On January 29, 2024, the Office of the Comptroller of the Currency (the “OCC”) proposed guidance in the form of a policy statement to provide greater transparency around the factors considered by the agency when approving transactions under the Bank Merger Act. The proposal follows an extended period in which the regulatory approval process for bank mergers has become somewhat opaque, and many transactions have languished or been abandoned. The OCC reviews transactions involving national banks and federal savings associations where the surviving entity is either a national bank or federal savings association. While much of the proposal travels ground that is familiar to banks that have engaged in, or contemplated, merger transactions that require OCC approval, the guidance will certainly help prospective merger partners assess the likelihood of approval for a specific transaction. Comments on the proposal are due 60 days after the date of publication in the Federal Register.

The OCC proposal is the latest in a series of developments that have signaled a new approach to bank mergers by federal regulators. In 2022, after a series of contentious public meetings, the Federal Deposit Insurance Corporation sought public comment on the existing regulatory framework for bank mergers, including whether regulators were considering the appropriate factors in the approval process. The FDIC action followed the Biden Administration’s July 2021 Executive Order that directed federal agencies to review the impact of consolidation on the goal of maintaining a fair, open, and competitive marketplace and specifically directed federal bank regulators to adopt a plan for the “revitalization” of bank merger oversight.

In public remarks on January 29th, Acting Comptroller Michael Hsu noted that “(m)erger applications exist along a spectrum. Some have significant deficiencies. Others are straightforward because the acquiring bank is a model of safety and soundness and has earned the trust of the community and its supervisors. The majority lie somewhere in between and require varying degrees of scrutiny and multiple rounds of inquiry. The transparency provided in our proposed policy statement effectively proposes chalk lines demarcating these three groups.”

At the same time, the OCC has proposed the elimination of the expedited review process for bank mergers and the streamlined merger application, both of which are currently available for certain transactions. The OCC determined that, given the significance of the factors outlined in the proposed policy statement, a “fuller record” will be necessary for the agency to review a proposed transaction. Acting Comptroller Hsu noted, “(t)he guidance removes the possibility that mergers will be deemed approved solely by the passage of time.” The OCC noted, however, that there may circumstances in which the agency will tailor the information required by the full Interagency Bank Merger Act application to better fit the structure of a proposed transaction, citing the relatively discrete case of a purchase-and-assumption transaction involving an institution placed in receivership by the Federal Deposit Insurance Corporation.

As a general matter, the policy statement is organized around a “what will work” and “what won’t work” approach for an acquirer seeking approval of a bank merger. At the core of the policy statement is a listing of 13 factors that are consistent with approval of a transaction and six circumstances that will make approval less likely.

Factors Consistent with Regulatory Approval

Section 2 of the proposed policy identifies thirteen key factors that are consistent with approval of a proposed transaction:

• the acquirer is well capitalized and the resulting institution will be well capitalized;
• the resulting institution will have total assets less than $50 billion;
• the acquirer has a Community Reinvestment Act (“CRA”) rating of “outstanding” or “satisfactory;”
• the acquirer has composite and management exam ratings of 1 or 2;
• the acquirer has a consumer compliance rating of 1 or 2;
• the acquirer has no open formal or informal enforcement actions;
• the acquirer has no open or pending fair lending actions, including referrals to other agencies;
• the acquirer is effective in combatting money laundering activities;
• the target’s total assets are less than or equal to 50% of the acquirer’s total assets;
• the target is a depository institution;
• the transaction clearly would not have a significant adverse effect on competition;
• the OCC has not identified any significant legal or policy issues related to the proposed transaction; and
• public comments have not raised significant CRA or consumer compliance concerns.

Circumstances That Will Make Approval Less Likely

On the other side of the equation, the policy statement highlights six circumstances that would make approval of a merger application unlikely, unless the applicant adequately addressed or remediated the concerns:

• the acquirer has a CRA rating of “needs to improve or “substantial noncompliance;”
• the acquirer has either a composite or management exam rating (under either the ROCA or UFIRS scale) of 3 or worse;
• the acquirer has a consumer compliance rating of 3 or worse;
• the acquirer is a global systematically important banking organization;
• the acquirer has an open or pending Bank Secrecy Act/Anti-Money Laundering enforcement actions or fair lending actions (in each case to include referrals or notifications to other agencies);
• the acquirer has failed to adopt, implement, or adhere to all corrective actions required by a formal enforcement action in a timely manner; or
• there have been multiple enforcement actions against the acquirer during the preceding three years.

Assessment of Financial and Managerial Resources

Section 3 of the proposed policy statement articulates a series of factors that the OCC will consider regarding the financial and managerial resources of the combined institutions, and how the OCC will assess the future prospects of the resulting institution. The guidance notes that the OCC will consider these factors independently and holistically since the factors may relate to one another.

