Top 5 stories from Banking Dive

Count Five Star Bank among the lenders seeking to swoop in after the collapse of First Republic and other banks that catered to Silicon Valley businesses — except the Sacramento-area bank’s CEO makes a notable distinction.

“We’re not from the East Coast,” said James Beckwith, who’s been at the helm of the Rancho Cordova, California-based bank since 2003. 

“We’re a Northern California bank, we understand that market,” he said. “We’ve been involved in the Bay Area for a long time, growing up there. We all understand that there’s various parts of the area that are distinct.”

The “great turmoil” of spring 2023, with the failures of Signature, First Republic and Silicon Valley Bank, presented a prime opportunity for $3.7 billion-asset Five Star to go after talent and banking relationships in the San Francisco Bay Area, Beckwith said.

“Geographically, it's not that far removed from us,” he said. “But historically, it was a market in which there was no way to enter it, and so we never really thought much about it.”

When SVB and others failed, East Coast banks moved in quickly: Raleigh, North Carolina-based First Citizens purchased Silicon Valley Bank’s assets, New York Community Bank bought a large portion of Signature’s, and New York City-based JPMorgan Chase acquired the majority of First Republic’s. 

Now, as former First Republic customers express frustration over JPMorgan’s service, Five Star Bank is betting its California roots will appeal to those clients.

The lender is opening a 3,700-square-foot office space in San Francisco’s financial district in September, Beckwith said.

“We’re just walking over what we’ve done historically, and developed historically, and bringing it into the Bay Area,” he said. 

Additionally, Five Star has hired 21 people since June 2023, and aims to double that number over the next two years, Beckwith said. Hires have come from First Republic, Signature and California Bank of Commerce, he said. 

“We think those opportunities still exist,” Beckwith said of further hiring, “as we continue to build and show ourselves in the marketplace as a successful organization and one that's very employee-centric.” 

The bank has about 200 employees and eight offices.

Five Star’s recent investments — brick-and-mortar and talent — have been fueled by a public offering the bank closed in April, raising $81.5 million.

Beyond talent acquisition, Beckwith suggested the bank may consider purchasing another lender, as the operating environment has strained community banks.

“We’ve always been an organic growth shop,” he said, “but there may be opportunities for us to look at other organizations to see if they’re like-minded and would want to join us.” 

The commercial bank’s customers are generally small to medium-sized companies generating between $1 million and $200 million in revenue, Beckwith said. Given the sizable market and the prevalence of Silicon Valley entrepreneurs, “over the next five years, we think we can grow the franchise by up to 1 billion dollars just in the Bay Area.” 

The bank doesn’t offer wealth management services and doesn’t plan to, Beckwith said, noting that’s a “very competitive space.”

Providence, Rhode Island-based Citizens Bank, for example, has snagged former First Republic bankers to help it build out its wealth-management presence and scale its business banking footprint on the West Coast. 

Five Star’s business model is most closely aligned with that of First Republic, with a high-service, technology-focused approach, Beckwith said. “That's the expectation of a lot of these customers of the old FRB, who were really well-serviced and well cared for,” he said. That, in turn, fostered a strong sense of loyalty among those customers, he added.

The high-touch service approach is crucial to those commercial customers, Beckwith said.

“It’s having a relationship with somebody they can pick up the phone and call; somebody that’s going to return the call immediately; somebody that’s going to be on their business premises to visit them, to check in on them, how they’re doing,” Beckwith said, noting that Five Star doesn’t have 1-800 numbers.

“We think there's a great niche for us to provide that community bank service,” he said.

During a March appearance on Capitol Hill, Federal Reserve Chair Jerome Powell characterized comments in reaction to the July 2023 proposal that would have forced the largest U.S. banks to hold 19% more capital as “voluminous and very substantive.”

The same might be said 24 hours after the Fed’s vice chair for supervision, Michael Barr, previewed a revision to that contentious proposal, which knocks the 19% increase to a 9% one. Here are nine of the most crucial comments.

