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

• Size Matters. If adopted as proposed, the BMA Proposal would make the M&A market less favorable for GSIBs and their subsidiaries, and more favorable for community and regional banks under $50 billion in total assets that are well-capitalized and facing no significant legal or regulatory hurdles.
  • A more rigorous review should be expected by GSIBs and for any institutions that are not able to satisfy the factors enumerated by the OCC.
  • The BMA Proposal seems to indicate OCC’s disfavor for merger of equals (MOE) given a target’s combined total assets should be less than or equal to 50% of the acquirer’s total assets for it to be more likely to be approved. While no single factor is dispositive, this could have a discouraging effect on market participants who may be considering a MOE. This could have a significant impact on the M&A market for financial institutions because MOEs have been a larger portion of total deals while bank stock pricing continues to lag the rest of the market. An acquirer considering a MOE, or a transaction not satisfying the size requirements as enumerated by the OCC, needs to have a robust plan and must be able to describe how it will manage growth, especially if growth will push it past a regulatory size threshold.
• Target Condition Matters. Gone are the days of acquiring a problem bank and remediating its issues after the transaction. : On its face it appears that the acquirer’s condition is primarily what matters for approval. However, the positive approval factor stating that a target is an “eligible depository institution,” effectively imposes positive factors 1, 3, 4, 5 and 6 applicable to acquirers on the target as well. The BMA Proposal indicates that two healthy institutions are as likely to see approval as they would have before the BMA Proposal, but a significant portion of M&A activity is in the “grey zone” where the target is not as healthy as the acquirer or the acquirer or target together do not check off each of the enumerated factors. Based on the BMA Proposal, acquirers can continue to expect regulatory delays and/or conditions imposed by the OCC in connection with the noted areas of Bank Secrecy Act/anti-money-laundering, fair lending actions, or compliance with the CRA. Challenges in the foregoing areas, even at the target, may impede or delay transactions that cannot be planned around in the regulatory application process. Many “troubled condition” financial institutions often enter the M&A market to be saved by a healthy acquirer. The BMA Proposal seems to indicate that a more rigorous review should be expected on these types of applications. This can be worrisome for institutions that are in troubled condition and need an expedient acquisition by a healthy acquirer, particularly given the uptick in enforcement actions and Matters Requiring Attention (MRAs) since March 2023.
• Emphasis on certain acquirer characteristics and transaction structures. In addition to the typically known criteria, such as an acquirer having a less than satisfactory supervisory record or an acquirer having failed to satisfy its prior OCC licensing decisions, the OCC expanded upon acquirer characteristics that are more likely to result in disapproval. The OCC noted that where an acquirer has experienced rapid growth, has engaged in multiple acquisitions with overlapping integration periods, or is functionally the target in the transaction, such as may occur in a reverse triangular merger, such acquirers are less likely to see an approval. These clarifying characteristics, although helpful from a transparency perspective, can have a stifling impact on acquirers that may otherwise be in a good position to pursue another transaction with a target. Further, the OCC provided the example of a reverse triangular merger as a situation where an acquirer may be functionally a target, but there are many situations where the form of the transaction is not reflective of the substance of the transaction; however, the OCC did not elaborate any further on how it would analyze this criteria. Acquirers and their counsel should carefully evaluate these acquirer characteristics and potentially discuss transaction structures with the OCC prior to filing the BMA application, especially if the structure could be perceived by the OCC as a situation where the acquirer is functionally the target.
• Emphasis on acquirer risk management. If the acquirer or target have negative factors and the parties seek regulatory approval only having a plan of action, such a plan will likely not be sufficient to overcome regulatory scrutiny. Instead, acquirers need to show that plans have been implemented to remediate their own open issues or those of the target. Acquirers may need to show that they have systems in place and operating rather than committing to doing so post-closing. While less than satisfactory ratings at the target does not preclude approval according to the OCC, approval is more likely if the acquirer can employ sufficiently robust risk management and financial resources to correct the weaknesses at the target. The OCC specifically noted that it reviews the sufficiency of the acquirer’s due diligence of the target in its attempt to understand the target’s business model, systems compatibility and weaknesses.

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.