Fed Slows First Union Bid for CoreStates

The Federal Reserve Board, in a rare move, extended the public comment period on First Union Corp.’s proposal to purchase CoreStates Financial Corp. until the bank submits plans for lending to low- and middle-income areas.

The Fed, in a brief statement, said First Union has yet to submit a plan to comply with the Community Reinvestment Act, a law intended to prevent discrimination in lending to low-income neighborhoods and minority groups.

“First Union indicated it would submit the plan, but to date no plan has been submitted,” the Fed said. “The public comment period will close 14 calendar days after First Union submits the plan to the board.”

The extension could delay plans by First Union, the sixth-largest U.S. bank, to acquire Philadelphia-based CoreStates for $16.1 billion, in the biggest bank takeover ever.

Charlotte, N.C.-based First Union told investors it would cut 45% of CoreStates’ annual expenses, or about $459 million, by closing branches and eliminating back-office jobs.

In response, dozens of community groups and a broad slate of local, state and national politicians criticized the transaction and held protests in Philadelphia. On Feb. 13, an alliance of community groups asked the Fed to block the purchase.

A First Union spokeswoman declined to comment on the extension. “We’ll have our community reinvestment plan in the very near future. We’re meeting with community groups and we’re very close,” said Mary Eschet.

The bank still expects to complete the transaction by April 30, she said.

While it’s unlikely the merger would be delayed, First Union’s name has suffered in the Philadelphia area. The plan to buy CoreStates has drawn opposition from Pennsylvania’s Republican senators, Arlen Specter and Rick Santorum, 10 members of the U.S. House of Representatives and Philadelphia officials as well as dozens of community groups.

“This merger has now surpassed Wells Fargo-First Interstate in terms of outcry from public officials and sets a new record in community reaction,” said Kenneth Thomas, a lecturer in finance at the University of Pennsylvania’s Wharton School and an expert in bank antitrust issues.

The groups say First Union has a weak record of lending to people in poor neighborhoods and that large-scale branch closings would hurt the region’s economy.

“This has been a major embarrassment for First Union. This could become its Waterloo,” Thomas said. “Never before have I seen such political pressure brought on the Fed.”

First Union shares rose $1.50 to close at $52.31 on the New York Stock Exchange on Monday.