The Federal Deposit Insurance Corp.'s approval of Provident Financial Services Inc.'s acquisition of Lakeland Bancorp Inc. was handed down with unusual conditions that could become the norm.
After pending for more than 555 days, the FDIC gave the companies a green light but with conditions that the combined entity must stay below specific commercial real estate (CRE) concentration ratios, make more mortgages and retain more capital. Provident, which also must raise $200 million prior to closing the deal, is confident in its ability to execute on the mandates, CFO Thomas Lyons said in an interview. The Jersey City, NJ-based
"The conditions reflect the environment today, and they're consistent with other recent approvals that we've seen," Provident General Counsel and Corporate Secretary Bennett MacDougall told S&P Global Market Intelligence in an interview.
Deal advisers and lawyers said the slew of conditions are unusual but could become more common as regulators increasingly scrutinize mergers.
"The combined institution is really going to be expected to address those issues quickly as part of the approval," said Joseph Silvia, a member at Dickinson Wright PLLC who advises financial institutions on M&A and regulation, in an interview. "They put these things in there sometimes because they really want to see the remediation of whatever the issues are really quickly."
The set of conditions reminds applicants to get their financials and pro forma numbers "tightly locked in" and supported prior to applying, Silvia added.
The companies, which are still awaiting Federal Reserve approval, expect the transaction to close by June 30.
Commercial real estate
Under one of the FDIC provisions, Provident is required to "maintain its ratio of commercial real estate loans to total capital and reserves at or below the levels set forth in the three-year projections supporting its regulatory applications," the company said in a news release.
The FDIC "established targets based on the pro forma projections that we provided that were part of the application," Lyons said. The CFO did not disclose what those specific projections were when asked in the interview.
At Dec. 31, 2023, Provident had $5.79 billion in CRE loans while Lakeland had $4.27 billion, so the combined entity would have $10.06 billion in CRE loans, making up 52% of the combined company's $19.22 billion in gross loans and leases.
The inclusion of this provision is likely related to the ongoing operating environment, in which CRE is facing a lot of stress and banks with exposure are under a microscope, according to Greg Halter, director of research at the Carnegie Investment Counsel and a former commissioned bank examiner at the Federal Reserve Bank of Cleveland.
"Especially [with] what's going on with New York Community Bancorp Inc. right now, [the FDIC is] trying to guard against those types of things," Halter said. "They're always revamping what and how they look at it for the prevailing market conditions."
The companies' combined footprint around New York City and New Jersey may have also led to the provision, Halter added.
"If they're concerned about CRE loans in New Jersey, New York, wherever they're lending, yes, I think they want to try and tighten that up and make that a provision," Halter said.
Heightened capital
The combined companies' CRE exposure could be to blame for the heightened capital requirements imposed by the FDIC in the deal approval. Right now, regulators are focused on CRE to total capital ratios and reserves, Silvia said.
"They may say that their CRE levels ... are such that they require additional capital to support the risk," said Chip MacDonald, managing director of MacDonald & Partners LLP.
For three years after the deal closes, Provident will have to maintain at least 8.5% Tier 1 capital to total assets, above the 4% regulatory minimum, and at least 11.25% of total capital to risk-based assets, above the regulatory minimum of 8%.
Provident also must raise $200 million in capital before deal completion. The company plans to use the funds to pay down the combined entity's borrowings to boost capital ratios, Provident's CFO told Market Intelligence.
Capital-related provisions will likely become more common in deal approvals as the FDIC is acting with caution for the banking system's safety and soundness, Halter said. This kind of condition will be more likely to crop up in deals involving banks engaging in specific areas of lending "because you have to hold more capital against them."
The need to raise capital comes at an inopportune time for Provident, given where interest rates are, MacDonald said.
"If you need it, that's the worst time to have to try and get it," MacDonald said in an interview. "If a deal is under the gun, the market will take advantage of you to a certain extent in terms of rates. ... It's not going to be able to be raised on the most favorable of terms."
More mortgages
In another unusual condition, Provident will have to develop an FDIC-approved action plan "to improve home mortgage applications from and originations to all demographic populations within the combined bank's reasonably expected market area," according to the news release.
Regulators used this provision more recently in the merger of equals between CBTX Inc. and Allegiance Bancshares Inc., which changed to the name Stellar Bancorp Inc., though that provision was more targeted as the institutions had to make more mortgages to African Americans specifically.
Advisers said the requirement is likely a result of Lakeland's recent redlining investigation. In September 2022, Lakeland entered into a $13 million settlement agreement with the US Justice Department to resolve allegations that it violated fair lending laws and engaged in a pattern or practice of lending discrimination by redlining in the Newark metropolitan area.
"Most of these provisions are really to address where the applicant was stronger than the target and/or the target had pointed issues, like an enforcement matter," Silvia said. "Because the target has certain challenges, they put these provisions in there so that the acquirer addresses those challenges specifically."