The board of Columbia Banking System was confident of a relatively quick turnaround when it agreed to a $5.1 billion merger with rival Umpqua Holdings Corp. in October 2021, and with good reason: Just 11 days earlier, it had closed another — albeit smaller — deal for Bank of Commerce Holdings in less than four months.
Given $30 billion Umpqua’s size, “we expected it would be an eight- or nine-month process” to close the deal, says Clint Stein, Tacoma, Washington-based Columbia’s CEO. Instead, it took nearly 17 months: 505 days from start to finish.
The deal closed in March 2023, creating a $54 billion regional powerhouse with the scale to knock heads with the big guys in the northwest. Even so, Stein struggles to contain his frustration —aimed mostly at regulators — over the time it took to complete a deal between two healthy banks with strong capital positions and no outstanding regulatory issues.
“There was absolutely no logical reason for it to take that long to get approved,” he says now.
Not long ago, Columbia’s time spent in deal-closing purgatory would have been considered an aberration; today, longer gaps between announcement and closing are par for the course. An analysis by investment bank Janney Montgomery Scott found that the average closing timelines have increased 78% since 2012.
Wait times jumped sharply across all size levels in 2023. For example, the average sub-$100 million deal took 209 days to close in 2023 versus 167 days the year before, according to Janney. Transactions valued at more than $500 million averaged 347 days to complete last year, compared to 286 days in 2022.
Some pending deals could soon surpass the wait time of the Columbia-Umpqua merger. Provident Financial Services’ proposed $1.3 billion acquisition of rival Lakeland Bancorp was announced about 480 days ago; Washington Federal’s $654 million bid for Luther Burbank Corp. is approaching 440 days.
“Bankers are waiting longer and they’re getting frustrated,” says Warren Tryon, a partner with Capitol Counsel, a Washington, D.C. lobbying firm that is working with some bankers on draft legislation to speed the approval process and enhance regulator transparency.
“These banks have employees and customers and investors, and they’re left hanging for months on end waiting for answers,” Tryon adds. “They can’t be living their lives on hold like that.”
Why the Hold-Up?
There are several reasons for the growing gap. In 2021, President Biden issued an executive order calling on regulators to provide “more robust” scrutiny of banking deals over concerns that “excessive consolidation raises costs for consumers, restricts credit for small businesses, and harms low-income communities.”
Regulators have fallen in line. In a speech last June at the Brookings Institution, Jonathan Kanter, assistant attorney general for antitrust, said the Department of Justice was “modernizing its approach to investigating … competitive factors,” taking a microscope to post-deal concentration levels, the impact on fees, interest rates, branches, customer service and other tougher-to-measure factors “for different customer segments.”
Most agree that the Federal Deposit Insurance Corp. has been a sticking point — especially for larger deals where approvals are moved from regional offices to Washington. In Columbia’s case, the Federal Reserve Board, which typically is the last to approve deals, beat the FDIC to the punch by more than two months. An FDIC spokesperson declined to directly address the complaints.
Banking regulators have reportedly been fielding more comments from community activists during merger reviews on Community Reinvestment Act (CRA) compliance and redlining concerns. Sometimes, the reviews reveal potential Bank Secrecy Act (BSA) or other violations that demand further investigation. All of those add time.
Perhaps the biggest concerns center on safety and soundness. Capital levels are a regulatory priority and rapidly rising interest rates have left many banks with relatively shaky balance sheets. In the wake of the March 2023 failures of three regional banks, agencies are under pressure to avoid mistakes.
Attorneys and investment bankers say they are seeing deeper scrutiny of post-deal capital positions and loan portfolios, which can extend the process. “There’s a lot of concern around pro forma liquidity, capital ratios, interest-rate risk, credit quality,” says Kirk Hovde, managing principal at Hovde Group, an investment bank. “Regulators want to be sure they’re comfortable with the buyer’s positioning post-deal so they’re not creating another problem.”
Other factors are at play, as well. More small banks are being acquired by credit unions or private investors, inviting additional scrutiny. If a group of investors wants to buy a bank, “it almost requires two approvals: One for the buyers and another for the transaction,” says Scott Brown, a partner at Luse Gorman, PC, a law firm. “That adds time to the process.”
Nonregulatory factors can also extend closing times. For example, buyers will sometimes purposely extend closing times to align with systems conversions. “[Buyers] like to close the deal and do the conversion simultaneously” and will delay the deal’s completion to make it happen, Hovde says.
The Impact of Longer Closing Times
No matter the cause, longer closing times can cause operational and strategic headaches. In the current rate environment, deal values can change significantly with time. Sometimes, “the marks look so different that they change the capital ratios for the pro forma company,” explains Frank Schiraldi, an analyst with Piper Sandler & Co.
Some banks, worried about being sidelined by lengthy closing schedules, are getting more selective about choosing partners. “If a more attractive target comes along and you’re ensnared in a long approval process, you probably won’t be able to act on it,” Schiraldi explains.
It also can be harder to keep investors, customers and employees happy when months go by with no progress on a deal. At Columbia, Stein says the added time and lack of regulator transparency about his deal’s progress “put stress and strain on every person in the organization.”
Umpqua and Columbia continued to operate separately, competing against each other until the deal closed — even as plans went forward for the combined company. That meant keeping some people on who wouldn’t have jobs with the new company and coercing others to delay retirements. “The frustration lies in the economic, human and organizational toll it takes,” Stein says.
Picking up the Pace
Tryon’s Capitol Counsel is crafting legislation that would attempt to accelerate regulatory approval timelines and enhance transparency. And the FDIC, which has been dealing with leadership changes and its own in-house challenges, recently added two new directors to its board, including Jonathan McKernan, who heard out Stein on his grievances and appeared sympathetic.
In a January speech, McKernan said he was “struck” by the length of some merger approval timelines, adding: “We have an obligation to consider these applications in good faith.”
Whether any of that goes anywhere remains to be seen. Can a bank do anything itself to speed-up the closing process?
Larry Spaccasi, a Luse Gorman partner suggests being proactive: Clean up outstanding BSA, CRA or other matters requiring attention, and address compensation, vendor contracts and other potential sticking points before entering a deal.
Communicating in advance with regulators doesn’t hurt, either. “We like our buyers to approach their regulators with a business plan before the deal,” Spaccasi says. They’ll usually give you “appropriate body language” to indicate their opinions.
Stein says he’ll structure future merger agreements to make closing deadlines easier to extend — but will likely wait to see if the process improves. “With the kind of uncertainty we endured, I’d be hesitant to do another deal without some change.”