How Regulators Have Changed the Bank M&A Market

by Jack Milligan

A lot of the talk at the 2015 Acquire or Be Acquired conference has been about the strong impact that the federal bank regulatory agencies continue to have on the mergers and acquisitions market. The regulators became a lot tougher pretty much across the board after the financial crisis, which probably isn’t surprising under the circumstances since lax supervision was often cited as one of the causes of the crisis in the first place. In an interview I did recently for Bank Director magazine, Camden Fine, president of the Independent Community Bankers of America, told me that safety and soundness examinations in most areas of the country have become a little less strenuous for banks, which makes sense since the industry has now largely recovered.

The regulators are also approving acquisitions at a faster pace than they had been a few years ago, but they are still taking an approach that has no precedent in my 30-plus years of experience covering the banking and financial services industry. Only clean banks with an excellent regulatory compliance record can reasonable expect that their merger application with whatever federal banking agency serves as their prudential supervisor will be approved without any complications. The regulators are paying especially close attention to any deficiencies in an institution’s Bank Secrecy Act compliance program, but it’s safe to assume that any major regulatory violation will require remediation before the bank involved will be allowed to do an acquisition. This applies to sellers as well as buyers, since a seller with a significant problem might find that the agencies won’t allow any potential acquirers to bid for them. As one speaker put it today, they don’t want the problem bank poisoning the healthy bank.

But even clean banks need to take the extra step of communicating their M&A intentions to their primary regulator and maintaining a steady dialogue about their plans. This includes any new markets and potential merger partners the bank has identified, as well as any changes to the bank’s business plan from a possible acquisition. If it’s a transformational deal that would significantly increase the bank’s size or take it into new business lines, the regulators will want to make sure that the current management team is capable of handling those challenges.

There was a time when banks were reluctant to communicate their acquisition plans to their regulators because they didn’t consider them trustworthy enough not to leek the news to the outside world. But it’s now a fact of life that the regulators expect full disclosure of a bank’s M&A plans, and there’s really no other choice but to bring them inside the tent.

Ciao from the desert.