Fed Finally Approves MB-Taylor Deal

MB Financial's acquisition of Taylor Capital Group (TAYC) has a bit more certainty — and a few more strings.

The $9.4 billion-asset MB Financial (MBFI) disclosed Tuesday that the Federal Reserve Board had approved the acquisition of the $5.7 billion-asset Taylor Capital. The Chicago companies still need approval from the Office of the Comptroller of the Currency, but the Fed approval offers a big boost of confidence that the transformational deal between the rivals will close.

The $680 million deal was announced in July 2013 and had an initial deadline of June 30. MB announced alongside its first-quarter earnings earlier this year that the deal could potentially be delayed as regulators evaluated an account-opening process tied to a former deposit relationship between Taylor and Higher One, a New Haven, Conn., company that provides electronic financial-aid disbursements and payment services.

The companies said in a filing Tuesday that delay has required them to amend the merger agreement to push back the deal's deadline to Sept. 30. The amendment also lets the companies to further extend the deadline as long as regulatory approval remains pending, but no later than Dec. 31.

The Fed also disclosed on Tuesday that it and Taylor's Cole Taylor Bank entered into a cease-and-desist order on June 26 over fraudulent practices in violation of section 5 of the Federal Trade Commission Act, which prohibits "unfair or deceptive acts or practices in or affecting commerce." The order also involves the Illinois Department of Financial and Professional Regulation.

Cole Taylor was assessed a $3.5 million civil money penalty by the Fed and a $600,000 penalty by the state. Taylor said in a May regulatory filing that it expected civil money penalties of up to $3.6 million based on conversations with the Fed.

From May 2012 to August 2013, Cole Taylor provided deposit accounts for Higher One. In its order, the Fed claims Higher One, through Cole Taylor, used deceptive practices in misleading students with one of its products by omitting important information about fees, features and limitations of the product.

Further, Higher One omitted information about locations and hours where students could access their accounts without cost. The product also displayed university and school logos, which may have erroneously implied that several higher education institutions endorsed the product. (The Fed alsosaid it is pursuing actions against an unnamed state member bank that had a similar arrangement with Higher One.)

Taylor disclosed earlier this year that its "former counterparty" was obligated to reimburse it due to an indemnification agreement, but the Fed's order with Cole Taylor requires it to assume backup liability for any restitution to students that Higher One is required, but may be unable to pay. MB said in its filing that the restitution is capped at $30 million.

MB says it has entered into an agreement with Taylor to not consider the consent order as a material adverse effect — essentially a deal breaker. However, MB assigned limits to the amount Cole Taylor can pay. The bank is allowed to pay about $4.7 million tied to the civil money penalties and legal fees and 40% of the restitution amount prior to the merger's closing.

Additionally, MB has entered into an escrow agreement with Taylor's principal shareholders, who own roughly half the company's stock, to be on the hook for 60% of the restitution payments made by Cole Taylor or by MB after the deal closes.

Taylor's principal shareholders include Chairman Bruce Taylor, investors Harrison and Jennifer Steans and private equity firm Prairie Capital. The Steans and Prairie became shareholders through a series of capital raises in the years after the 2008 financial crisis.

MB and Taylor executives, through a spokesman, declined to comment beyond what was disclosed in the filing.

Followers of the deal say the lengthy disclosure was a net positive. The market apparently did, too, with MB's stock up 3.4% on Tuesday, with shares approaching $28.

"The Fed approval is a huge box checked off in getting the deal done. That clears up a lot of uncertainty," says Chris McGratty, an analyst at Keefe, Bruyette & Woods. "Paying restitution is not an ideal scenario, but is very manageable…. The amount is now quantifiable and known and the deal can move on."

Some industry observers thought the deal was headed toward termination, McGratty says. That would have been a negative for the companies and for deal-hungry community banks.

"I think if it was broken up it would have discouraged others from doing anything of size," McGratty says. "The is good news for the industry."

The Fed has gained a reputation among dealmakers as the toughest on deal applications. Though gaining Fed approval does not make OCC approval a foregone conclusion, industry observers say it is a major win and an endorsement of MB.

"It is a very positive sign of MB," says Chip MacDonald, a partner at Jones Day. "It is reaffirmation of faith in management."

Janaki Challa contributed to this report.