The intense pressure on banks, which have had to respond to new regulations and rapidly changing markets for financial products and services, has only been compounded by the recent volatility in the banking sector. However, during such times, one bank's struggles could present an opportunity for others.
Here are eight questions an organization should ask itself when considering acquiring a distressed bank:
- Are there restrictions on its ability to acquire a bank? A financial institution may not be able to acquire a bank if, for example, the institution has outstanding anti-money laundering compliance deficiencies or a low Community Reinvestment Act rating.
- Are its existing business activities consistent with the activity restrictions imposed on banks and bank holding companies? An organization that acquires control of a bank becomes subject to restrictions on its activities, including prohibitions against commercial activities, proprietary trading, and asset management activities. This may require divestitures or restructuring of the current business or necessitate a non-controlling investment.
- What financial resources are required to acquire a bank? While the exact capital commitment depends on the situation, an acquirer must serve as a financial source of strength for the bank and demonstrate that the bank and the bank holding company will be sufficiently capitalized after the acquisition.
- What type of managerial resources are expected by the regulators to acquire a bank? Among other things, an acquirer must have personnel with bank experience and robust risk management and compliance programs.
- Would an acquisition of the target bank present antitrust or systemic risk concerns? Banking acquisitions are subject to an antitrust analysis that has not been updated since the mid-1990s and may necessitate branch/deposit divestitures.
- Is the target bank subject to any existing regulatory actions or investigations? A bank that has an existing enforcement action with its regulator may have ongoing compliance and remediation obligations. And information about the existence or extent of any existing investigations or examination concerns may be limited by restrictions on sharing confidential supervisory information (CSI), making due diligence complicated.
- What other licenses or registrations do the target bank's affiliates hold? A target bank that owns a broker-dealer might be subject to FINRA approval for a transfer in ownership. Similarly, asset management subsidiaries may be subject to client consent requirements that the acquirer would need to navigate.
- What type of personal information must owners, officers and directors disclose to the regulators as part of the application to acquire a bank? Even noncontrolling or natural person acquisitions of a bank may require the acquirer and others to disclose significant amounts of information to federal and state banking regulators, including fingerprints and financial information.
To summarize, the prospective acquirer's and target's current business circumstances, activities and relationships could present regulatory and other hurdles—which can be surmounted. To learn more about the eight considerations above and others for a contemplated deal, please contact one of the authors of this Legal Update or another member of our Financial Institutions M&A practice, which works closely with Mayer Brown's Financial Services Regulatory & Enforcement, Private Equity, Funds & Investment Management, Banking & Finance, and Technology & IP Transactions practices.
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