Acquiring or Investing in Banks – More Interest Expected in a Second Trump Administration

Federal banking agencies under a second Trump Administration are expected to be more receptive to industry proposals for bank mergers, acquisitions, and related transactions. We've previously explored national trust banks and foreign banks' establishing U.S. branches to streamline state licensing. Besides chartering de novo banks, another option is for investors—individuals or entities—to acquire existing banks by investing in them.

We expect interest in these deals to pick up in 2025, especially if the next administration rebalances the agencies' posture, which was generally restrictive under the Biden Administration.

Read more DWT insights about the incoming Trump Administration: New Administration Outlook

Key Takeaways

• The U.S. banking sector is ripe for consolidation. And the second Trump Administration may be favorable to mergers—but not to the exclusion of de novo bank charters. New tax policies and a general deregulatory trend may also provide further tailwinds.
  • In a recent survey, 43% of bank leaders said their organization is very or somewhat likely to buy another bank by the end of 2025; 48% of bank leaders said their management team would consider a merger of equals or a similar combination.[1] Larger banks are also expected to be likely buyers.
• Acquiring a bank may be easier than chartering a de novo bank, but an existing bank will have legacy issues, management, staff, and a business plan that will come with the acquisition. De novo charters may avoid some of these constraints.
• An entity that controls—directly or indirectly—a bank becomes a bank holding company that is subject to comprehensive supervision and regulation by the Federal Reserve. Individuals that seek to own a bank must separately have the approval of the applicable federal bank regulator.
• Control may be presumed or found at levels far below 50% equity ownership.

Why invest in a bank?

An investor may want to acquire or otherwise invest in a bank for various reasons. An acquirer might want to consolidate existing banks. Alternatively, an investor may want to expand into new geographic markets. A non-bank may want to expand into the banking sector by buying a bank and moving certain operations to the bank or to a non-bank affiliate. For instance, moving certain licensed operations to a bank could obviate the need for those licenses, allow for interest rate exportation, or benefit from federal preemption of certain state laws.

Foreign banks may expand into the U.S. banking sector by purchasing or investing in U.S. banks (in addition to establishing a U.S. branch).

By "bank" we mean an insured depository institution under federal law: a state-chartered or national bank or a state-chartered or federally-chartered savings and loan association. We don't mean industrial banks (also called industrial loan companies), special-purpose national banks, so-called narrow banks, or other alternative/novel state-chartered institutions. Owning these other kinds of institutions comes with notable exceptions, limitations, and flexibility.

Owning a bank also allows a non-bank entity to offer deposits insured by the Federal Deposit Insurance Corporation (FDIC), to access the U.S. payments system, and to access Federal Home Loan Bank loans and the Federal Reserve's discount window lending.

How to invest in a bank

An investor can invest directly or indirectly in one or more banks by owning equity and other obligations or rights that are like equity interests. There's a lot of nuance involved, and careful analysis of any instrument is needed, but to streamline the discussion, we will generally focus on purchasing and owning equity.

An investor can purchase equity in one or more banks (i.e., direct) or one or more companies that own banks (i.e., indirect). Whether the bank is owned by various holding companies and is publicly traded may influence which targets are selected and how ownership is pursued—that is, which entity's equity the investor purchases.

Consequences of investing in a bank

An investor that invests in a bank will generally enter the regulatory and supervisory ambit of the federal banking agencies—the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), and the FDIC.

At a high level, the three federal banking agencies regulate and supervise different kinds of banks, while the Federal Reserve also regulates and supervises the bank holding companies (BHCs) and savings and loan holding companies (SLHCs) as well as the non-banking activities of banking organizations generally. We generally only consider BHCs, not SLHCs, in this article. There are some differences, but the principles remain the same.

Other functional regulators will regulate certain subsidiaries that engage in securities and insurance activities within a banking organization.

In addition, before purchasing bank (or BHC) equity, various filings and approvals are generally required with one or more of the federal banking agencies.

Change in Bank Control Act filings

Under the Change in Bank Control Act (CBCA), a person—including an individual and some entities—acting directly or indirectly, or through or in concert with one or more persons, must give the appropriate federal bank regulator 60 days' written notice before seeking to acquire the power to vote 25% or more of a class of a bank's (or BHC's) voting securities or the power to direct the bank's management or policies, unless the acquisition is exempt. In addition to other exemptions, an entity does not need to file CBCA notice if approval under the Bank Holding Company Act or the Bank Merger Act is required. These other filings are discussed below.

