More bank acquisitions by investor groups are being scuttled this year as regulators look at these deals with a sharper eye.

Four investor acquisitions of banks have been terminated so far in 2023, the most since 2019 when six such deals were terminated. Now, nearly half of the bank deals that have fallen apart this year involved investor group buyers.

The uptick in breakups comes at a time when investors are increasingly pursuing bank acquisitions, with these deals making up nearly 12% of all US bank deals this year, the largest proportion in over a decade.

While bank acquisitions are attractive to investors in times like now when valuations are lower and M&A is slow so there is a lack of bank buyers, these deals must clear extra regulatory hurdles that traditional bank deals usually do not face, industry experts told S&P Global Market Intelligence. A lack of prior experience in banking or any indication that the investor group will deviate from the bank's business plan will raise regulatory red flags, they said.

"Business plan, management and board — those are the things that can cause you to be turned down or to put you into the glacial approval process," Randy Dennis, president of DD&F Consulting Group, said in an interview.

Of the four investor-bank deals terminated so far this year, two attributed the decision to terminate to a lack of regulatory approval certainty.

Bank experience

Leadership is a key component when regulators review these deals, as the agencies prefer investors and management that have prior banking experience.

"It's tough to file an application today, I would say, without having that banking experience," Jack Greeley, attorney at Smith Mackinnon PA, said in an interview. "That creates an unnecessary pressure point."

Among the three terminated deals this year in which the investor's name was disclosed, at least two were from outside the bank space: Tilman Fretitta, whose current businesses include Landry's, the Houston Rockets, and the Golden Nugget Casinos and Hotels, and Greg Kidd, the CEO of venture capital firm Hard Yaka Inc.

Still, even when leadership is from the banking sphere, regulators still want to ensure the individuals have no "baggage," either from their prior positions at a bank or personally, Greeley added.

In addition, the bank should have executive officers who are familiar with its size.

"In other words, the bank that they came from or that they previously managed was X times the size of this particular bank that you're looking at, so they're clearly capable of working with the risk profile and also being able to operate the bank over a period of time," Greeley said.

Hill Womble, who is part of an investor group that is in talks to acquire Union Springs, Ala.-based Community Bank & Trust - Alabama and will be CEO after the deal closes, said regulators want more bank experience from investors than they used to.

Womble has prior bank experience, having served as a community bank CEO before. The investor group's other planned leadership includes a CFO who was previously a bank CEO, a board member who previously worked at the Office of the Comptroller of the Currency (OCC) and a compliance coordinator who also worked at the OCC.

"So when they looked at our bank experience ... we checked the boxes," Womble said in an interview.

Stick with the plan

It is also critical that investor groups intend to stick with the bank's current business plan. Regulators want to avoid "charter stripping," in which an acquirer sidesteps the de novo process by acquiring a bank, but then changes its business model, experts said.

Regulators are "obviously looking at trying to avoid groups that are coming in to do some charter stripping, where they're trying to use the charter for something that might create additional risks or some sort of concentration in the business plan, whether that's on the asset side or whether that's on the liability side," Chad Hull, managing director and head of depository investment banking at Janney Montgomery Scott LLC, said in an interview. "You're going to see a fair amount of friction with the approval process if the community bank is not staying sort of consistent with a traditional community bank approach and where there's going to be some dramatic alteration to the business model."

One recent example is Farmington State Bank, which was acquired by an investor group in 2020 that then pivoted the bank's business model to digital assets. The bank found itself caught in the crosshairs of the fall of FTX and is now no longer operating after the Federal Reserve Board and the bank's state regulator unveiled an enforcement action against the bank and its holding company in August, which revealed the bank chose to voluntarily liquidate and cease operations.

In order to avoid charter stripping, regulators can be particularly critical of individuals trying to acquire a bank if they operate in another sector outside of banking or if they have a side gig that they might use the bank to enhance, experts said.

For example, if someone experienced in technology states plans to "run it as a regular bank, regulators aren't stupid — in fact they're pretty smart, and there's not many things they haven't seen," DD&F's Dennis said. Regulators will "try to understand why this technology person wants to buy a little bank."

Other challenges for investor-bank deals

Another sticking point for these deals can be when a prospective bank investor already invests in other industries, such as shipping or manufacturing, which are not allowed to own banks, Matthew Bisanz, a partner in Mayer Brown's Financial Services Regulatory and Enforcement practice, said in an interview. The investor might need to divest of other investments but not want to.

Another potential issue is "if you control a bank you're generally required to act as a source of managerial and financial strength for the bank," Bisanz said. "If the bank needs additional financial resources, you will provide them. If the bank needs qualified executives, you have the capability to provide them. For many private investors, particularly in the fund space, they are not in a position to commit themselves or their investors into providing future infusions of capital to a bank or providing future staffing."

In addition, regulators might have anti-competitive concerns if someone invests in multiple banks with overlapping market segments, Bisanz said.

While regulators review all those issues, some deals might fall apart as investor groups grow impatient. The median number of days it took investor-bank deals to close since 2016 is 147, just slightly higher than the median of 143 for all bank deals, though a number of deals have taken longer than the median to get across the finish line.

"Many of them feel like they've been pecked to death by ducks. Well, OK, so we need a CEO in addition to a president, OK. And we need an outside chairman of the board, OK. Those kind of things just wear people out," Dennis said. "More apps probably die because of frustration than being turned down."