1. "Obviously 10 is better than 20,” Daniel Pinto, JPMorgan Chase president

“The issue is we have no idea what they have changed,” said Pinto, the No. 2 executive at the nation’s largest bank, according to Reuters.

JPMorgan will look closely at changes in how the revamped proposal considers risks to markets, Pinto said.

“It’s not just the overall number. It’s the composition of it,” he said.

2. “There's an old phrase, 'Show them death, and they'll take despair.' I sometimes feel that that's what we just got," Brian Moynihan, Bank of America CEO

Moynihan, who attended the same Barclays conference that Pinto did, said a 10% increase in capital requirements would prevent Bank of America from making $160 billion in loans to small businesses and middle-market companies, according to American Banker.

By the same measure, Moynihan said, “We're fine. We can continue to buy back stock. Now on the other hand, you've had successive chairs of the Federal Reserve saying the capital's right in the industry and suddenly we needed more capital.”

3. “On nearly every point of contention, this is a capitulation to the banks,” Jeremy Kress, University of Michigan professor

By percentage, Barr’s preview indicated the increase in capital requirements for the nation’s largest banks would be less than half what it would have been under the July 2023 proposal.

But “this is not a middle-ground re-proposal,” Kress, a former lawyer for the Fed, told the Financial Times,

4. “The revised bank capital standards are a Wall Street giveaway,” Sen. Elizabeth Warren, D-MA

Warren, a key member of the Senate Banking Committee, has been a perennial and vocal critic of Powell and repeated her assertion that he’s a “dangerous man” to run the Fed.

“After years of needless delay, rather than bolster the security of the financial system, the Fed caved to the lobbying of big bank executives,” she said, according to Bloomberg.

5. “Our financial regulators have yet to justify these changes and provide a comprehensive cost-benefit analysis,” Sen. Tim Scott, R-SC

The Senate Banking Committee’s ranking member said he has consistently said the Basel endgame proposal would increase costs and decrease credit access for consumers. Barr’s announcement “only underscores that this proposal should be withdrawn and properly re-proposed in its entirety,” Scott said, adding that he “will be closely monitoring these developments and look forward to engaging with the financial regulators directly."

6. “I’ll be a no,” FDIC board member Jonathan McKernan

The Basel proposal is a multiagency one, requiring sign-off from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, in addition to the Fed. The FDIC, for its part, is expected to hold a board meeting this month to consider the plan, Reuters reported, citing a person with knowledge of the matter. The revamped plan could be released as early as Sept. 19, Bloomberg reported.

“We should be re-proposing in its entirety,” McKernan, a Republican, told Bloomberg. “And I struggle to see how key aspects of this package make conceptual sense.” 

Pushback from the FDIC isn’t wholesale, though.

“The Federal Reserve, OCC and the FDIC have worked cooperatively on the Basel III proposal, including the changes outlined in Vice Chairman Barr’s remarks,” FDIC Chair Martin Gruenberg, a Democrat, said in a statement seen by Reuters. “I look forward to the agencies working together to bring Basel III to a conclusion that will strengthen bank capital and bolster financial system resilience and stability.”

Still, the biggest divide on the upturn in capital requirements is a political one.

7. “I don’t think the Fed is dumb enough to do that,” Rep. Patrick McHenry, R-NC

The chair of the House Financial Services Committee is demanding a withdrawal of the July 2023 the rule, rather than a re-proposal, telling the Financial Times that lawmakers would invoke the Congressional Review Act to overturn a final rule if it passes before the next U.S. president is sworn in.

“If [regulators] take the deeply political approach that Michael Barr has taken to regulatory policy, you will see the Congress and the courts severely curtail the Fed’s regulatory policy capacity,” McHenry said.

The clock has been ticking ever since the Fed indicated a rewritten proposal was forthcoming. The nuclear option, for the proposal’s Republican opponents, has always been to attempt to yank back the rule even if its largely Democratic supporters were to get it finalized before a transfer of power at the White House in January.

