Regulatory Uncertainty Weighs on Associated's M&A Plans

Associated Banc-Corp has crafted a reputation for being risk-averse under the leadership of Philip Flynn, and that mantra applies to the Green Bay, Wis., company's appetite for bank acquisitions.

Larger banks — with a few exceptions — have been hesitant to buy competitors since the financial crisis. A few deals, including M&T Bank's bid for Hudson City Bancorp and CIT Group's purchase of OneWest Bank, have drawn intense scrutiny from regulators and community groups, serving as a warning for bankers looking to get bigger through deals.

Management at the $27 billion-asset company has expressed an interest in a cost-saving deal in Wisconsin, Illinois or Minnesota. But Associated has yet to find a deal attractive enough for it to make the leap after an eight-year break, Flynn, the company's president and chief executive, said in a recent interview. Uncertainty, particularly tied to regulatory approval, is partly to blame.

"It's really the concern around the risk of doing a transaction and getting timely approval," Flynn said, adding that Associated also wants to avoid inheriting another company's problems. "I think there are transactions that make sense from a strategic … and a price point of view, but it has to be fairly compelling to overcome the potential regulatory risks."

M&T's three-year slog to close its purchase of Hudson City has been top of mind for Flynn. M&T is still trying to get regulators to sign off on its efforts to beef up anti-money laundering compliance.

Associated has grappled with its own anti-money laundering issues, paying a $500,000 fine in 2014. And other deals, like CIT's purchase of OneWest, have drawn the ire of community groups, which creates added risk.

Associated has no specific concerns tied to community groups or regulation, Flynn said, adding that the overall environment gives him reason to pause. "There's an awful lot of engagement of any potential transaction from community groups, so you have to be prepared to deal with those issues as well," he said.

To be sure, Associated has dealt with uncertainty before. When Flynn took over in late 2009, Associated was saddled with troubled commercial real estate and construction loans, as well as dwindling capital. At that time, he asked the board about its goals and whether they included positioning to sell the company, Flynn said, noting that Marshall & Ilsley in Milwaukee agreed to sell itself the next year.

Associated's board backed independence, and Flynn raised $478 million, an amount that turned out to be more than what the company ended up needing, industry experts said.

A belief arose that Associated would "pick up a lot of smaller banks … but that didn't come around," said Scott Siefers, an analyst at Sandler O'Neill. Instead, management opted to buy back the company's stock.

Associated's last bank deal was the 2007 purchase of First National Bank of Hudson in Woodbury, Minn. The company has been open to buying fee-generating businesses, such as this year's acquisition of Minnesota benefits consulting firm Ahmann & Martin.

There are signs, meanwhile, that regulators and community groups are becoming more supportive of deals under the right circumstances.

CIT was able to complete its purchase of OneWest and the $210 billion-asset BB&T bought the $19 billion-asset Susquehanna Bancshares without incident. Such progress could encourage other larger institutions to get back into M&A, industry experts said.

"The Susquehanna deal was important psychologically to the industry," said Chris McGratty, an analyst at Keefe, Bruyette & Woods. "It got approved and closed without any hiccups. That was the first big deal since the crisis that shared those characteristics."

Flynn is less convinced. While he said it was "great" to see Kelly King, BB&T's chairman and chief executive, successfully complete a big deal, such as accomplishment "is hard to translate to what happens for one bank in one area to our bank."

Associated could initially look at a small deal to "dust off the playbook and make sure the checks and balances are in place," McGratty said. "I think the larger the transaction the more careful they have to be because you could destroy credibility quickly."

Flynn's conservative nature has seemingly played a role in Associated's dearth of bank deals, industry observers said. Flynn spent the first 30 years of his career at Union Bank, an institution he touted for its conservative culture.

"There's at least an element of discipline, which is a good thing, but when you're trying to do deals it works against them," Siefers said. "They won't pay up for anything or go outside of their comfort zone."

Flynn said he believes banks are measured by how they fare during downturns, adding that discipline should exist around the loan book to prevent problems. Despite a conservative view, the size of Associated's loan portfolio has increased by 9% from a year earlier, to $18.2 billion.

"There are a lot of other risks out there these days … which are really hard to manage," Flynn said. "When you screw them up like having a AML problem like we did, there are big consequences. I don't think banks, over the cycle, get rewarded for taking a lot of risk."