Regulatory problems have prompted BancorpSouth in Tupelo, Miss., to once again withdraw its applications to buy two banks.
Meanwhile, the banks — Ouachita Bancshares in Monroe, La., and Central Community Corp. in Temple, Texas — have agreed to extend the deadlines of their agreements with the $14.1 billion-asset company until the end of 2017. But they've also raised the termination fee BancorpSouth would have to pay if the deals are not completed in time.
The latest snag in the deals, which were first announced in early 2014, is related to BancorpSouth Bank's Community Reinvestment Act rating. In August the bank's rating was retroactively downgraded from "satisfactory" to "needs to improve."
"We've withdrawn our merger applications and we intend to refile when we're able to repair that rating," Dan Rollins, the company's chairman and chief executive, said in an interview Friday.
"I don't think anybody would've anticipated that a merger would take three or more years," he added.
The extension underlines the companies' commitment to the deals, despite "the very frustrating past 2.5+ years of regulatory delays," Kevin Fitzsimmons, an analyst at Hovde Group, said in a research note.
The extension "puts in a valid end date to the merger agreement that's out in the future," Fitzsimmons said in an interview. "From an investor's standpoint, I think [Friday's announcement] says that BancorpSouth feels pretty confidently they'll get this thing dealt with by then."
The deals were announced in January 2014, and marked the historically acquisitive company's return to M&A after the economic downturn of 2008. Both deals were initially expected to close in the second quarter of that year, but in the summer of 2014 the company withdrew the applications from the Federal Reserve and Federal Deposit Insurance Corp. and extended the deals' deadline through mid-2015 when regulators raised concerns over the bank's compliance to the Bank Secrecy Act.
Around the same time, the Consumer Financial Protection Bureau began conducting a review of the bank's fair-lending practices.
The BSA order from the FDIC was lifted in April 2015.
In June of this year, BancorpSouth entered into a consent order with the Justice Department and the CFPB that settled and resolved alleged violations of the Equal Credit Opportunity Act and the Fair Housing Act. The bank agreed to a $10.6 million fine. The recent retroactive CRA downgrade is related to this issue.
Clyde White, chairman of Ouachita, said in the release that he was "disappointed in the length of time it has taken" to complete the deal. Still, he and Donald Grobowsky, the chairman, president and chief executive of Central Community, said in the release they are committed to selling their respective companies to BancorpSouth.
As part of the extension, BancorpSouth agreed to double the termination fee it would pay Central Community to $2 million, according to an SEC filing. The agreement allows Central Community to terminate the agreement if: BancorpSouth Bank's CRA rating is not upgraded in its next examination; if the next examination does not commence before March 30, 2017; the acquisition application isn't refiled to regulators by Aug. 31, 2017; or if regulators deny the application. The bank also has to cover $500,000 in "merger-related fees" in the case of a termination.
The termination fee with Ouachita is based on a timeline. It is set at $2 million if the bank doesn't have a better CRA rating by June 30, 2017. Ouachita could get $2.5 million if the company doesn't refile the transaction application by Aug. 31, 2017. It increases to $3 million if the deal is not completed — or at least approved by regulators with closure impending — by Dec. 31, 2017. Ouachita is also entitled to $500,000 in merger-related costs.
When BancorpSouth faced problems with its BSA compliance, it served as a heads-up to similarly sized banks, Fitzsimmons said.
"It was a bit of a warning shot that if you're over $10 billion you better have your BSA programs squared away," he said.
Fitzsimmons added that the delays are doubly frustrating.
"It's not only prevented BancorpSouth from completing these deals, it kind of has frozen them out of doing any deals," he said. He added, "A lot of it just comes down to the regulatory environment we live in."