Over the years, I have been asked to advise numerous domestic and international clients regarding acquiring a commercial bank or other type of financial institution. Generally, the discussions involve one of the following scenarios:
- Purchase of an existing healthy bank from the current owners;
- Purchase of a failed institution from FDIC or the Government Agency responsible for the resolution of a failed bank,
- Chartering of a de novo bank by the appropriate regulatory agency in the US or by the Central Bank in my international assignments.
Among the above scenarios, chartering a de novo bank is the least desirable alternative in today’s banking environment because of the time requirements for regulatory approval and the lack of an immediate revenue stream. In the early stages of these discussions, I tell the potential acquirers they will be required to submit the following information as part of the acquisition process:
- The source(s) of capital for the proposed acquisition;
- The proposed ownership group, management team, including the board of directors; and
- Preparation of a proposed three-year Business Plan
In today’s regulatory, economic, and political environment, the ownership group must satisfy the banking regulators on the following two critical considerations for purchasing a commercial bank. These are referred to as the two C’s:
- Capital
- Character
The source of capital has to be readily identifiable from the founding members. The founders can use little or no leverage to capitalize the target bank. In these transactions, cash is king. Non-cash contributions such as real estate or other non-liquid assets are frowned upon and are considered non-starters. Personally, I do not waste my time on these types of deals.
The proposed board members and management team are expected to have the character and integrity to be involved in the banking business. Acquiring a bank is a privilege, not a right. There is generally a set of disqualifiers that prohibits potential acquirers from purchasing or being involved in the operations of a commercial bank. There is no leeway on this matter.
The first document I usually provide to an investor group is referred to as a biographical and financial information form. This form must be completed and filed by each shareholder and board member. I provided this document right up front so there was no misunderstanding about the required disclosures.
This information is required because banking is a highly regulated business subject to many laws, regulations, and rules. These regulatory requirements are ever-changing, and the acquirers must be aware of the high level of scrutiny involved in this process.
One of the critical attributes for any commercial bank is selecting directors and executive management willing to adhere to fiduciary duties and obligations, including a firm commitment to put the bank’s interest ahead of personal interest and avoid any conflict of interest. I was recently hired as an expert witness on a case where a proposed controlling shareholder withheld critical information about his past dealings with a financial institution. His actions caused a financial institution to suffer a substantial loss. He blamed his attorney, which is much like filing an inaccurate tax return. The tax authorities will deem you responsible for the mistakes, not the person who prepared the return. The same applies to a change of control notice.
Banks operate differently than most organizations. For the most part, banks obtain their funding from the general public. In other words, banks are entrusted with the money that the general public provides. Without these funds, a bank cannot thrive. This is one of the reasons why banks are heavily regulated.
If you look at banking, it is not a complicated business; however, the strategies often used make it more complex than it should be. I often use the following analogy during my classes with my international students. I tell them banks are in the business of buying and selling money. They purchase money in deposits and sell it in the form of loans. The spread between these two components is the expected profit, after overhead costs are paid
I tell the acquisition group that the following are crucial elements of this process:
- Establishing the preferred parameters for target institution(s) selection, including:
- Asset size,
- Geographic consideration,
- Amount of capital required to consummate the transaction;
- Identifying the potential targets that meet the established criteria;
- Determining the type of charter to be pursued for this endeavor – state vs. federal;
- Conducting the analysis and negotiations to arrive at a market value, including all due diligence analysis of the targeted bank’s files and records;
- Drafting the documents necessary to close the deal,
- Assist in establishing and completing the requisite application package to obtain regulatory approvals. (The information to be furnished to the regulators will depend on the type of charter being pursued and which regulatory agencies have jurisdiction over the process.)
Once a target has been identified, the process includes:
- Letter of intent with the target institution
- Pricing/bid considerations based upon the results of the due diligence,
- Closing/take control
- Design of post-acquisition risk management and corporate governance systems in the form of a three-year business plan.
Conclusion: The management body of a commercial bank or credit institution must be suitable to carry out its responsibilities and be composed in such a way that contributes to the effective management of the bank and its decision-making processes. This will have an impact not only on the safety and soundness of the institution itself but also on the wider banking sector, as it will reinforce the trust of the public at large in those who manage the financial sector. This article’s policies, practices, and processes are not static. It is meant to be a practical tool that is updated regularly to reflect new developments and experiences.
Prepared by Terry L. Stroud – April 2025
