What to Know About Conditional Regulatory Approvals

Does it seem like merger approvals are being issued with conditions more frequently than in the past? Maybe we’re just focusing on the conditions, or maybe they are becoming more common. Either way, it is important to remember a few key points about approvals that come with conditions.

1. No surprise to the banks involved
We’re all aware of the general review process the federal and state banking agencies engage in upon the receipt of a merger application. Financial institutions submit detailed information about the proposed transactions, the parties involved, the activities involved, pro forma financials and anything else to support the application. Regardless of what institutions submit, each of the banking agencies has certain statutory factors that it reviews for each of the banking organizations, and certain criteria that must be satisfied for approval.

These statutory factors include, but may not be limited to, the financial and managerial resources and future prospects, the supervisory records of the organizations, the convenience and needs of the communities to be served by the resulting organization(s), the effectiveness of each organization in combating money laundering activities, the impact on competition in the relevant banking markets and any risks posed to the banking or financial system of the United States.

Since we know these factors are reviewed for each of the banking organizations, it stands to reason that the parties should know if there will be trouble satisfying a particular factor, especially if one party has an outstanding enforcement action — formal or informal — or a less than satisfactory rating relevant to one of the factors. Parties on the outside looking in will not appreciate potential challenges satisfying the statutory factors where a target or acquirer is coming to the table with a nonpublic enforcement action, Matters Requiring Attention or other confidential supervisory concern. If a potential acquirer has a less than satisfactory supervisory record, the contemplated transactions will face significant barriers to approval.

2. Conditions typically address borderline metrics
An approval letter or order outlining conditions typically reflects two things:

1. The conditions will correlate with existing liquidity, compliance or other shortcomings of the target organization in areas related to the statutory factors.
2. The conditions will outline expectations for the resulting organization(s) to address specific metrics, such as capital or liquidity, that were strong enough to satisfy the statutory factors necessary for approval, but not so strong that the agency was entirely confident in some pro forma aspect of the resulting organization(s).

For example, a condition that requires the development of a plan to address fair lending compliance or compliance with anti-money laundering regulations would reflect the confidential fact that there were significant supervisory concerns with those programs at the target organization.

Similarly, where a condition requires a plan to address a specific concentration in, for example, commercial real estate lending at the resulting institution, we can surmise that the combined pro forma balance sheet of the resulting institution reflected a concentration percentage in CRE that otherwise may raise supervisory concerns. Even clearer is a condition that specifically requires divestiture of assets post-transaction.

3. Conditions extend approval time frames.
The inclusion and potential negotiation of conditions ahead of an approval will extend the typical time frame for regulatory review and ultimate approval where possible. While approval time frames can run from 30 to 60 days, if regulators identify issues, timing becomes much less certain. Timing becomes a function of the negotiation regarding how to address the issues post-transaction, as well as the internal coordination necessary at the agency. Unfortunately, this results in very inconsistent periods of regulatory review as applications are reviewed on a case-by-case basis.

So, what does this mean for future merger transactions and assessing the likelihood of approval? Merger partners need to take an honest look internally and on a pro forma basis as a consolidated organization to see where regulators may have challenges reviewing the statutory factors. Banking agencies disfavor large banks merging to become even bigger, but this does not appear to translate into a general disfavor toward mergers. The critical point is to get ahead of the issues and prepare to address them in consultation with the regulators, regardless of whether they become a condition to approval.