Dodd-Frank Changes Could Nudge Midsize Banks Into Deal-Making

By Evan Weinberger

The recent Dodd-Frank Act rollback signed by President Donald Trump could be the extra push some banks need to start ramping up mergers and acquisitions.

The changes will be an extra incentive for combinations among banks with $50 billion to $250 in assets, which are already benefiting from an improved economy and tax cuts.

“I would say that for some of us in the industry, we thought there would be consolidation even in the absence of this bill,” Michael Reed, a partner at Covington & Burling LLP who specializes in corporate transactions, told Bloomberg Law in a May 30 phone interview.

However, the new law that Trump signed May 24, combined with easing of the Federal Reserve’s annual Comprehensive Capital Analysis and Review bank stress tests and other regulatory adjustments, likely remove one potential obstacle to deals getting done.

“Banks are reluctant to sign up a deal, go public and make noise about a big transaction when there’s uncertainty about whether the regulators are going to give them the green light,” Cliff Stanford, a partner in the financial services practice at Alston & Bird LLP, told Bloomberg Law in a May 31 phone interview.

Potential Deal-Makers

Analysts with Keefe, Bruyette & Woods have pegged 12 banks that could be particularly aggressive in the coming months and years in a May 24 research note. Included on that list are Westbury, N.Y.-based New York Community Bancorp Inc., at $49 billion in assets and Tulsa, Okla.-based BOK Financial Corp., a $32 billion bank.

Both of those banks, and others in that range, should have a freer hand to make deals since they will no longer face bumping up against the $50 billion threshold.

On the seller side, KBW analysts pointed to Associated Banc-Corp. a $30 billion bank based in Green Bay, Wis., and Miami Lakes, Fla.-based BankUnited Inc., also at $30 billion in assets, as potentially attractive targets for bigger banks looking to grow.

No attorneys quoted in this story discussed any individual banks.

One Big Change for Bigger Banks

The bipartisan law written by Senate Banking Committee Chairman Mike Crapo (R-Idaho) and several Democrats from his committee, makes a host of changes to the operating environments for midsize or regional banks.

For the larger regional banks, the bill raises the threshold by which they are subjected to enhanced supervision by the Fed, including annual CCAR exams, from $50 billion in assets set in the 2010 Dodd-Frank Act to $250 billion in assets.

However, only banks with $50 billion to $100 billion are automatically exempted from the rules. The Fed has 18 months to determine whether individual banks with $100 billion to $250 billion should be subjected to tougher regulations.

Those threshold changes should make it easier for banks that were considering merging to get a deal done, Gregory Parisi, a Hogan Lovells LLP partner who handles M&A transactions, told Bloomberg Law.

“Banks in the $20 billion-plus asset size range that would have either not been a good target or to be acquiring another bank now have more flexibility,” Parisi said in a May 31 telephone interview.

Limited Universe

Just how active they are going to be is limited by the small universe of banks that are going to be affected by the new asset thresholds, Robert D. Klingler, a partner with Bryan Cave Leighton Paisner LLP who advises banks and other financial companies on transactional matters, told Bloomberg Law.

Since Dodd-Frank’s passage, only one bank has entered into a transaction that took them above the $50 billion threshold. That was in 2014 when CIT Group Inc. announced the purchase of OneWest Bank N.A. for $3.4 billion.

Treasury Secretary Steven Mnuchin served as chairman of OneWest at the time and Comptroller of the Currency Joseph Otting was OneWest’s chief executive when the deal was announced.

While any deals would signify a major increase, there are only so many banks that are going to weigh the new regulatory environment when considering a deal, Klingler said.

“You’re really talking about 50 or so banks where there were significant regulatory impediments to doing a transaction, and those regulatory impediments have been significantly lessened,” he said in a May 30 phone interview.

One Deal in the Books

Indeed, banks are already starting to do those deals.

On May 21, three days before Trump’s signature, Fifth Third Bancorp announced a $4.7 billion merger with Chicago’s MB Financial Inc.

The deal is intended to help Cincinnati-based Fifth Third to maintain its place in Chicago as competitors bolster their presence in that vital market.

But prior to the prospects for an eased regulatory climate, Fifth Third might have leaned against doing the deal, Brian Klock, a bank analyst with KBW, told Bloomberg Law in a May 31 phone interview.

“If this was a year ago, they may have thought twice about it versus buying back their stock,” he said.

Indeed, Klock said that the 13 banks that he monitors between the $50 billion and $500 billion asset level are likely to be active — assuming they are not subject to the types of anti-money laundering regulatory orders under which BB&T Corp. and U.S. Bancorp are operating. Banks are blocked from mergers until regulators determine that any AML or other compliance problems are fixed.

“They can be active now,” Klock said.

Effects on Small Bank Deals

While there are only so many larger banks that are going to be able to make deals — the country’s largest banks are not going to see much easing of their regulatory loads — smaller banks are also going to benefit from the new law.

For those banks with $10 billion in assets or less, changes to mortgage treatments, exam cycles, and other regulatory matters are going to make their operating environment and regulatory costs easier to bear, Stanford said.

But those lower costs are not going to balance out the existing costs of anti-money laundering compliance or the expenses of modernizing their operations, he said.

And that’s where economics comes in to the equation for bank management and boards.

This year’s corporate tax cuts have left extra cash lying around, some of which could go to acquisitions. And increasing interest rates could make deals more interesting for those looking to buy or sell.

Even without the regulatory changes coming to pass, those factors would have made the deal environment more fertile in 2018 and beyond than it had in the past, Stanford said.

“If the deal is there, and the deal is to be had, you figure out a way through the regulatory process,” he said.

To contact the reporter on this story: Evan Weinberger at

To contact the editor responsible for this story: Michael Ferullo at

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.