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The Cullen/Frost Merger Shows that Fair Lending Is Critical to Growth

author Andy Barksdale
3 min read
Jun 19, 2014

In this regulatory environment, there are elevated expectations regarding regulatory compliance from all agencies.  The quality of your compliance management system (CMS) can directly impact the go forward outlook of your organization. The perceived strength of your CMS can define your institution’s strategy and expansion plans.  

On May 15th, the Federal Reserve approved Cullen/Frost’s plans to acquire WNB Bancshares, Inc., a $1.5 billion-asset bank in Central and Western Texas.  Cullen/Frost, a $24.7 billion-asset commercial bank, is the largest independent bank in Texas.

The Federal Reserve’s approval contained some conditions. The day after the approval, Cullen/Frost CEO Dick Evans said in a statement: “As part of the approval process, we agreed with the Federal Reserve that before bringing them any further expansionary proposals, we would spend some time and effort enhancing our compliance programs, including those related to fair lending, which we will, of course, do.”  

This formal acknowledgement by Cullen/Frost is no surprise. A generally accepted belief is that expansionary activities must await resolution of major compliance issues, and that resolution depends on factors like the size, degree and complexity of the compliance issues.

Some questions the regulators will consider when making the decision to approve or deny acquisitions are: Does the compliance issue involve the entire compliance management system?  Are the issues considered significant?  Were the issues formal administrative actions (e.g., C&D, MOU, etc.) or informal action?  Do the compliance concerns represent a repeat finding from a prior exam or audit?  What was the timing since the last examination and has there be corrective action taken?

The American Banker expanded on how regulatory compliance can impact expansionary activities. In a May 21st article titled Cullen/Frost’s Fair-Lending Deal with Fed is an M&A Wake-Up Call, the ABA pointed towards the Fed’s approval order. In particular, the ABA article points to a specific footnote that reads: “Cullen/Frost has committed not to engage in any expansionary activities, including branching within its existing market areas, until such time that the Board has deemed Cullen/Frost to have clearly developed a policy to support future expansion in its compliance program, including fair lending, and to hire additional staff with requisite knowledge and experience to manage and control the bank’s fair lending risk, which might be heightened by expansion.”

Key Takeaways from the Frost/Cullen Merger

The Federal Reserve’s order provides some insight into the areas reviewed. They say: “The Board has considered the record of Frost Bank in complying with fair lending and other consumer protection laws. As part of this consideration, the Board reviewed the Frost Bank Evaluation and Frost Bank’s record of performance in helping to meet the credit needs of its communities since the Frost Bank Evaluation, considered the Reserve Bank’s recent evaluation of Frost Bank’s compliance with fair lending laws, evaluated Frost Bank’s fair lending policies and procedures, and considered the comment on the application.” The order also states that the bank reviewed specific markets where Frost Bank operates (e.g. Houston and Dallas). A lender's compliance history will clearly play an important role in the regulators' evaluations. 

Here is some deeper detail about factors analyzed by the regulators during the merger:

  • The Fed analyzed the Bank’s lending data, assessment area definitions, geographic distribution of branches, and marketing and outreach efforts.
  • The Reserve Bank also compared census data and peer HMDA data to the bank’s HMDA-reportable applications. 
  • Finally, the Reserve Bank reviewed Frost Bank’s policies and procedures, Fair Lending risk assessment, compliance training plan, and the HMDA analysis for pricing and underwriting disparities.

If you're involved in expansionary activities, you can expect that some of these factors may be considered by the regulators. You need to know what analysis of these factors will reveal about your institution.

In today’s regulatory world, bank M&A due diligence must work in multiple directions (up, down and forward).  For the acquisition target, you have to look at the acquirer and make sure they have the regulatory green light to proceed. For the acquirer, there has to be sufficient due diligence on the acquisition target to ensure their existing compliance program does not bring unforeseen risks. Going forward, you have to be properly staffed with sufficient resources dedicated to compliance with sufficient expertise to help manage the new, larger organization.

The Cullen/Frost announcement is a simple reminder of what we already knew: compliance plays a major role in expansion plans. It needs to be a priority.

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