delay is another example of the thoroughness regulators are showing as they evaluate mergers. The poster child for such regulatory snags is the still lingering acquisition of Hudson City Bancorp (HCBK) by M&T Bank (MTB), which was announced in 2012. That deal remains on ice because of issues related to the Bank Secrecy Act at M&T. Based on the information released so far, analysts do not expect the MB-Taylor deal to take a similar protracted path.
"This seems to be an isolated thing, not like a BSA/AML structural problem," says Chris McGratty, an analyst at Keefe, Bruyette & Woods. "Even if it pushes it out three months, it shouldn't change the long-term attractiveness of the deal."
Despite a potential delay, analysts agree that the deal will likely close. Still, in light of earnings misses at MB and Taylor, analysts are eager to see the deal completed, cost savings implemented and a boost to earnings achieved. The $680 million deal is expected to cut 30% of Taylor's core operating expenses, excluding its mortgage company, and result in a more than a 15% boost to MB's earnings after the second year.
"I do think the deal is ultimately done, but it does push out the accretion that Taylor brings to the table for the combined organization," Milsaps says.
MB reported on Wednesday that its first-quarter earnings fell 20% from a year earlier, to $20 million, due largely to flat net interest income, a higher loan-loss provision and a 5% decrease in fee income. Total loans fell 1.5% from the end of last year, to $5.6 billion.
Taylor's profit fell nearly 27%, to $9.9 million, primarily because of a 28% decrease in mortgage revenue. Loans were relatively flat compared to the end of last year. Taylor didn't host a quarterly conference, but MB was asked about Taylor's loan growth on the call.
Some of the slowdown at Taylor is tied to an unfounded fear of the merger, Feiger said in response to a question about what could be suppressing growth.
"We like the way they make loans and think about loans," Feiger said. "It is really tough for them in the market right now as you can appreciate. Prospects understand that we are merging and they are somewhat cautious. And they needn't be."