If the revamped plan is released Sept. 19 and given a 60-day comment period, the earliest a rule could be finalized is Nov. 18 — though that risks criticism from opponents that new comments were not taken into account. That would mean the 60-day window for lawmakers to invoke the CRA would end Jan. 17, giving a new Congress about two weeks to launch that effort.

8. "Basel Endgame and [the proposed surcharge for global systemically important banks] will survive no matter who wins," Chris Stanley, banking industry practice lead at Moody’s

Stanley’s comment, seen by Reuters, stands out among a litany of analyst feedback. He said the timeline for the rule — so close to the election — means progress will be slow.

Raymond James analyst Ed Mills went a step further, saying a post-election finalization and subsequent legal challenges would make the rule’s future uncertain.

Ian Katz, managing director of policy research at Capital Alpha Partners, said a Basel endgame proposal “might be possible under Republican regulators, but it would look different and almost surely be easier on the banks." 

9. “It is unfortunate that we are more than a year into this process and we are looking at a preview of a re-proposal that’s not yet out,” Kathryn Judge, Columbia University professor

“When we think about the overall time frame, this is not an optimal position to be in for the Federal Reserve and for the other bank regulators,” Judge told the Financial Times.

Federal banking agencies’ recent statement on bank-fintech ties points to more change on the horizon, which could lead to a rulemaking, greater engagement between regulators and non-banks, or an even smaller roster of lenders in the banking-as-a-service space, analysts say.

The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency issued a joint statement July 25 outlining risks that may be heightened when banks deliver deposit products and services through a third party, such as risks related to compliance, liquidity and “end user confusion.”  

“A bank’s use of third parties to perform certain activities does not diminish its responsibility to comply with all applicable laws and regulations,” the statement advised. It underscored that banks need to prioritize rigorous due diligence and monitoring when forging such ties.

The agencies also issued a request for information, seeking input on bank-fintech partnership arrangements.

Underscoring risk management  

Both reaffirmed regulators’ heightened focus on BaaS and third-party risk. The key messages of the statement and RFI aren’t new, but “the emphasis is,” noted Michele Alt, a partner at consulting firm Klaros Group.

“Banks and their third parties should be reading this very carefully,” Alt said.

It isn’t novel for banks to work with third parties for some activities, but regulators “have observed an evolution and expansion ... to include more complex arrangements” that rely on third parties to deliver deposit products and services, according to the statement. Banks tap third parties for various reasons, including to perform compliance or customer service functions, provide consumer-facing technology applications or handle dispute resolution functions.

Some of those situations can carry greater risk, including if operations are fragmented or banks lack access to records; growth outpaces operational capabilities; or misleading statements are made related to FDIC insurance, the statement noted.

Banks engaged in third-party partnerships are encouraged to develop risk assessments to consider risks unique to each arrangement; conduct and document due diligence “of sufficient scope and depth” on the reliability of third-parties the bank might partner with; and draw up contingency plans for account transfers in the event of a third party’s failure or bankruptcy, among other suggestions. 

Synapse influence

It’s clear the Synapse debacle was on regulators’ minds, based on mentions of risk associated with rapid growth, lack of access to records and potentially inaccurate FDIC insurance coverage information, analysts said.

Middleware provider Synapse, which served as the link between consumer-facing fintechs such as Yotta and Juno and the banks that actually held customers’ money, filed for bankruptcy in April. 

Thousands of customers have been locked out of accounts with banks that partner with Synapse, and affected customers haven’t been given a clear timeline for restored access to their funds. A potential shortfall of $65 to $96 million has been identified, between what consumers are owed and the funds held on their behalf by Synapse partner banks. 

That has highlighted a need for clearer guidance related to bank-fintech relationships, regulatory officials have suggested. FDIC board member Jonathan McKernan said existing third-party guidance leaves room for more activity-specific advice. 

With their latest statement, the agencies are signaling that BaaS activities can require additional capital, Alt said, so it’s crucial banks ensure they have adequate liquidity and capital available. She added that she wouldn’t be surprised to see future enforcement actions take aim at inaccurate or misleading information regarding FDIC deposit insurance coverage. 

