February 7, 2024
On January 29, 2024, the Office of the Comptroller of the Currency (OCC) proposed amendments to its rules for business combinations under 12 CFR §5.33 involving national banks and federal savings associations, including a new policy statement, titled “Policy Statement Regarding Statutory Factors Under the Bank Merger Act,” that summarizes the principles the OCC uses when it reviews proposed transactions under the Bank Merger Act (BMA) (together, the BMA Proposal). The BMA Proposal is part of the OCC’s effort to clarify its process of reviewing transactions under the BMA.
The BMA Proposal is open for comment for 60 days from the date it is published in the Federal Register.
Proposed Regulatory Changes
The BMA Proposal includes two key changes, which are both driven by the OCC’s rationale that a business combination is a significant corporate transaction. Firstly, it would remove provisions in 12 CFR §5.33 related to expedited review of certain applications, a procedure under which such applications are deemed approved 15 days after the end of the associated comment period (if the review period is not otherwise extended). The OCC’s position is that given a business combination transaction is a significant corporate transaction, no application should be automatically deemed approved without actual OCC review simply due to the passage of time.
Secondly, the BMA Proposal also eliminates the OCC’s streamlined version of the BMA application for certain transactions. The OCC suggests that a fuller record provided through the full BMA application provides the appropriate basis for the OCC to review a business combination application. The OCC states that the removal of this option does not significantly burden applicants as information requested in the application may be tailored, as appropriate, and the OCC can exercise its discretion to reduce the information that the applicant needs to provide to the OCC.
The Policy Statement
The policy statement included in the BMA Proposal is intended to provide greater clarity to financial institutions and the public regarding how the OCC will evaluate transactions subject to the BMA. Issues addressed by the policy statement include the general principles that the OCC will follow in reviewing BMA applications, as well as how the OCC will analyze statutory factors when reviewing an application. The policy statement provides 13 factors generally consistent with OCC approval of a business combination transaction and six factors that would raise supervisory or regulatory concerns and are less likely to result in an approval. No single factor is necessarily dispositive, although institutions should carefully evaluate each of these factors in considering potential transactions.
The factors consistent with approval are as follows:
1. The acquirer is, and the postmerger resulting institution will be, well-
2. The resulting institution will have total assets of less than $50
3. The acquirer has a Community Reinvestment Act (CRA) rating of Outstanding or Satisfactory.
4. The acquirer has composite and management ratings of 1 or 2 under the Uniform Financial Institution Ratings System (UFIRS) or risk management, operational controls, compliance and asset quality (ROCA) rating system.
5. The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System, if applicable.
6. The acquirer has no open formal or informal enforcement
7. The acquirer has no open or pending fair lending actions, including referrals or notifications to other agencies.
8. The acquirer is effective in combatting money laundering
9. The target’s combined total assets are less than or equal to 50% of acquirer’s total
10. The target is an eligible depository institution (as defined by OCC regulation).
11. The proposed transaction clearly would not have a significant adverse effect on
12. The OCC has not identified a significant legal or policy
13. No adverse comment letter from the public has raised a significant CRA or consumer compliance
The factors inconsistent with approval are as follows:
1. The acquirer has a CRA rating of Needs to Improve or Substantial Noncompliance.
2. The acquirer has a consumer compliance rating of 3 or worse.
3. The acquirer has UFIRS or ROCA composite or management ratings of 3 or worse, or the most recent report of examination otherwise indicates that the acquirer is not financially sound or well managed.
4. The acquirer is a global systemically important banking organization (GSIB), or subsidiary thereof.
5. The acquirer has open or pending Bank Secrecy Act/anti-money-laundering enforcement or fair lending actions, including referrals or notifications to other agencies.
6. The acquirer has failed to adopt, implement and adhere to all the corrective actions required by a formal enforcement action in a timely manner, or multiple enforcement actions have been executed or are outstanding against the acquirer during a three-year period.
In addition to above, the policy statement also discusses the OCC’s consideration of the BMA’s statutory factors, namely, (i) financial stability, (ii) managerial and financial resources and future prospects, and (iii) convenience and needs, under the BMA, as well as the OCC’s decision-making process for extending the public comment period or holding a public meeting.
Key Takeaways
The BMA Proposal does not provide any color on the weight attached to each of the factors as part of the OCC’s evaluation of applications, other than noting that no single factor is dispositive. While the BMA Proposal is an important step towards providing greater transparency, the factors noted in the BMA Proposal are generally known to financial institutions and their counsel that routinely file BMA applications. The BMA Proposal does not provide clarity where most needed, which is in the “grey zone” of M&A activity in the financial institutions industry.
Delays in processing of regulatory applications already impact deal certainty. Acquirers and their counsel will need to continue to anticipate issues raised in the BMA application process, and the potential for delay will need to be addressed with targets at the bidding stage and in the negotiation of definitive agreements.