The Bank Secrecy Act has put another bank acquisition in limbo.
Washington Federal in Seattle has been forced to delay its $63.9 million deal to purchase Anchor Bancorp in Lacey, Wash., after concerns were raised about its BSA compliance. The deal’s applications were withdrawn and its termination deadline has been pushed back six months, to June 30.
The $15.1 billion-asset company isn’t the first institution — and likely won’t be the last —
to be tripped up by BSA and anti-money-laundering issues while trying to complete an acquisition.
Those laws remain the toughest hurdles for buyers to cross, particularly as technology and scams continue to grow and evolve, industry experts said.
“Threats to the banking system are constant and changing,” said Michael Iannaccone, vice president of business development at Plexus Groupe. “Banks have to constantly change to meet these challenges.”
Several deals in recent years have been delayed or scuttled over BSA and AML concerns. It took M&T Bank more than three years to complete its deal for Hudson City Bancorp. When the Federal Reserve finally gave its approval, it warned that banks from that point on they would have to withdraw their applications if issues surfaced.
BancorpSouth, for instance, has been unable to complete its purchases of Central Community and Ouachita Bancshares because of problems with its BSA and Community Reinvestment Act compliance.
Investors Bancorp and Bank of Princeton nixed their planned merger earlier this year after realizing it was unlikely they would receive approval from the Federal Deposit Insurance Corp. before its termination deadline. Investors had previously entered into an informal agreement with regulators over its BSA and AML practices.
“Part of [the issue] is a regulatory sensitivity and an emphasis on BSA compliance in the examination process,” said Chip MacDonald, a lawyer at Jones Day. “I think regulators have an almost zero-tolerance policy.”
Brent Beardall, Washington Federal’s president and CEO, declined to provide more details on the compliance issue, though he was quick to absolve regulators of doing anything untoward.
“I don’t want anyone to think it is about overzealous regulators,” Beardall said. “We simply have grown substantially in our deposits and our internal processes haven’t kept up where we need them to be. We’re taking this opportunity to improve and we appreciate that Anchor has agreed to extend the deadline.”
Washington Federal hasn’t estimated how much it will cost to address the issue, though Beardall said the company should be able to absorb any added expense since it is already an efficient organization. Its efficiency ratio was below 47% at June 30.
Washington Federal also increased what it agreed to pay Anchor to a price that values the seller at about 100.7% of its tangible book value, Beardall said. The original deal priced Anchor below tangible book value.
The compliance issue has nothing to do with a BSA-related cease-and-desist order Washington Federal had to work through roughly a decade ago, Beardall said.
BSA compliance is difficult because “it involves a lot of judgment and isn’t black and white,” Beardall said. “Judgment can be second guessed in hindsight. The expectations are different as you grow in asset size. … It’s why we’re beefing up and improving ourselves so we’re in a position not just to be $15 billion of assets but to allow us to be $20 billion or $30 billion.”
Washington Federal and Anchor also included clauses that let them push the deal back three more times, until the end of 2019, if approvals aren’t received, which seems to recognize that regulators will move at their own pace.
“It goes without saying that regulatory issues need to be dealt with and have to be the forefront at every bank,” said Jon Bruss, CEO and managing principal at Fortress Partners. “Every bank board I have served on in the last couple of years has had heightened awareness of the necessity of assuring that compliance with the Bank Secrecy Act is [more than] satisfactory.”
Deals in limbo can cause issues for buyers and sellers, experts said. Competitors, which generally try to lure clients and lenders away when a deal is announced, tend to step up their efforts when “there are uncertainties or delays,” MacDonald said.
A buyer could also lose the target to a higher bidder. It makes sense that a seller may extend a deadline rather than terminating a deal since doing so allows it “to have the best of both worlds,” Iannaccone said. The bank knows it still has a deal in place, along with an opportunity for other suitors to make offers.
In the case of Washington Federal and Anchor, the penalty for rejecting the deal for another offer was lowered to $900,000, said Jerald Shaw, Anchor’s president and CEO. Shaw said that he isn’t necessarily expecting Anchor to get a better offer but that he still believes selling to Washington Federal is his company’s best option.
Anchor has struggled in recent years, losing money in 2013 before returning to profitability the next year, according to data from the FDIC. It has also faced pressure from activist investors.
“There’s no one standing over us with an offer that would trump theirs,” Shaw said. “I have absolute confidence the deal will be completed June 30 — the year is questionable.”
Washington Federal, which has been transforming itself from a thrift to a commercial bank, has posted strong commercial loan growth and changed its asset sensitivity, said Jeffrey Rulis, an analyst at D.A. Davidson.
The regulatory snag could slow that transformation.
“This has the potential to stall that out as folks say, Wait a minute, maybe more work needs to be done before they get a full commercial bank multiple,” Rulis said. “It is kind of an overhang.”