‘Nested risk’

Some saw the statement as further evidence that regulators have taken a negative view of bank-fintech partnerships. 

“What bank will be willing to enter the business after reading this ‘reminder’?” Matthew Bisanz, a financial regulatory partner at Mayer Brown, said in a LinkedIn post. “Sort of like a reminder that it is totally safe to work in a nuclear reactor if you wear a dosimeter, keep your radiation suit on, and can run very fast when the alarm goes off.”

To Alexandra Steinberg Barrage, a partner at law firm Troutman Pepper, regulators are emphasizing that there are a number of risks involved, “and it's not just what you see. It's also the nested risk issue. It's what you don't see.”

Banks now need “due diligence on steroids” if they want to engage in these partnerships, she said. Regulators appear to be underscoring that “unless you're a bank that's able to invest in what you need to do to appropriately risk manage these relationships, you're going to have issues,” she said.

The banking agencies understand how impactful these partnerships can be for banks engaging in them, but knowing more and earlier is paramount, she said.

Ultimately, regulators are “frustrated” that they only communicate with their regulated banks, and aren’t engaging directly with the fintechs in those relationships, Barrage said.

Change could be on the horizon in that regard, she said. Bank regulators “want fintechs to have more skin in this game,” Barrage said.

Rule in the offing?

The agencies appear to be using communication and guidance strategies to address BaaS risks in a timely manner, said Alt, an OCC veteran. In that sense, the RFI is “a rulemaking-like document,” she added.

There’s potential for guidance and the examination process to evolve, Barrage said. It’s also “entirely possible we’ll have better exam manuals that are more bespoke to these types of relationships,” she said.

Fed Gov. Michelle Bowman also touched on the possibility of a rulemaking in a statement she made. Bowman appeared wary of further action, expressing concern that the agencies “continue to publish piecemeal guidance and other documents based on an incomplete understanding of current bank-fintech relationships.” 

“While I am supporting the RFI, my support should not be construed as future support for any potential guidance or rulemaking that could result from this RFI,” she said, adding that she encourages the public to weigh in on the tie-ups.

As partnerships and technology change constantly, “regulators are never going to feel like they know enough,” said Barrage, a former FDIC executive. “That’s quite challenging for them.”

Whether a regulation is put forth or not, the costs of being a partner bank are likely to increase, as lenders address mounting supervisory expectations, compliance and risk management needs, and due diligence and record-keeping requirements, Alt said. That may lead to bigger banks dominating and smaller lenders exiting the business.

Room for more

Some analysts said the agencies’ statement left more to be desired, including enhanced guidance. Eric Holmquist, managing principal at consulting firm Capco, said regulators could have gone further to underscore the importance of monitoring third-party relationships and understanding the benefits, costs and risks of entering such arrangements.

“Banks are getting better and better at vetting third parties and asking the right questions, but ... monitoring does not mean, ‘Give us a monthly or quarterly report on performance,’” said Holmquist, who recently served as chief risk officer at Customers Bank. “Monitoring means monitoring.” 

Additionally, the lure of low-cost deposits brought in through these partnerships can be a “siren song” that keeps banks from fully assessing the associated costs and risks, Holmquist said, adding that he thinks regulators should have more meaningfully emphasized that.

There’s an “inherent challenge in the world of change management,” that if you “allow yourself to fall in love with the benefit, then you become somewhat indifferent to the cost and the risk,” he said.

Citi is working to “swiftly” incorporate regulator input amid the bank’s effort to put its data, risk and control issues behind it, CFO Mark Mason said this week, as the lender chases growth one year after launching a major reorganization. 

New penalties totaling $135.6 million from the Federal Reserve and the Office of the Comptroller of the Currency provided “feedback” on the New York City-based bank’s endeavor to modernize its technology, Mason said at a Barclays conference.

Those fines came with regulators’ admonishment that the bank had failed to make sufficient progress on the data quality, risk management and internal control issues that resulted in a pair of enforcement actions in 2020. Citi executives have called the “Transformation” the bank’s top priority. 