The policy statement identifies five circumstances that make it less likely that the agency will approve a transaction:

• the acquirer has a less than satisfactory supervisory record;
• the acquirer has experienced rapid growth;
• the acquirer has engaged in multiple acquisitions and the integration periods for these transactions are overlapping;
• the acquirer has failed to comply with conditions imposed in connection with prior OCC approvals; and
• the acquirer is functionally the target in the transaction.

The OCC will also consider a number of factors that focus on whether the proposed transaction creates risk to the stability of the banking or financial system:

• whether the transaction would result in a material increase in risks to the stability of the financial system;
• whether the transaction would result in a reduction in the availability of substitute providers for the services offered by the combining institutions;
• whether the resulting institution would engage in any business activities or participate in markets in a manner that, in the event of financial distress of the resulting institution, would cause significant risks to other institutions;
• whether the proposed transaction would materially increase the extent to which the combining institutions contribute to the complexity of the financial system;
• whether the proposed transaction would materially increase the extent of cross-border activities of the combining institutions;
• whether the proposed transaction would increase the relative degree of difficulty of resolving or winding up the resulting institution’s business in the event of failure or insolvency; and
• any other factors that could indicate that the transaction poses a risk to the US banking system.

The policy statement indicates that the OCC will apply a balancing test when considering all these factors, considering each factor individually and in combination with others. However, the OCC may deny the application if even a single factor indicates that the proposed transaction would pose a risk of stability to the US banking system. Finally the OCC will consider whether the transaction would provide any benefits to stability in the financial system and whether enhanced prudential standards applicable as a result of the proposed transaction would offset any potential risks. Based on a review of these factors, the OCC may impose conditions on the approval of any transaction to address and mitigate financial stability concerns, including requiring asset divestitures, imposing higher minimum capital requirements, or imposing other financial stability related conditions.

Other Operational Considerations

• The acquirer must be able to demonstrate that due diligence was performed at the target at a level sufficient to understand the target’s business model, systems compatibility, and weaknesses of the target. The acquirer will be asked to demonstrate the ability to address matters identified in the due diligence phase and a strategy for remediation of weaknesses.
• The OCC will also consider the acquirer’s analysis and plans for systems integration at the resulting institution.The agency will review the analysis in light of the acquirer’s prior track record with information technology governance, business continuity, and, if applicable, successful integration of prior acquisitions.
• The OCC will also evaluate the proposed governance structure of the resulting institution. The review will include an assessment of the acquirer’s decision-making processes, the structure of board and management oversight, the acquirer’s risk management system.These factors will be subject to special scrutiny if the resulting institution will introduce new or more complex business products or business line. This analysis will include consideration of the board and management oversight structure and the risk management structure of the resulting institution.

Assessment of Future Prospects

An important element of the OCC’s decisional process will be an evaluation of the future prospects of the resulting entity in light of the agency’s assessment of the financial and managerial resources available to the resulting institution. The OCC will be looking for answers to the following questions:

• Will the integration of the combining institutions allow it to function effectively as a single unit?
• Will the resulting institution’s business strategy and management capabilities allow it to operate in a safe and sound manner?
• How will the merger impact the resulting institution’s continuity planning and operational resilience?

Community Impact

A key decision point for the OCC will continue to be the impact of the merger on the communities served by the acquirer and target, including consideration of the following:

• the resulting institution’s plans for branch closing or consolidation;
• whether the transaction will reduce or increase the availability of banking services and credit services; and
• planned community investment or development initiatives, including support for affordable housing and small business programs.

The OCC will continue to consider public comments on a proposed transaction, and the acquirer’s response to public comments will factor into the agency’s review process. The OCC will also consider whether a public meeting is necessary to inform the agency’s decision-making process. The proposed guidance identifies several factors that would influence the OCC’s decision to hold a public meeting, including the extent of public interest in the transaction, whether a public meeting would provide information that would not be obtained by a written submission, the significance of the transaction to the banking industry and the communities served by the merging institutions, and whether there are issues related to either parties’ CRA, consumer compliance or fair lending records.

Key Takeaways

• From the perspective of the frequent practitioner in the bank M&A market, the policy statement confirms much of what is already known about the OCC’s approach to the review of bank merger applications.
• It is, however, very useful to see the full picture in a single coherent statement and to have the opportunity to provide comments on specific aspects of the OCC’s approach to merger applications.
• The proposal should provide bank acquirers and targets with a better sense of whether a possible transaction is viable and with a better roadmap of the regulatory approval process.
• It remains to be seen, however, whether greater clarity around the factors that will or will not lead to approval will actually accelerate the approval process for specific deals.
• Prospective acquirers should heed the reminder in the policy statement that due diligence on prospective targets should be robust and forward-looking.Acquirers should emerge from due diligence with a clear picture of the resulting institution’s business strategy, governance structure, and systems integration requirements.