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Fed offers pre-merger advice to banks

by Ira Teinowitz | Published July 13, 2012 at 7:00 AM

The Federal Reserve Board on Thursday, July 12, announced a new procedure aimed at making it easier for smaller community banks to merge by allowing institutions to get regulators' guidance before submitting a merger for an official decision from the agency.

The new procedure replaces an informal process in which banks' attorneys brief Fed staff on a possible merger and get the officials' thoughts on the deal.

Formalizing the inquiry process might give smaller banks that don't have Washington attorneys a way to benefit from merger advice before going to the expense of arranging a merger that might not fly with regulators.

Banking industry attorneys and experts said the new process was carried out in anticipation of an increase in bank mergers. Its immediate impact, however, will be to formalize and make more transparent the Fed's informal review process. The observers suggested the main beneficiaries may be smaller banks without Washington lawyers already familiar with the Fed's informal review options.

"I think they expect a lot of mergers of small community banks," said Bradley K. Sabel, partner and co-head of Shearman & Sterling LLP's financial institutions advisory and financial regulatory practice group. "This is a way to formalize the prefiling and cut out on the phone calls."

Chris Whalen, a banking industry analyst and senior managing director of Tangent Capital Partners LLC, said the Fed's action will especially help community banks.

"It made official what the Fed has always done," he said. "If you have a good law firm, you've already done this. Part of the board action is to institutionalize the process and try to educate the small banks about how to proceed."

Whalen said he doesn't expect the move to fuel a floodgate of mergers because bank valuations remain law compared with the highs of several years ago. "The big problem with bank mergers is the valuations don't work so people don't want to sell," he said.

The Fed announced its action on Thursday in a three-page supervision letter that said the process was especially aimed at "community banking organizations that typically do not file applications on a frequent basis or for pre-filers with novel proposals."

Banks looking at mergers can submit details of structures, business plans, partnership agreements and get Fed staff feedback within 60 days.

"It's a positive thing. It will help some banks address issues," said Derek M. Bush, a partner at Cleary Gottlieb Steen and Hamilton LLP. "At the margin it will help some deals go forward."

Lawrence D. Kaplan of Paul Hastings LLP said the new procedure is likely to benefit both banks and the Fed, allowing speedier processing of applications.

"It allows the parties to get some instant feedback and minimizes the regulatory burden so that once filed, a deal will move more efficiently," he said.

The parties are likely to get a better understanding of regulators' needs early and file a more complete application.

The Fed stressed that the staff advice would not constitute preapproval and a bank will still need to file a formal application after getting a response to the pre-filing questions. Pre-filings, however, may contain draft transactional and structural documents and may include shareholder, purchase and voting agreements, side letters, offering documents, partnership agreements, or qualified family partnership agreements.

The Fed said it will try to respond within 60 days but that deals with unusual structures could take longer.

Kaplan noted especially the Fed's commitment to provide feedback within 60 days. "It's very nice for them to publish a time frame," he said.

In a client report, analyst Jaret Seiberg of Guggenheim Partners LLC suggested the process "should encourage M&A, as it offers a way for banks to learn before they commit to the transactions if a deal will fly with regulators." Seiberg said helping banks in small communities plan mergers is significant because they are more likely to encounter antitrust issues when they try to acquire another bank in their town than an outside bank would.

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