In addition, there is a presumption that a person seeking to acquire the power to vote 10% or more of any class of voting securities has acquired control in certain circumstances—and thus, a CBCA filing is required.

The relevant federal banking agency may disapprove a CBCA notice for various reasons: competition, financial stability, adverse effect on the Deposit Insurance Fund, the competence, experience, and integrity of the filer(s) or proposed management. In effect, the CBCA notice filing is a prior approval filing.

Bank Holding Company Act filings

Under the Bank Holding Company Act (BHCA) an entity—but not an individual—must generally have the prior approval of the Federal Reserve before acquiring ownership or control of a bank or another company that owns or controls a bank (BHC).

(To be clear, an individual is not a BHC. Individuals that own voting shares typically file CBCA filings.)

Specifically, prior approval under the BHCA is required before taking any action:

• that causes any company (broadly speaking, most kinds of entities) to become a BHC
• that causes a bank to become a subsidiary of a BHC
• where a BHC acquires direct or indirect ownership or control of any voting shares of any bank or BHC in excess of 5%
• where a BHC or non-bank subsidiary of a BHC acquires all or substantially all of the assets of a bank
• where a BHC merges or consolidates with any other BHC

A company (i.e., the entity as investor) has control over another entity or bank for purposes of the BHCA when:

• the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25% of any class of voting securities of the bank or company
• the company controls in any manner the election of a majority of the directors or trustees of the bank or company
• the Federal Reserve determines that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company

The Federal Reserve has codified its framework for determining whether an entity (i.e., the investor) has a controlling influence over a second company/bank (i.e., the target). The Federal Reserve's framework involves a detailed set of presumptions generally based on various levels of ownership or control of voting shares, total equity, and other factors like the number of directors the investor has on the target's board, business relationships and terms, officer/employee interlocks, and contractual powers of the investor over the target, among other factors. For instance:

• There is a presumption of control at less than 5% ownership of any class of voting securities, if there is a management agreement.
• Conversely, an investor may own or control up to 24.99% of any class of voting securities of a target, provided it does not trigger a presumption of control based on the other factors discussed above.
• Ownership of 25% or more of any class of voting securities, or control of a majority of directors, by statute is conclusive as to control.
• Under the Federal Reserve's controlling influence framework, an investor that controls less than 10% of any class of a target's voting securities is generally presumed not to control that target (absent other control factors).

A BHCA control analysis is an important undertaking for entities as investors that want to invest in a bank or BHC.

Bank Merger Act filings

Under the Bank Merger Act (BMA), when two banks merge or consolidate or when a bank merges with an uninsured entity, a BMA application is generally required. BMA transactions also generally include acquiring assets or assuming the liability for any deposits.

Bank mergers—broadly speaking—have been the subject of intense scrutiny during the Biden Administration. Ahead of the 2024 election, the FDIC and OCC under the Biden Administration issued bank merger rules or guidelines that would generally subject bank mergers to more scrutiny from and discretion of federal agencies, add more time to process applications, and make deals harder to approve. During this same period, the U.S. Department of Justice updated its bank merger guidelines with similar policies in mind. The Federal Reserve notably did not follow suit. In any event, it is expected that these developments will be substantially revised in the second Trump Administration.

A non-exhaustive summary chart follows for these three kinds of filings.

(Non-exhaustive chart)

Why we may see consolidation

There are approximately 4,500 banks in the United States. Many of these are smaller institutions. Some of these banks may only have one or very few branches and were founded in an era when families owned banks across generations but not state lines, serving a tight community without much competition.

Today, things are different. These banks must now compete locally, regionally, and even nationally to attract deposits, often using third-party service providers like fintechs and other technology companies. In addition, even with tailoring for smaller institutions, compliance obligations, supervisory scrutiny, and regulatory demands are exponentially higher for these institutions. And while they may try their best (and may even outperform or provide more stability than certain larger banks during times of stress) they may still find it difficult to attract the talent to adequately staff and run these banks in the long run.

Many of these banks may be ripe for mergers, acquisition, and other equity investments—whether as acquisition targets of U.S. banks to acquire their branches, customers and deposits, or simply as an entry mechanism to the U.S. market by non-bank fintechs, foreign banks, and others.

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If you have questions or would like to explore acquisition or investing options, please reach out to the authors or your regular DWT attorney contact.