Are Regulatory Delays Overblown?

Nicolet Bankshares bought three banks during the last two years that doubled the size of the now $8.8 billion Green Bay, Wisconsin-based banking company. How hard was it to get regulatory approval? Well, if you ask CEO Mike Daniels, it was a breeze.

Despite all the talk of the tough regulatory environment for deal-making, not all banks experience problems, let alone delays. Nicolet’s latest acquisition, the purchase of $1.1 billion Charter Bankshares in Eau Claire, Wisconsin, took all of five months from announcement to conversion, including core conversion and changing branch signage.

“I hear deals are getting delayed, and you never know what the reason is,” says Daniels, who is speaking about mergers and acquisitions as part of a panel at Bank Director’s Acquire or Be Acquired conference in Phoenix this week. He attributes Nicolet’s ease of deal-making to lots of experience with conversions, good communications with its primary regulator, the Office of the Comptroller of the Currency, and an “outstanding” Community Reinvestment Act score. “We spend a lot of time with our primary regulator, the OCC, so they know what we’re thinking about,” he says. “We’re having those conversations before [deals] are announced.”

Are regulators taking longer to approve deals? “I’m in the mid-sized and smaller deal [market], and I’m not seeing that,” says Gary Bronstein, a partner in the law firm Kilpatrick Townsend in Washington, D.C. In fact, an S&P Global Market Intelligence analysis of all whole bank deals through August of 2022 found that the median time from announcement to close was 141 days from 2016 to 2019, ticking up to 145 days from 2020 through Aug. 22, 2022.

Attorneys say regulators are scrutinizing some bank M&A deals more than others, particularly for large banks. The median time to deal close for consolidating banks with less than $5 billion in combined assets was 136 days during the 2020-22 time period, compared to a median 168 days for consolidated banks with $10 billion to $100 billion in assets, according to S&P. Bronstein says in part, there’s pressure from Washington politicians to scrutinize such deals more carefully, including from U.S. Sen. Elizabeth Warren, D-Mass., who has tweeted that the growing size of the biggest banks is “putting our entire financial system at risk.” The biggest deals, exceeding $100 billion in assets, took 198 days to close in 2020-22.

President Joe Biden issued an executive order in June 2021 directing agencies to crack down on industry consolidation across the economy, including in banking, under the theory that consolidation and branch closures raise costs for consumers and small businesses, and harm access to credit.

Regulatory agencies haven’t proposed any specific rules yet, says Rob Azarow, a partner at the law firm Arnold & Porter, in part because Biden has been slow to nominate and then get Senate approval for permanent appointments to the heads of agencies.

Regulators scrutinize larger deals, especially deals creating institutions above $100 billion in assets, because of their heightened risk profiles. “It does take time to swallow those deals and to have regulators happy that you’ve done all the right things on integration and risk management,” Azarow says.

Smaller, plain vanilla transactions are less likely to draw as much scrutiny, says Abdul Mitha, a partner at the law firm Barack Ferrazzano Kirschbaum & Nagelberg in Chicago. Some issues will raise more concerns, however. Regulators are interested in the backgrounds of investor groups that want to buy banks, especially if they have a background in crypto or digital assets. Regulators are also looking for compliance weaknesses such as consumer complaints, fair lending problems or asset quality issues, so buyers will have to be thorough in their due diligence. “Regulators have asked for due diligence memos,” Mitha says. “They’re deep diving into due diligence more recently due to factors such as the economic environment.”

Bronstein concurs that regulators are asking more questions about fair lending in deals. The Consumer Financial Protection Bureau, which regulates banks above $10 billion in assets, is very much focused on consumer regulation and underserved communities, Bronstein says. So is the OCC and Federal Deposit Insurance Corp., which have traditionally focused on safety and soundness issues. They still do that as well, but fair lending has become a hot topic.

In the fall of 2022, the Fed signed off on a merger between two Texas banks, $6.7 billion Allegiance Bancshares and $4.3 billion CBTX, noting that the FDIC required the two institutions to come up with a plan to increase mortgage applications and lending to African American communities.

Still, the regulatory environment isn’t a major factor pulling down deal volume, the attorneys agreed. The economic environment, buyers’ worries about credit quality and low bank valuations have far greater impact. Buyers’ stock prices took a tumble in 2022, which makes it harder to come up with the currency to make a successful acquisition. Also, with bond prices falling, the FDIC reported that banks in aggregate took almost $690 billion in unrealized losses in their securities portfolio in the third quarter of 2022, which impacts tangible book values. Banks are wary of selling when they don’t think credit marks reflect the true value of their franchise, says Piper Sandler & Co.’s Mark Fitzgibbon, the head of financial institutions research.

An analysis by Piper Sandler & Co. shows deal volume dropped off a cliff in 2022, with 169 bank M&A transactions, compared to 205 the year before. But as a percentage of all banks, the drop looks less dramatic. The banks that sold or merged last year equated to 3.6% of total FDIC-insured institutions, close to the 15-year average of 3.4%.

“I would expect M&A activity to look more like 2022 in 2023, maybe a little lower if we were to go into a hard recession,” Fitzgibbon says. “You’d expect to see a lot of activity when we were coming out of that downturn.”