October 15, 2022 / VOLUME NO. 231

Planting Seeds in Hard Ground

Following a bounce back last year, 2022 has proven to be anemic for bank M&A. Just 130 deals were announced through Oct. 12, compared to 206 in 2021 and 255 in 2019, according to data from S&P Global Market Intelligence. (Deals totaled just 112 in 2020, during the onset of the pandemic.) The majority of this year’s deals were announced in the first quarter. Losses in bank security portfolios during the second quarter, along with growing economic uncertainty, have wreaked havoc on bank valuations. 

But the regulatory environment shouldn’t be overlooked and promises to continue to pressure bank M&A through 2023. 

Cliff Stanford, a partner at Alston & Bird LLP, points to two key regulatory obstacles for prospective acquirers. First, federal regulators have been working to fine-tune the Community Reinvestment Act for the modern era, and CRA issues are coming up more frequently in merger applications. “CRA is an important criterion for getting a deal done,” says Stanford, who says regulators are increasingly asking banks to describe how the needs of the community will be better served post-transaction. The FDIC’s recent approval of a merger between two Texas banks, CBTX and Allegiance Bancshares, stipulated that the combined entity submit a plan to increase mortgage lending to African Americans. On top of that, S&P reports an uptick in community benefits agreements, which can include commitments for lending to underserved areas and community investments.

Stanford also notes more attention on competitive effects following a 2021 executive order from President Joe Biden’s administration that raises concerns about the adverse impact of consolidation across several sectors, including banks. The order asked the prudential regulators to craft guidance to “provide more robust scrutiny of mergers.” Although regulators haven’t published such guidance yet, clarity is needed. Much like the CRA, the methodology used to assess the competitive effects of a bank merger aren’t up to snuff for the digital economy, says Stanford. “It doesn't reflect banking as it's done today.” Acquirers should be thoughtful about addressing these questions from regulators, as well.

But despite shifting winds in Washington, Stanford stresses that deals are getting done, and some are getting done quickly. The common thread on these? They’re plain-vanilla deals that aren’t raising red flags around competitive or community impact. 

“In terms of the regulatory dialogue, the banks that are good at this can get deals done,” he says. He advises clients to meet with their regulators annually to explain their strategy; they should also demonstrate a track record for execution, including integration, if they have one. “When they do drop that application with their regulator,” says Stanford, “they've already planted seeds [for] their success.”

Emily McCormick, vice president of research for Bank Director

What to Consider as Regulators Scrutinize Bank-Fintech Partnerships

Software has made it easier for community banks to add banking as a service, but the head of the OCC is worried about the increasing risk and complexity that the business line carries.

“[Hsu] understands what’s happening in the digital world, but he’s ringing a bell, saying ‘Let’s not walk into this blindly.’ It’s quite clear that [the OCC] is going to be doing a deep dive in examinations on fintech partnerships.” — Meg Tahyar, co-head of Davis Polk’s financial institutions practice 

• Kiah Lau Haslett, managing editor of Bank Director

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