The lender is considering how it approaches data from an end-to-end point of view, “ensuring that we're capturing the right critical data elements at inception as they come into our systems so that they are of the quality and the speed with which we need them as we have to do regulatory reporting,” Mason said. 

“We've already done a lot of work at how we invest more in that, how we improve some of those processes, how we strengthen that governance and the standardization around that,” he added. That work will continue over the coming quarters, Mason said.

Citi’s regulators “wanted to ensure that we were allocating enough resources in order to deliver on the plan we had committed to,” he noted.

That’s led the bank to review how it’s proceeding against its initiatives and where it’s behind schedule. The bank also aims to identify what additional support is needed to get back on track, Mason said.

“We take the feedback on a regular basis from our regulators,” he said. “We incorporate that feedback. We try to do that swiftly.”

The bank spent $12.2 billion on technology last year, with more than half of that going toward modernization initiatives. 

Ultimately, executives are committed to investing whatever’s necessary to resolve the consent orders and strengthen risk and controls, Mason said. 

“But it will take some time and there will always be fits and starts when you do an overhaul of this size and magnitude,” Mason said.

Citi expects this year’s expenses to be between $53.5 billion and $53.8 billion, but closer to the higher end. 

While the bank has been focused on “right-sizing” expenses, Mason said Citi is also ensuring it has the right staffing levels to chase opportunity, so it’s reinvesting as it’s also cutting costs. The lender is likely to do more hiring in the second half of the year, he added.

“We obviously have to continue to put some proof points on the board,” Mason said. “There's still skepticism around expenses and revenue growth and those two are kind of tied.”

The bank has cut some 7,000 employees since announcing its reorganization last September. It has said it aims to shrink its staff by 20,000 by 2026. 

Also on the road to recovery

Wells Fargo, another big bank that’s faced a similar level of long-standing regulatory scrutiny, continues work to distance itself from its 2016 fake-accounts ordeal, Wells Fargo CFO Mike Santomassimo noted during an appearance a day later at the Barclays conference.

The bank expects non-interest expenses to total $54 billion for the year, up from a previous forecast of $52.6 billion, due in part to higher operating losses and customer remediation costs. 

Barclays analyst Jason Goldberg said he thought most of the lingering expenses from Wells’ own post-scandal reshuffling would have been behind the bank by now, five years after Charlie Scharf became CEO.  

Santomassimo said the San Francisco-based lender spent the first half of the year “working really hard to put some of the historical issues behind us.”

“Sometimes these things take much longer than you would expect,” Santomassimo said, adding that they can be “complicated” and take time to work through. 

But as those expenses “crystallize,” that typically means “you’re a little bit further along in the process,” he said, without elaborating.

Wells has continued its client remediation work, Santomassimo said. 

Goldberg later asked about the bank’s $1.95 trillion asset cap, imposed by the Federal Reserve in 2018, noting it feels like the tone around the asset cap has been more upbeat this year.

Santomassimo pointed to the evolution of language executives have used related to the restriction on the bank’s asset size. About five years ago, the bank gained clarity on what needed to be done, and set out to make progress; now, Scharf has been highlighting the bank is seeing the benefit of changes it’s made, in terms of operations and operating metrics, Santomassimo said.

Ultimately, the removal of the asset cap is up to the Fed, he underscored. But “our focus … across all of the regulatory work, is to get the work done in a really high quality way.” 

The asset cap is one of eight remaining consent orders against the bank (though the OCC announced a ninth on Thursday); six have been lifted since Scharf became CEO.

As regulatory approval timelines for bank mergers and acquisitions stretch out, bankers are eager to smooth the way for a potential deal. 

That’s led more banks to pledge they’ll raise capital to boost a deal’s chances of approval, or explore charter changes to find a more amenable regulator. Investment bankers and attorneys say banks are making these moves more often with the goal of obtaining necessary regulatory approvals.

After hitting a five-year low in 2023, bank M&A activity has shown signs of life this year: UMB Financial announced a $2 billion deal to buy Heartland Financial. SouthState aims to purchase Independent Bank, in the year’s second $2 billion transaction. And Wintrust plans to acquire Macatawa Bank for $510.3 million. 

