Regulatory “Chops” – You’ll need them to buy a bank in this environment

Your company is in the market to buy a bank and may have settled on a prospect.  As the executive in charge of the project you are considering how best to build and fully staff your M&A team to proceed with the purchase.  Simply put, the purpose of this article is to demonstrate the importance of bringing on board to your team professionals with what I call “regulatory chops.”  These are highly experienced banking professionals, sensitive to the complexities of the current regulatory environment, who can assist with your due diligence efforts and help pave the way to a successful negotiation, regulatory approval process and ultimate transition and integration.

Regulatory Environment

With that in mind let’s first step back and consider both the industry and current atmosphere in which you seek to execute a successful acquisition.  Regardless of how highly skilled an acquirer that you are – or are not – you need to always appreciate that you are buying an asset in one of the most highly regulated industries in the world. For illustrative purposes let’s quickly run through some of the sanctioning bodies and apparatus that you will need to consider as you navigate the regulatory landscape of the financial services industry. Depending on charter type, geographic locale and certain lines of business you could be regulated by any, or possibly all, of the following:

  • Federal Reserve
  • Office of Comptroller of the Currency
  • Federal Deposit Insurance Corporation
  • Consumer Financial Protection Bureau
  • State Banking and Insurance Departments
  • Securities Exchange Commission
  • Federal Trade Commission
  • Department of Labor
  • Financial Industry Regulatory Authority
  • Others

And, for those of us who have toiled these past several years in the post-2008 regulatory environment, let me state unequivocally that it has not at all been a friendly or forgiving environment!  To the contrary, the combination of continuing congressional ire and public outcry have left the banking regulators (and, of course, the industry) squarely under the glare of hot lights – and lead to the earlier passage of the landmark, albeit deeply flawed, Dodd-Frank legislation.

What has this meant for the banking industry?  And for the institution you are seeking to acquire?

  • Difficulties in raising capital and/or restructuring balance sheets (consider the TruPS dilemma for small banks)
  • Stalled or stillborn attempts at M&A, line of business or other expansion efforts
  • Regulatory examinations with heavy emphasis on Compliance, Risk Management, BSA/AML, Fair Lending, etc
  • Extensive (and expensive) hiring during a down economy of non-revenue producing staff in Compliance, Risk Management and related staff disciplines
  • Issuance of numerous Regulatory Orders, Written Agreements, MOUs and other directives restricting bank operations until satisfactory remediation is attained
  • Postponement or cancellation of negotiated mergers due to surprise regulatory issues raised during the application process (consider M&T Bank/Hudson United and the 3-year merger delay)
  • Difficulties in attracting and retaining talented board members
  • For publicly traded banks, low and stagnant stock prices due to restrictions on dividend payouts and the market-perceived need to raise capital

Now, consider at the same time the recent actions by the OCC in proposing the issuance of limited purpose national bank charters for FinTech companies (See OCC Proposal of 12/2/16).  As stated in the Proposal, the Agency’s intent is to further evolve the industry as technology changes the manner in which banks will deliver products and services.   With that said, from an industry perspective it would appear also to further enhance competition in an already overcrowded marketplace.

Finally, as this article is being written industry prognosticators are feverishly reading tea leaves for indications of what the Trump Presidency will mean for the financial industry beyond some measure of regulatory relief.  Admittedly, there are some easy guesses: (i) Dodd-Frank will be refashioned in some unknown manner; (ii) Fannie Mae and Freddie Mac could transition to the private sector with very different missions, and (iii) the Volcker Rule may stand to exist in name only.  The question for both you and your advisors to ponder, however, is how the new political reality might change the M&A landscape both in large and small ways – and affect the execution of your deal?

Due Diligence

Let’s spend a few minutes on the importance of due diligence before getting into particulars.

To state the obvious, you have numerous constituencies to satisfy as your acquisition is being pursued. The importance of shareholder satisfaction, regardless of whether your company is public or private, is certainly a foremost consideration. Likewise, it is essential that you prove to your Board that your team can successfully navigate the roiled M&A waters.  In this regard, you particularly need to satisfy your regulators as to both the quantity and quality of your due diligence efforts.  The regulator’s job may not exist to question strategy – but it certainly exists to question your ability to execute. And remember, that regulatory scrutiny will apply to all stages of the acquisition – application, integration and future operations.

What does a successful Due Diligence do for you?

  • Value-add to your pricing calculus – should lead to appropriate adjustments
  • Avoid harmful surprises – both in the market and on the regulatory front
  • Introduce the “players” at Target – use it for talent evaluation, a valuable side benefit
  • Helpful to Transition – create the beginnings of an Integration Roadmap
  • Help assure regulatory approvals – consider and deal proactively with regulatory issues

The Due Diligence Team

At the risk of repeating what can be found in numerous articles written on this subject a representative team should look like the following:

  • Management – representatives from the Executive ranks as well as lines of business and key staff functions are essential. These employees should be freed up somewhat from their “day jobs” so that they can dedicate the requisite time and effort.
  • Investment Bankers – will have most likely completed the bulk of their assignment by this point but still quite valuable during the diligence period
  • Legal team – both outside and internal lawyers are essential to the review
  • Other Advisors – this is where you round out your team with consultants, accountants and other professionals, who will both augment management resources and conduct stand-alone diligence, as necessary

At the outset of this article I briefly stressed the importance of hiring advisors with what I call “regulatory chops.”  Allow me to elaborate as follows.

