Acquisitive community banks are having a harder time justifying deals on cost-cutting grounds, as the expense of implementing new risk-containment systems undermines their goals.

More regulation on banking systems paired with the economy have pushed acquirers to more rapidly implement new platforms to better handle risk after a growth spurt. Such growing pains have cost banks millions of dollars to restructure all of their platforms so they avoid falling out of compliance regardless of their size.

"As small banks are integrating other banks and approaching larger bank status, some of the larger bank rules … are being pushed down on them," said Jeff Theiler, a senior risk officer at Hancock Holding Co. "The regulators are saying 'if it's good for them, it's good for the smaller banks.'"

Hancock became acutely aware of this when it hit $19.4 billion in assets after buying Whitney Holding Co. earlier this year. Before the acquisition, Hancock planned to upgrade its systems when it reached $10 billion to $15 billion in assets in a couple more years.

"We have blown by that within less than a year," Theiler said. "We had to quickly match those capabilities" of a bank with more than $20 billion in assets.

Hancock accelerated a schedule to upgrade its systems, scheduling the move to coincide with the planned March integration of Whitney. The company hired outside consultants, designated 60 people to the integration and signed up with NICE Actimize for its new fraud and Bank Secrecy Act platform. Hancock's merger-related expenses for the first nine months of 2011 were $47 million. Management expects costs tied to Whitney to total $125 million.

"For us, that's just the growing pains," Theiler said. While the new system is costly, "we're looking at how much money we can save by not being penalized by the regulators."

Industry observers say such new systems are needed to reduce risk and satisfy regulators, but they fear it will make acquisitions more expensive. Pricey integrations could also make it harder to sell a proposed deal to shareholders and to analysts as a way to lower expenses, at least in the short run.

"Certainly a component of many bank deals historically has been the cost savings," said Gregory Lyons, corporate partner and co-chair of the financial institution's group at Debevoise & Plimpton LLP. The new costs to integration "could encumber the cost savings."

The financial services sector is estimated to spend more than $23 billion on technology in 2013, based on to a Chartis Research paper issued earlier this month. Chartis said technology spending will be largely "driven by the proliferation of regulations," such as the Dodd-Frank Act, Basel II and III, and Solvency II.

Though most of the new regulation directly hits banks with more than $10 billion in assets, even smaller banks are looking at implementing such rules as a precaution.

"More generally, regulators are looking to implement 'best practices' for those that are far below $50 billion in assets but are getting larger," Lyons said.

Such was the case at the $3 billion-asset Brookline Bancorp Inc. in Massachusetts, which is upgrading all of its platforms as it prepares to buy Bancorp Rhode Island Inc.

"In today's environment, what passed muster before is not going to pass muster now," said Paul Perrault, Brookline's president and CEO. "It's one thing to have a successful business that is ultimately sound but it's another thing to be able to support that in a manner that satisfies regulators."

Though new regulation is in its early stages, Lyons said his firm has received many inquiries from banks with $5 billion to $25 billion in assets about best compliance practices at other institutions.

Demand is often evident at banking conferences where enterprise risk management firms dominate exhibit halls. It shows just how tough it is for banks to determine exactly what risk systems regulators want.

"The platform pressure is huge," said said Walter Moeling 4th, a partner at Bryan Cave. "You've got to prove to the regulators that you've got complete risk management controls in place. That is really hard to do because many of these are emerging technology firms."

Bankers are "trying to get a gauge" on the best practices since "you often times don't find out, unfortunately, until an examination," Lyons said. "There are all these horizontal reviews where the regulators are not just looking at what you're doing, but what you're doing relevant to the banks of equivalent size."

Bankers say an increased regulatory focus is not just on implementing regulations but on improving existing requirements, even for failed-bank buyers such as Sunwest Bank in Tustin, Calif. Sunwest was delayed in making more deals after regulators ordered it in January to improve Bank Secrecy Act compliance.

Moeling said it is very common for regulators to put failed-bank acquirers "in a penalty box" to see how the buyer manages the assets before regulators approve another deal. "It's not enough to send them your policy," he said. "They want to see that your policy actually works in practice."

Ben Knieff, the director and head of fraud protection at NICE Actimize said acquirers often operate up to five different systems after buying other banks. It is often "easier" to show consistencies and efficiencies to the regulators on a uniform system, he said.

Theiler said fraud detection and regulatory satisfaction have become an increasingly vital selling point to its customers despite higher initial costs. "When we have the ability to do this enhanced [fraud] monitoring, I'm sure we will use it as a selling technique because banks that can do this well will have a competitive advantage," he said.