Frank Sorrentino, a managing director in the investment-banking division at Stephens, said he’s seeing a lot of banks with $5 billion in assets or less that are “waving the white flag” and ready to sell, as a higher-for-longer interest rate environment and mounting technology and regulatory compliance costs stress smaller banks. 

But in the wake of last year’s regional bank failures, regulators remain concerned about banks’ capital levels, their exposure to troubled sectors such as commercial real estate and higher interest rates’ effect on securities portfolios.  

Mergers are facing more intense scrutiny from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, leading approval timelines to increasingly draw out, which is daunting to would-be dealmakers, noted Reb Wheeler, a New York City-based partner specializing in financial services M&A at law firm Mayer Brown.

To that end, anything buyers can show or do to put regulators at ease will likely benefit a potential transaction, attorneys and investment bankers said.

“There was already a high bar; now there’s a higher bar,” said Max Bonici, counsel focused on bank regulation at law firm Venable.

Here are four things investment bankers, attorneys and consultants said they’re seeing banks pursue to nudge potential deals along to get regulators’ stamp of approval.

1. Capital raises

Raising capital alongside a deal has popped up in some recent acquisitions, including the Provident-Lakeland merger, UMB’s acquisition of Heartland Financial, and Fulton Bank’s purchase of failed Republic First.

FirstSun’s January announcement of its aim to acquire HomeStreet noted a $175 million equity raise “to support the merger.” That has since increased to as much as $235 million. In the Provident-Lakeland merger, regulatory approvals were given on the condition that Provident complete a $200 million capital raise ahead of the transaction’s closing.

That pattern is expected to continue. Attorneys and investment bankers said they’re seeing an uptick in merger conditions involving capital, including post-transaction raises.

“Most of the larger deals that have been done in the last 12 months, they’ve had some kind of capital component to it,” Sorrentino said.

Sorrentino said his firm has spent a lot of time talking with companies about the need to bring capital to the equation, and how they might structure that.

Capital concerns are heightened for regulators since last spring’s bank failures. Regulators are more likely to probe an acquirer’s plans to raise added funds if a post-transaction capital ratio will be lower than optimal, and they’ve shown more concern that the surviving entity, in a larger merger, is going to be well-capitalized.

Before sitting down with regulators, would-be acquirers need to ensure that they’ve “answered the capital question,” said Jacob Thompson, Dallas-based managing director of investment banking at Samco Capital.

“The last thing you want to do is spend time and money and resources trying to put a transaction together, only to find out that there's not enough capital there,” Thompson said. “The regulators aren't going to approve it.”

With bank stock valuations near historic lows, raising capital can mean dilution for existing shareholders.

“If it’s needed in order to do a transaction, it generally comes from a place of the current shareholders understanding the value creation of a deal, despite that potentially dilutive effect of raising capital,” said Robert Kuykendall, a senior vice president at boutique investment banking firm MJC Partners.

2. Capital requirements

Requirements to maintain certain capital levels have also popped up in merger agreements — including increased back-and-forth with regulators during the application process.

“As a general matter, we're seeing more of this type of use of conditions in our deals,” Joe Silvia, a Chicago-based partner with law firm Dickinson Wright, said of both capital raises and threshold requirements.

The Provident-Lakeland deal, for one, included adherence to certain capital thresholds for a three-year period post-merger: The bank needs to maintain a Tier 1 capital to total assets leverage ratio of 8.5% and a total capital to risk-based assets ratio of 11.25%.

“I've never actually seen that in a public document,” Sorrentino said. “You tend to see that a lot behind the scenes, in terms of a nonpublic capital plan.” 

Being able to show capital adequacy for a period of time after a merger is not uncommon, Thompson noted. Still, “I don't remember seeing capital requirements discussed maybe as openly, as far as the deal approval and amending merger agreements,” he said. 

That development can provide a kind of playbook for how bankers might pursue a similar deal and the kind of capital ratios they might need to ultimately hold, Sorrentino said. 

