The trend toward community, regional bank, and credit union consolidation in the United States is showing no signs of stopping in 2018. While bank M&A activity only grows, closing risk in the current regulatory environment should stay a top-of-mind issue for institutions mulling potential M&A transactions. For institutions looking to enter the bank M&A fray, a proactive strategy for managing regulatory risk will be key to successfully executing transactions. We’ve identified three areas of regulatory risk that must be managed by both buyers and sellers and best practices to set you up for more productive and expedient regulatory approvals.
Even though bank M&A activity remains high, significant delays in transaction closings due to regulatory concerns remains a persistent hindrance for those mid-transaction and even those considering diving into a transaction. In 2017, The Fed took an average of 54 days to approve a deal and that number rocketed to 190 days if the deal received adverse public feedback. What’s more chilling for potential buyers and sellers, delays can often stretch into years if a buyer has compliance issues. Notably, it took M&T Bank (MTB.N) more than three years to complete its 2015 acquisition of Hudson City Bancorp after the Fed found problems with M&T’s compliance systems.
Cases like this have left a lasting impression in the minds of many bank executives where perceptions of the regulatory climate remain a significant hindrance to pursuing new deals. Both buyers and sellers are concerned about “hanging out there in the market” for prolonged periods of time due to difficulties in obtaining regulatory approvals, which create potential for franchise disruption and instability, as well as openings for market/shareholder criticism. As a result, potential sellers are requiring a more comprehensive understanding of the buyer’s regulatory standing in earlier stages of transaction discussions, while buyers considering an acquisition are seeking greater comfort from regulators prior to any deal announcement regarding the prospects for timely transaction approval.
Understanding and managing regulatory risk will remain a dominant theme for bank M&A in 2018. From our experience, we’ve identified three areas of regulatory risk that must be managed in order to protect transactions:
Pre-Announcement Regulatory Strategy and Planning
Pre-announcement discussions with regulators are a must to increase the transactions odds of closing without unanticipated delays. Yet, this requires balancing the risks of meeting with regulators too early in the process and having enough facts, plans, data, and forecasts to properly respond to regulator questions. Beginning the conversation too late often means potential costs and delays in transaction timing. Be prepared and truly understand what the transaction entails. Develop an honest assessment of execution and document the assessment through playbooks and consistent dialog with your regulators.
In our experience, another best practice is for buyers to complete reverse due diligence on itself to identify areas that post operational and technical regulatory risk. In fact, we are seeing this becoming a top priority of seller boards from the outset of transaction discussions. The reverse due diligence doesn’t need to yield a completely clean report, but acknowledgement and plans to address any identified risks should be made available to sellers and regulators. Of course, this approach is predicated on having a relationship in good standing with regulators, as well as comfort in sharing information with the seller that may come sooner than a buyer anticipates.
Regulatory Risk Management
Assuming a deal is struck, infrastructure must be in place to manage detailed plans for the legal close and operations integration in order to meet the buyer’s obligation to obtain regulatory approvals. This is of keen interest to regulators throughout the process and should be expected to be a part of any regularly scheduled exams for both the buying and selling institutions. To expedite those conversations and, ultimately, deal approval, establish the integration infrastructure to develop these plans, identify risks and mitigation plans. These steps can form the backdrop for post-announcement deal dynamics in the event regulatory concerns or issues arise while the deal is pending. As deal risk-allocation (regulatory delay fees, reverse termination fess, etc.) provisions become more prevalent in contracts having these best practices in place will ultimately save time and money.
While bank M&A activity shows no signs of stopping, many executives, both buyers and sellers, are balancing the benefits of new transactions with the needs of the current regulatory environment. While that current environment may be favorable to M&A and asset growth, change is always a constant in this area. Managing regulatory risks in these three key areas though can set institutions up for a more predictable and simpler regulatory approval process. Predictability of transaction execution is a premium for all stakeholders; customers, employees, communities, shareholders, and regulators that will open the door for future transactions and continued growth.