Extended deal closing timelines and a backlog of U.S. bank deal applications at the Federal Reserve may lead to a slowdown in U.S. bank M&A.
Among the 20 largest pending U.S. bank deals, seven have been outstanding longer than the median close time this year of 142 days. As a result, a handful of banks, such as First Citizens BancShares Inc. and New York Community Bancorp Inc., have pushed out the expected closing timelines for their deals given lack of clarity around when they will secure all necessary regulatory approvals. On third-quarter earnings calls, Webster Financial Corp., Old National Bancorp and WSFS Financial Corp. all reported that they are still waiting on Fed approval.
Experts attributed the slowdown in deal approvals to President Joe Biden's recent executive order to reconsider regulatory approval, as well as uncertainty in Fed leadership. Though the delays seems to be isolated to the largest pending deals, banks of all sizes are hyperaware of the regulatory environment and considering if now is a good time to strike a deal, said Gary Bronstein, a banking lawyer and partner at Kilpatrick Townsend & Stockton.
"It's certainly giving people some pause," he said in an interview. "This issue needs to be factored into the equation. Do you even move forward at this point? Is now a good time?"
Further, the regulatory scrutiny of larger deals could sidetrack the ongoing trend of transformational M&A as regional banks could shy away from megadeals and instead opt for bite-size deals, he said.
"It's become a more strategic decision about how to proceed, given the current regulatory environment," he added. "It might make sense to try to do a couple of smaller deals as opposed to one larger deal, if you're going to do something."
Size matters
Deal delays have been more common among the largest deals, but smaller deals do not appear immune as two community banks announced delays this month.
Charlottesville, Va.-based Blue Ridge Bankshares Inc. announced Nov. 4 that its merger of equals with Fairfax, Va.-based FVCBankcorp Inc. will likely close in the second or third quarter of 2022, instead of the initial projections of by year-end or 2022 first quarter, due to regulatory concerns identified by the Office of the Comptroller of the Currency. Blue Ridge declined to comment, responding to a request for comment by by citing previously disclosed details.
About two weeks after Blue Ridge's announcement, Helena, Mont.-based Eagle Bancorp Montana Inc. pushed out the expected closing date of its acquisition of Glasgow, Mont.-based First Community Bancorp Inc. to the first quarter of 2022.
"It wasn't anything major," President and CEO Peter Johnson said in an interview. "The fourth quarter, that timeline was very aggressive. If we had applied our normal timeline, we would have been saying in first quarter anyway, but the seller really wanted to try to get it in for tax purposes."
Eagle Bancorp Montana closed three bank deals between 2018 and 2020, and while regulators have not raised any concerns with its latest deal, Johnson said he senses a change
"It does seem like there's a little bit of a different attitude," he said. "That's probably what's contributing to these larger deals maybe being a little bit slower, but we haven't seen anything with ours yet."
Johnson said he is not concerned that Eagle Bancorp Montana's pending acquisition will face delays because "those are all much bigger transactions. Ours is, comparatively speaking, pretty small."
Selective scrutiny
Despite the pair of pushed-back timelines for community bank deals, experts said tougher regulatory scrutiny appears to be limited to only the largest bank deals.
"That's not going to be the political focus right now [on] a deal of $100 million in size that creates a $2 billion and $3 billion asset bank," Bronstein said. "For smaller deals, I think it is business as usual."
The majority of deals resulting in a company with less than $50 billion in pro forma total assets "seem to be working through the regulatory approval pipeline in a timely manner, but deals above that threshold are moving far more slowly,"
Though experts do not think smaller bank deals will be impacted, some are still taking precautions. OceanFirst Financial Corp. was "conservative" in its projection that its announced acquisition of Partners Bancorp will close sometime in the first half of 2022 given the current regulatory environment, Chairman and CEO Christopher Maher said on the Nov. 4 deal call.
"As a precaution, there's nothing wrong in telling your investors that this may take a little bit longer," said Christopher Marinac, director of research at Janney Montgomery Scott.
Political winds blowing
President Biden's July 9 executive order called on the attorney general to review the process of bank merger approvals, in consultation with banking regulators.
"[The Fed is] trying to placate the White House. They're trying to be respectful of what the White House said in that order," Marinac said in an interview. "If the Fed was truly worried about mergers then it would scrutinize the smaller mergers more as much as the big ones, but we clearly see that's not the case."
Uncertainty surrounding Fed leadership also contributed to deal delays, Bronstein said. "We're waiting to see what's going to happen with the political appointments at the Fed, in particular, the Chairman and Vice Chairman," he said. "So it's probably not a good time, given the pressure that the progressives are putting on the President, for there to be a lot of approvals of big deals. The political winds are blowing against the big deals right now."
But President Biden on Nov. 22 announced his intention to nominate Jerome Powell for a second term as chair of the Fed, a move Marinac believes could speed things up.
"It's a little bit of a political bargaining chip as it relates to his renomination," he said. "If his nomination happens soon and smoothly, then these mergers might get approved soon and smoothly. If this drags on, into year-end and first quarter, then perhaps these mergers drag onward."
But Bronstein believes the Fed will continue to look at bank deals with increased scrutiny given President Biden's stance on M&A.
"It's going to be slow going for a while," he said.