If you plan to submit a regulatory application for a merger, acquisition, consolidation, or other restructuring, take heed.

Regulators have changed their reviewing standards, with the result that management factors now weigh more heavily than ever before.

You may think you are an excellent president or chief executive officer of a community financial institution - until you file an application and become subject to the regulatory investigation.

Roots in Thrift Debacle

Horror stories about the S&L kingpins and their pillaging of the savings and loan industry have filled the media.

The regulators, therefore, are firmly committed to preventing any individuals with even the slightest managerial flaws in their records from engaging in an acquisition or other transaction requiring regulatory approval.

If you are going to apply to an agency for approval of an acquisition, you had better be clean enough to run for President of the United States.

A merger or acquisition must generally be approved by the agency that will have jurisdiction over the resulting institution.

Factors in Approval Process

For example, a state bank merging into a national bank will be approved by the Office of the Comptroller of the Currency. Or a state Fed-member bank merging into a state nonmember bank will be approved by the Federal Deposit Insurance Corp.

A regulatory agency generally considers the following factors in the course of the approval process:

* Needs and convenience of the community.

* Future earnings prospects.

* Management strength.

* Adequacy of capital structure.

* Financial history and condition of the bank.

Several of these factors have changed but slightly over the years. And capital adequacy is still measured rather subjectively.

Others, such as convenience and needs of the community and antitrust considerations, seem to change with each new political administration.

But analysis of the management factor has changed most recently - and most resoundingly.

A Case History

Actual experience has shown that even a banker with 35 years of experience and an excellent track record may not make the cut in a regulatory approval process.

The banker in question purchased a piece of "other real estate" from a related bank 10 years ago. He discussed the deal beforehand with his board but did not show it in the minutes.

These circumstances, along with jealous sniping by competitors, was enough to seal his fate: When in doubt, the regulators will disapprove.

There is, however, hope. Even if a transaction requiring regulatory approval fails the management test, it does not mean that the failing individual is destined for removal, penalties, or some type of purgatory.

Avoiding Being Second-guessed

It simply means that the regulators were not willing to be subject to interrogation by congressman or other persons with 20/20 hindsight.

These regulators want to avoid being asked if they knew, should have known, or could have known that there might have been a character flaw, defect, or managerial problem with the proposed executive officer or officers.

Times have changed dramatically in the bank application arena. As a result, bankers must prepare their applications carefully and work closely with the regulators toward approval.

Mr. Gerrish, formerly regional counsel for the Federal Deposit Insurance Corp., is a member of the Memphis-based law firm of Gerrish & McCreary.

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