M&A can be complex and difficult work, certainly not the place for novice participants. There is no question of the importance of including your key internal players and lawyers on your team.  They will bring all sorts of value as they evaluate everything from corporate documents, to contracts, credit, operations and technology.  But can they bring you the sort of essential regulatory review that is crucial to truly assessing and understanding the overall risk profile of the target bank – and that is mandated by both the marketplace and skeptical regulators?  What you need is a team of industry professionals that can meet the challenge brought by banking regulators who increasingly go beyond legal due diligence requirements to dive deeply into financial and operational risk, management capacity and sometimes even business judgment.

Strategic Risk Associates, LLC (“SRA”)

SRA can bring to your team professionals with considerable public regulatory as well as banking industry experience.  SRA teams include former bank examiners and supervisors, M&A professionals and former C-Suite executives with dozens of years of financial industry experience – a valuable mix that can provide keen insight as well as an invaluable perspective to your due diligence efforts.  In short, they have “regulatory chops.”

What do these folks bring to the table that differentiates them from your other team members?  As you are likely aware many regulatory directives and examinations are both highly confidential and proprietary to the issuing agency — and are not to be shared with 3rd parties.  You may find limited disclosure in a public company’s filings if any such directive is deemed material to operations and thus mandated by the securities laws.  However, the resulting disclosure might only scratch the surface in telling the story of the regulatory action.  And for those directives that do not require disclosure there may be scant evidence in the documents being reviewed that speak to their origins.

When SRA professionals conduct due diligence, they are on the lookout for telltale signs of “regulatory fingerprints,” both past and present.  For instance, there may be discussions in minutes of certain “remediation” efforts – or the evident existence of such continuing efforts.  Likewise, there may be evidence of aborted expansion efforts (i.e., branching, acquisitions, new lines of business, etc.), followed by extraordinary management attention to BSA/AML matters, a current hot button.  Among other things, SRA professionals look for evidence of unscheduled board visits by senior regulators; interview executives who take on “special projects” that occupy inordinate amounts of time; look for evidence of credit write-downs following the normal (or extraordinary) regulatory examination cycles; look carefully at Management Letters for evidence of auditor unease with regulatory matters; and, will scrutinize heavy expenditures for outside consultants.  They also dig hard into the less than glamorous world of governance and policies (i.e.  compliance, credit, enterprise risk management). When and why did certain policies evolve?  Are there missing policies? Have any policies been amended or are in the process thereof?  Is there evidence that these policies have been blessed by the regulators? And, most importantly, are these policies being followed?  In short, this is a “regulatory-focused” team highly attuned to those matters that could unduly delay your acquisition and place your deal (and perhaps your bank) squarely under the unforgiving eye of the regulator’s microscope.

As you might expect, SRA professionals remain “connected” to other industry insiders and can recognize the need to pivot quickly when industry events turn regulatory attention in entirely new directions.  For instance, the ongoing Wells Fargo matter will likely result in extensive industry examination of incentive compensation practices for sales personnel.  And, finally, consider the value of having highly experienced banking professionals readily available to you, if so desired, to assist with the preparation of regulatory applications and to help construct your business plan.

Let me leave you with one final thought.  Some time ago I worked under a Chief Executive, a renowned serial acquirer, who after poring over his team’s diligence results was known to reject more deals than he pursued.  He constantly admonished his M&A team at the outset of a potential deal to be aware that “bad acquirers get acquired.”  At a minimum that suggests that a successful diligence and merger will enable your institution to live another day.  I’ve talked at length in this article as to how present day M&A has been made that much more complex given the supercharged political atmosphere and regulatory scrutiny.  It is my considered advice that you best serve your institution and yourself well by retaining banking professionals with “regulatory chops” to round out your team and help navigate this new regime.


Stephen J. Antal (“Steve”) is an accomplished legal executive with over 35 years experience advising financial institutions in roles ranging from Law Firm Partner, General Counsel, Special Advisor and C-Suite Executive positions.  A primary career focus has been financial institution M&A, having successfully executed in excess of 40 transactions.  Steve has also been recruited at times to step into advisory roles with banks experiencing debilitating regulatory and market challenges.

Mr. Antal has authored a number of articles, lectured extensively on industry matters and taught M&A as an adjunct professor at the MBA level.  He has collaborated with SRA on client assignments and anticipates that he will be a regular contributor to the SRA Website.