Bank M&A: Where are we on bank merger regulatory approval?

Regulatory approval is managed by the buyer.

If an application is “informationally complete,” it is supposed to be approved 91 days after filing by statute.

The process could be delayed by information requests from the regulators pushing the “informationally complete” clock.

Fortunately, in our transaction, both banks were very clean, our market was adequately served, and the approval was within the time window.

If the combined assets of both banks are below $10 billion, and you are well-capitalized with strong asset quality, you likely will experience the same.

At the time of this writing, there have been conversations about updating the way bank mergers are assessed in terms of competition in serving communities and on financial stability.

Again, this generally applies when assets of one of the two banks exceed $10 billion or that level is going to be exceeded with the combined banks.

Regulators are operating from rules last updated in 1995, based on 1960s era standards.

Much has changed since 1995 in terms of access to financial products and services with the growth in online and mobile banking and the rise of non-bank competitors.

M&A in rural communities have been especially impacted by the advanced growth of non-bank competition from credit unions, fintech’s, credit card companies, and the U.S. Department of Agriculture’s Farm Credit.

Farm Credit takes a rural bank’s primary opportunity away from the community bank by way of real estate lending.

When you think about a rural bank’s biggest opportunity to make a loan, it is on real estate.

That opportunity is primarily with a farmer or rancher and the real estate owned to support their livelihood.

Financing real estate for a farmer or rancher is a substantial expense and any savings they can get on interest rates has a meaningful impact.

As a government agency and not subject to taxation, Farm Credit is able to loan money out at rates well below what a tax-paying bank can offer (but they typically do not offer the money at rates to the full extent of the tax benefit, usually just enough to win the deal).

In a step further, Farm Credit often wraps in the production loans by cross-collateralizing them with the real estate, further eroding the community bank’s ability to offer production lending.

Consumer lending faces intense competition for rural banks as well.

Mortgages from online mortgage lenders, auto loans from online lenders, auto dealers and manufacturers leave little behind to assure the survival of the community bank.

Farm Credit, online mortgage lenders, online consumer lenders and automobile manufacturers employ relatively few, and in most cases, no one in those rural communities.

Community banks need economies of scale to continue to exist.

There is a certain level of fixed cost in running the bank.

Accounting, human resources (HR), IT, loan operations, deposit operations and regulatory compliance functions are a big part of that.

Regulatory and HR compliance are increasingly becoming more expensive.

When one bank buys another, the result is that one set of each of these functions stays and the other goes away, along with the expense associated with it.

Not all, but most.

That’s the scale I’m talking about.

Increased regulation has a cost.

The old methods of competition calculation are no longer effective predictors of competition.

Saying there aren’t enough banks in a particular geographic area is no longer an accurate way to measure competition.

The internet has changed that.

Regulators have changed that.

Non-bank providers have entered where banks have exited because it is too costly to provide some services.

They, too, need modernization to consider the competition coming from government agencies, such as Farm Credit and other non-bank lenders.

Federal Reserve Board Governor Michelle “Miki” Bowman filled the long-vacated community bank seat at the Federal Reserve in 2018.

It should be noted that the seat sat vacant during the financial crisis and the subsequent Dodd-Frank legislation.

The seat sat vacant for 12 years prior to Governor Bowman’s appointment.

Community banks were missing that voice.

Governor Bowman served as the Kansas banking commissioner and served as vice president of Farmers and Drovers Bank in Council Grove, Kansas, which her family helped establish.

Governor Bowman is aware that competition is at the foundation of our financial and economic system and is leading efforts to modernize the regulators’ approach to competitive analysis.

She, as well as community bankers, their elected officials and trade associations need to help make her voice heard and support her in her efforts.

I provide this context in the event the issue of competitive concerns arises.

Nobody wants to publicly announce they have a deal only to have the deal die when seeking regulatory approval.

Once the buyer has received regulatory approval, share the news with your employees, customers, and shareholders.

Leverage it.

It seems like this doesn’t need to be pointed out.

But too often those directly involved in the process feel a big sense of relief and can overlook the significance of the message and miss an opportunity to reinforce the positives of the merger.

Action Plan:

• Where would your bank fit in regarding regulatory approval?
  • Are you greater than $10 billion in assets?
  • Is a potential buyer (think 5x to 7x your size) greater than $10 billion in assets?
  • Are the combined banks more than $10 billion in assets?

Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• Define your message so it can be communicated with confidence.

This is how savvy bankers navigate.

They build smart and valuable banks and choose the best time to sell – serving the needs of the shareholders and the board.

I hope you found this short lesson helpful.

What are your thoughts?

I’ll see you next week.