Bankers nationwide worry that regulators have significantly raised the bar for merger-and-acquisition approvals after regulatory snags caused back-to-back delays in BancorpSouth’s acquisitions of banks in Louisiana and Texas.
The Wall Street Journal noted in its MoneyBeat column July 1 that while the two deals are relatively small, “the delay is notable because it may play into bankers’ concerns that deals among banks face higher regulatory hurdles than before the financial crisis.”
Such concerns have put a damper on bank M&A, experts told The Wall Street Journal.
One likely reason for the new level of scrutiny on bank mergers and acquisitions is the arrival on the scene of the U.S. Consumer Financial Protection Bureau, a post banking-crisis watchdog agency created by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The $13.6 billion BancorpSouth said last year that regulatory concerns over its Bank Secrecy Act compliance and anti-money laundering program contributed to delays in regulatory approval of its acquisitions of Ouachita Bancshares Corp. of Monroe, La., and Central Community Corp. of Temple, Tex. Another contributor: The Consumer Financial Protection Bureau (CFPB), which raised concerns over BancorpSouth’s fair lending practices.
The agency is not part of the formal approval process, but the Federal Reserve wants assurances the CFPB is satisfied with BancorpSouth’s compliance with the Fair Lending Act, analysts say.
Analyst Kevin Fitzsimmons of the Hovde Group said so far very little dialogue has occurred between the CFPB and BancorpSouth – only letters between lawyers. This, Fitzsimmons said, “understandably seemed to frustrate management in its desire to expedite the resolution of the matter,” he said in a June 30 report.
Approvals must also come from the Mississippi Department of Banking and the FDIC, though analysts note neither has indicated reluctance to approve the acquisitions of Ouachita Bancshares, parent of Ouachita Independent Bank, and Central Community Corp., parent of parent of First State Bank of Temple. Ouachita Independent Bank has 13 locations in Central Louisiana and First State Bank 31 locations in Central Texas.
Analysts estimate postponing of the acquisitions will cut BancorpSouth’s earnings per share for the year by 3 cents and tie up money allocated for uying the banks. What’s more, strengthening Bank Secrecy Act compliance has cost the bank a reported $3.1 million.
But the good news, analyst Catherine Mealor of Keefe, Bruyette & Woods said, “is that this announcement extends the exclusivity agreement with BXS (BancorpSouth) and Ouachita and Central Community, so now the company has another six months to hopefully resolve any issues the CFPB has without the deals being actively shopped to other potential buyers.”
The deal for the $654 million Ouachita and $1.3 billion First State Bank is valued at a combined $325 million in stock and cash.
One analyst, John G. Arfstrom of RBC Capital Markets, said he expects that in addition to the 3 cents cost this year, the delays will double the hit to earnings-per-share next year to 6 cents.
Arfstrom said he thinks both banks are willing to wait. “Our sense is that the acquisitions likely remain the best-case scenario for each of the sellers,” he said in a June 24 report.
Hovde Group’s Fitzsimmons says the delays come as a strategic set back by effectively preventing BancorpSouth from jumping back into the M&A arena as a buyer in future deals.
Arfstrom, Fitzsimmons and Mealor say the newest delay hardly surprised anyone. BancorpSouth announced an initial delay last summer after announcing the deals in January 2014. The bank said at the time it must resolve regulatory concerns before moving ahead with the Louisiana and Texas purchases.
The Wall Street Journal’s MoneyBeat said regulators have sent other signals they intend to toughen scrutiny of mergers and acquisitions in the wake of a banking crisis in the previous decade that required hundreds of billions of dollars in federal bailout money.
M&T Bank Corp. of Buffalo, N.Y., for instance, reached a deal in 2012 to acquire Hudson City Bancorp but has yet to get regulatory approval because of Federal Reserve concerns over M&T’s anti-money laundering controls, the WSJ reported July 1.
American Banker recently cited several other stalled acquisitions, including BancorpSouth’s, as indications of regulators’ new reluctance to approve M&A deals.
» Pennsylvania’s Customers Bancorp was unable to buy New York’s CMS Bancorp due to regulatory delays. The companies, which did not say what exactly had concerned regulators, are now squabbling over a $1 million breakup fee, American Banker reports.
» Banc of California has met resistance from advocacy groups as it tries to buy all of Popular’s branches in Southern California. The Office of the Comptroller of the Currency established an additional 30-day comment period after certain groups complained about Banc of California’s Community Reinvestment Act record, American Banker said.
American Banker reported that regulators approved Texas-based Cullen/Frost Bankers’ purchase of WNB Bancshares, but made it clear that Cullen/Frost must improve compliance with fair-lending laws before seeking approval for future deals.
American Banker’s Matthew Lee theorized in a December 2013 article that fewer mergers by big banks have led regulators to shift increased scrutiny to midsized banks’ M&A deals. He cited heightened concerns of regulators over Community Reinvestment Act compliance.
The new regulatory related delays in BancorpSouth’s purchase of Ouachita Bancshares and Central Community Corp. come just as the Tupelo-based regional bank has turned the corner on credit quality issues of its legacy operations, RBC Capital’s Arfstrom noted in his June 24 report.
“In terms of growth, structural changes have allowed the lending to begin reigniting growth channels,” he said, citing the bank’s eight consecutive quarters of sequential loan growth following several years of contracting loan portfolio balances.
Acquisitions have begun to play a part in the long-term strategy at BancorpSouth, Arfstrom said.
As analyst predicted upon the hiring of Texan Dan Rollins as CEO in late 2012, BancorpSouth has slimmed down its payroll and cut other core expenses. “While we suspect all of the major announcements have been made, we believe core efficiency will continue to improve in 2014, Arfstrom said.