Community banks can help ensure a speedy merger approval process if they dot their i's and cross their t's when it comes to compliance.
An increasing number of US bank deals of all sizes have faced prolonged closing timelines over the past two years as regulators have taken a harder look at M&A applications and community group protests have gained momentum. At S&P Global Market Intelligence's 2023 Community Bankers Conference, industry experts, including current regulators, provided insight on how banks can ensure a smooth and efficient merger application process.
Often, it is compliance issues that hold up a deal and not financial issues, such as pro forma capital or other metrics.
"I generally haven't seen problems except for usually it's on the compliance side of the shop because banks have a pretty good understanding of their own financial side and the target's," said John Geiringer, a partner in the Financial Institutions Group at Barack Ferrazzano Kirschbaum & Nagelberg LLP. "But when you get to compliance, there's a little bit of knowledge gap that I think needs to be rectified."
Specifically, weaknesses in the Bank Secrecy Act or anti-money laundering practices and fair lending and the Community Reinvestment Act (CRA) can easily hold up a deal, said Rafael Valle, the Federal Deposit Insurance Corp.'s assistant regional director of the division of depositor and consumer protection for Arkansas, Colorado, the western part of Texas, New Mexico and Oklahoma.
"The last thing we want to do is approve a bank, or holding company merger where there might be weaknesses in the applicant, a problem bank or holding company, and it's just going to create a bigger problem for somebody to resolve," said Colette Fried, the assistant vice president of banking supervision and regulation for the Federal Reserve Bank of Chicago.
How to 'expedite the process'
Ensuring both institutions' compliance practices are strong prior to filing a merger application can lead to a timely approval, the experts said.
Often, many banks do not spend enough time looking at components like fair lending, CRA, Unfair, Deceptive, or Abusive Acts or Practices, or Home Mortgage Disclosure Act data when evaluating the merger partner, and then issues at the buyer or seller unknowingly arise in the application process.
The acquirer should do its due diligence, and the target should do reverse due diligence because "sometimes, you don't know until you're in the middle of an exam process," Geiringer said.
"It's important to be proactive with regulators about knowing where the hotspots are," Geiringer added. "Those can be explained away unless they are extreme. The extreme ones will frequently elongate the deal and create issues."
At a time when community group protests of mergers are on the rise, performing thorough due diligence of fair lending and CRA compliance is more important than ever. In the past 12 months, Valle has seen 20 public protests to mergers related to CRA, compared to just three in the 12 years prior, he said.
"One thing that will slow down application for a branch or a merger is a CRA protest," Valle said. "So if you are properly managing fair lending risk and CRA, that helps expedite the process."
Engaging with community groups and having friendly relations with them is another way to ensure an M&A application does not experience any hurdles.
"Being proactive if you are an acquirer in meeting those community groups where they are and knowing what their concerns are so that when you do file an M&A application, they're going to be your supporter or not your detractor when it comes to this comment period," Geiringer said.