Mergers and acquisitions are an important reality of the banking landscape today, and we're expecting to see a renewed wave of activity over the coming months driven by a rising SIFI threshold. If your bank is considering a merger or acquisition, you owe it to yourself to read this post and learn why compliance really matters to the success of the deal.
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Throughout 2017 and the first quarter of 2018, there have been more than 260 bank mergers or acquisitions. Even though that number seems high, some banking industry experts say that M&A activity has been stifled by regulatory and compliance burdens. Many expect that to change dramatically.
With the potential easing of some regulatory restrictions, many of those same experts are expecting an increase in M&A activity in 2018. The bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S 2155), which just last month passed the Senate and is now being reviewed by House Of Representatives, is driving a lot of this speculation.
One of the most important aspects of this bill is that it would raise the threshold for a bank to be considered a Systemically Important Financial Institution, or SIFI, from $50B to $250B.
If this bill passes, we are expecting to see an uptick in merger and acquisition activity, particularly among the larger community and regional banks. If it doesn't, we still expect M&A activity to keep pace with previous years'.
If M&A activity is in your bank's future, it's time to prioritize compliance and conduct M&A Compliance Due Diligence. Need to see why? Here's how compliance risk can impact your deal.
As your bank considers a merger or acquisition, make sure that you're preparing for success and aware of the potential pitfalls. Here are three in particular that you need to know:
1. Compliance Risk Can Stall or Halt M&A Activity
As always, M&A activity comes with risks. You're combining two previously distinct financial institutions, each with their own unique policies, procedures, and practices. The most basic risk is that inefficiencies and lack of oversight let some things fall through the cracks. One of the most important risks is that consumers can be harmed in the process.
The fact remains that unchecked compliance risk can derail a merger or acquisition, and result in a less healthy joint institution than either of the individual banks.
In addition, the federal banking regulators have to approve every merger or acquisition. The Federal Reserve and your primary federal regulator (if they're different) must both approve the merger or acquisition. If you're a state bank, your state regulators will also need to approve the transaction. Each of these processes can be lengthy, and require lots of different forms and applications to proceed.
Compliance risk - such as Fair Lending, CRA, Redlining, or BSA/AML - may cause the merger or acquisition to be delayed even further, withdrawn, and even to fail.
2. Public and Media Attention May Delay the Proceedings
Over the past few months, we've seen a lot of coverage of the banking industry from investigative journalists, watchdog groups, and community action groups. If M&A activity increases, we expect to see these mergers and acquisitions take the spotlight. Much of the consumer protection data is public, like the annual HMDA LAR volumes, CRA ratings, and consumer complaints, so these groups will be able to write compelling, data-backed stories if they see any reason to be concerned.
We expect that public attention will put added compliance pressure on financial institutions. In every merger or acquisition, the public will have a chance to comment, and the regulators take those comments seriously. Negative feedback or protests to a merger or acquisition will be investigated, and can delay or prevent a merger or acquisition.
3. The Cost of the Deal, or Valuation of the Banks Involved, May Change
Compliance risk exposure, if uncovered during the course of negotiations or the approval process, can impact the valuation of either the target institution or the attractiveness of the acquiring institution as a potential partner. (Conversely, a strong compliance program may have a positive impact on the valuation of your institution or the speed of approval.)
In addition, delays and added complexity resulting from compliance risk will also mean that the process is longer and necessarily more expensive. Such delays will have an economic effect on all institutions and shareholders involved, and those effects aren't likely to be positive.
Proactive compliance risk management is a wise idea for many reasons, include resource and value protection.
Bottom Line: If a merger or acquisition is part of your bank's growth strategy, M&A Compliance Due Diligence needs to be part of that process.
In particular, it's a good idea to focus on how your Fair Lending, Redlining, and CRA compliance will be impacted.
Now that you know a few negative impacts of compliance risk, here are 4 steps of M&A Compliance Due Diligence.
This is by no means a complete list, but at a minimum, here are four steps of M&A Compliance Due Diligence that can prepare you for success.
- Analyze the data of all institutions involved for Fair Lending, Redlining, and CRA risk.
- Review the results of compliance risk assessments for all institutions involved.
- Evaluate your branch network optimization, or branch planning, strategy.
- As your institution changes, so will your branch network, delivery channels, compliance requirements, and growth strategy. M&A activity will alter your branch network and this alone will attract CRA, Fair Lending, and Redlining scrutiny. You need a strong Branch Network Optimization strategy that fully considers compliance and community impact.
- Reconnect with your programs, policies, training, and more.
- As your institution changes, so does your risk profile. With a merger or acquisition, your compliance risk will change, so your training, policies, programs, risk assessments, and documentation will likely need to be updated.
TRUPOINT Viewpoint: Mergers and acquisitions provide great opportunities for growth and synergies, but we never said they were easy or risk-free. If M&A activity is on your radar (past, present, or future), now is the right time to consider M&A Compliance Due Diligence. TRUPOINT conducts M&A Compliance Due Diligence, and can help you prepare for a successful transaction. Learn more by requesting this free info sheet today!