Hearing in Mercantile Bancorp bankruptcy case continued

Posted: Jul. 24, 2013 4:45 pm Updated: Aug. 14, 2013 5:04 pm

Herald-Whig Senior Writer

A hearing scheduled for Wednesday in U.S. Bankruptcy Court in Delaware involving Mercantile Bancorp Inc. (MBI) has been continued to Aug. 5.

Bankruptcy Court Judge Kevin Carey was scheduled to consider bidding procedures for the proposed sale of Mercantile Bank of Quincy, a subsidiary of MBI. No reason for the delay was given.

Lee Keith, president and CEO for MBI, was traveling and not available for comment on the court case. Several members of MBI's board of directors could not be reached or declined comment.

United Community Bancorp of Chatham announced plans June 27 to buy Mercantile Bank for $22.3 million. As part of the sale, MBI filed for Chapter 11 bankruptcy and stated in court documents that "the liquidation of its remaining assets will maximize the value of MBI's estate for the benefit of its creditors."

HoldCo Advisors of New York, however, filed an objection July 1, claiming that the Mercantile sale "destroys value" that should be realized by MBI and the Federal Deposit Insurance Corp., the federal regulatory agency that insures bank deposits. HoldCo represents VM Financial Restructuring Consulting Co., a Delaware firm formed in January 2011 that holds stock in MBI.

HoldCo, in its filing, said the "transaction should be abandoned in its entirety" and that MBI "should instead explore alternative transaction structures that can maximize value for all interested parties."

HoldCo claims that when all factors are considered, MBI would receive no more than $5 million and perhaps nothing from the sale to UCB. HoldCo asks the court to refrain from moving forward with the sale process and instead allow MBI, HoldCo and other interested parties to explore alternatives.

A hearing on those objections also is scheduled for Aug. 5.

Attorney Brennan Ryan of Nelson Mullins law firm in Atlanta, Ga., who specializes in bankruptcy cases, said objections are filed in many bank bankruptcy cases. He said most are filed on behalf of shareholders who want to avoid investment losses.

MBI officials have confirmed that owners of the company's common stock will lose their investments under the deal offered by UCB, and some of MBI's largest lenders also will lose money.

UCB's current offer for Mercantile Bank is $22.3 million. The FDIC is seeking $16.6 million to cover expected losses from two former MBI subsidiary banks that were seized by the FDIC in July 2012. The remaining $5.7 million will go to pay a small portion of the "trust preferred securities," which total $76 million. There will be no assets remaining to pay holders of MBI common shares.

The bankruptcy process also will require that other potential buyers be given a second chance to bid on the bank, but banking experts say UCB is likely to remain the winning bidder.

Todd Wise, UCB's president and CEO, said the second round of bidding is just another part of the bankruptcy court and acquisition process.

"There is an auction process that takes place. The (bankruptcy) court opens it up for potentially interested parties to bid more than we have bid. That will happen in August" according to the current schedule, Wise said.

Ryan said it would be unusual for another bank to outbid UCB.

"Historically there are not a lot of bidders. They've probably already shopped the bank to everyone who might be interested in buying," Ryan said. "In the last few years I only know of one time they had a competitive bidder (in a similar bankruptcy case) and the stalking horse still won."

MBI is seeking a 363 bankruptcy sale. Under those procedures, it needed to establish a floor bid before it could file with the bankruptcy court. Officials from MBI and UCB confirmed the steps they followed in coming up with the June purchase offer.

º MBI sought interested bidders who had to sign nondisclosure agreements. Once bidders qualified, they were allowed into a "virtual data room" where Mercantile Bank's information was available for review on the Internet.

º Bidders who were still interested after reviewing the general information then had the chance to visit the bank to view other documents. Loan documents were among the most important records seen during bank visits. Then offers were sought.

Three of the four potential buyers who followed those procedures made bids and UCB was the highest. Once UCB's bid was received, MBI was able to file for bankruptcy and the initial agreement to proceed was approved by Carey.