In many cases, attorneys and investment bankers are making sure clients understand that regulators are generally looking to see higher capital ratios than they may have in the past, especially given concerns around CRE concentration. 

“We're modeling out a lot of these transactions with higher pro forma ratios than we have in the past,” Kuykendall said.

For pro forma leverage ratios, that’s edged closer to 10%, where there was a level of comfort with closer to 8% in the past, he added.

Sorrentino said he expects to see more of that, “where banks are going to have to fulfill certain thresholds, and they’re going to have to commit to meeting certain capital ratios at closing, or thereafter.”

“It's a pretty hot topic, because if you're thinking about M&A, you’ve really got to understand, what are we signing up for?” he added.

3. Charter changes

Some acquiring lenders — FirstSun, for example — are pursuing or exploring charter changes, sometimes to find a more receptive regulator. 

FirstSun said in April it planned to switch from a national charter, overseen by the OCC, to a Texas state charter — making the Federal Reserve its primary federal regulator. FirstSun's subsidiary bank, Sunflower Bank, is Dallas-based.  

When New York Community Bank bought Flagstar, it switched from a state to a national charter, putting it under the purview of the OCC and making it so that the deal did not need FDIC approval.

“If you’re merging with another significant entity, it’s a perfect opportunity to re-evaluate and see where the best fit is,” said Denise Maple, a clinical assistant professor of finance at the University of Illinois.

FirstSun made the move partly due to concerns the OCC would delay approval of its purchase of HomeStreet, “given their recent experience with multifamily and CRE positions," FirstSun CEO Neal Arnold said in May. 

CRE exposure tends to be viewed differently by state or federal regulators, and the OCC has historically taken a harsher view of concentration in the segment, Silvia said. 

“If somebody decides to flip regulators, they probably have more comfort that whichever regulator that they’re going to has got a more open mind about the combined company’s business model,” Sorrentino said. 

Sorrentino said he expects more banks will explore charter changes, even preemptively, with the belief that they’ll have a better pathway if they decide to pursue a merger or acquisition. 

Thompson, by contrast, said he isn’t seeing much of that among his mostly privately held community banks based in Texas.

But, he said, “I can understand why a bank may want to switch charters, because they feel like maybe a state-level banking regulator would have a better or maybe a more thorough understanding of their business.”

The move could be viewed negatively, though.

It’s “sort of like trying to fit a square peg into a round hole, just to get a deal done,” Kuykendall said. “The regulators may be wising up to this, because it feels sort of forced.”

4. Informing regulators earlier

Banks, too, are socializing regulators significantly” more often, on the possibility of a deal of this, Kuykendall said. 

“You never want to surprise the regulators,” Thompson said. “The more transparent that buyers or potential buyers can be up front kind of helps.” 

Pre-application filing calls, involving regulatory agencies and the acquirer, are calls Silvia said he doesn’t recall having much of in the past but have become far more common.

“It feels like a soft application stage,” he said. Regulators are “questioning certain elements of the transaction, pre- and post-, and they're kind of giving you a roadmap as to where some of their thinking may be, with respect to the red flags of the application.”

Bank regulatory agencies aren’t going to give an indication of approval or denial during an initial conversation. But they’re likely to give enough meaningful feedback to give banks an idea of whether they should move forward with or re-evaluate a possible deal, Thompson said.  

Additionally, advisers are telling banks to lay out how the transaction would look on a pro forma basis and provide more documentation and detail during the application process than they have in the past. 

“I try and front-run some of the issues with clients and say, ‘Look … they're going to ask about capital, post-transaction. So, do we have a capital policy or a capital plan in place that's been approved by the board? Is it reviewed annually? Let's think about providing that,’” Silvia said.

Ultimately, good relationships with regulators are crucial when banks have a deal in mind. 

“Our own preliminary due diligence involves asking, ‘How is your relationship with your regulator, and how can you make it better? Because we're going to need to have a very tough conversation with them to get this deal done,’” Kuykendall said.