On January 29, the Office of the Comptroller of the Currency (OCC) issued a notice of proposed rulemaking regarding its review of business combinations under the Bank Merger Act (BMA). Specifically, the OCC proposed: (i) amendments to 12 C.F.R. § 5.33 to remove provisions related to expedited review and the use of streamlined business combination applications subject to BMA review; and (ii) the adoption of an official policy statement setting forth general principles the OCC will use in its review of applications subject to the BMA. If adopted as proposed, the rulemaking will likely lead to longer approval timelines for certain national bank transactions, particularly for mergers involving well-managed, well-capitalized community banks, internal corporate reorganizations, and branch acquisitions that would have otherwise been able to take advantage of expedited review. Currently, assuming certain criteria are met, a BMA filing that qualifies as a business reorganization eligible for a streamlined application is deemed approved on the 15th day after the close of the comment period, unless the OCC notifies the applicant that the filing is not eligible for expedited review or the expedited review process is extended. However, if the rulemaking is adopted as proposed, § 5.33 would be amended to remove the procedures for expedited review and the use of streamlined applications.
As explained in the rulemaking, the OCC views any business combination subject to review under § 5.33 as a significant corporate transaction requiring an affirmative OCC decision. In other words, the OCC does not feel that such transactions should “be deemed approved solely due to the passage of time.” Consequently, in place of the streamlined application, the OCC proposes a full Interagency BMA Application for each such significant corporate transaction with no opportunity for expedited review or automatic approval. According to the OCC, doing so will provide it with the opportunity to develop a fuller record through the Interagency BMA Application process, which, in turn, will provide the appropriate basis for OCC review and decision-making of business combination applications. The OCC asserts that the removal of expedited processing and the streamlined business combination process should not significantly increase the burden on applicants as the agency will retain regulatory discretion to tailor the Interagency BMA Application process as appropriate, depending on the type of transaction, to reduce the information required of the applicant.
In addition to the § 5.33 amendments, the OCC has proposed adding a new BMA policy statement as Appendix A to 12 CFR Part 5, Subpart C. The OCC believes this policy statement will provide the public with a better understanding of how it reviews applications subject to the BMA by outlining the general principles of application review, including how the OCC applies the statutory BMA factors of financial stability, financial and managerial resources, and convenience and needs of the community. The policy statement will also provide greater transparency regarding the public comment period and the factors the OCC considers in determining whether to hold public meetings. However, the policy statement will not address the statutory BMA factors of competition and the effectiveness of any bank involved in combatting money laundering activities (including in overseas branches), as the review of those factors will remain consistent with current interagency guidance.
Highlights of the proposed policy statement include:
- The General Principles section indicates that the OCC’s aim is to act promptly on all Interagency BMA Applications and identifies factors that raise supervisory or regulatory concerns. If any of the indicators listed below are present, the OCC is unlikely to approve the application unless or until the concern has been addressed or remediated:
- The acquirer has a CRA rating of Needs to Improve or Substantial Noncompliance;
- The acquirer has a Uniform Financial Institution Ratings System (UFIRS) or Risk Management/Operational Controls/Compliance/Asset Quality (ROCA) composite or management rating of 3 worse;
- A consumer compliance rating of 3 or worse;
- The acquirer is a global systemically important banking organization (GSIB), or subsidiary thereof;
- The acquirer has an open or pending Bank Secrecy Act/Anti-money Laundering enforcement or fair lending action;
- Failure by the acquirer to adopt and adhere to all the corrective actions required by a formal enforcement action in a timely manner; or
- Multiple enforcement actions against the acquirer during a three-year period.
- Whereas, applications with all of the below indicators are generally approved by the OCC.
- The acquirer is “well capitalized” under OCC regulations and the resulting institution will be “well capitalized”;
- The resulting institution will have total assets less than $50 billion;
- The acquirer has a CRA rating of Outstanding or Satisfactory;
- The acquirer has composite and management ratings of 1 or 2 under the UFIRS or ROCA rating system;
- The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System, if applicable;
- The acquirer has no open formal or informal enforcement actions;
- The acquirer has no open or pending fair lending actions;
- The acquirer is effective in combatting money laundering activities;
- The target’s combined total assets are less than or equal to 50% of acquirer’s total assets;
- The target is an “eligible depository institution” as defined under OCC regulations;
- The proposed transaction clearly would not have a significant adverse effect on competition;
- The OCC has not identified a significant legal or policy issue; and
- No adverse comment has raised a significant CRA or consumer compliance concern.
- The Financial Stability section provides additional information about how the OCC considers “the risk to the stability of the United States banking or financial system” as required by the BMA, including:
- The factors the OCC considers, such as;
- Whether the size of the combined institutions would result in material increases in risk to financial stability;
- Any potential 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;
- The extent to which the combining institutions contribute to the complexity of the financial system;
- 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 U.S. banking or financial system.
- The balancing test the OCC applies weighing the financial stability risk of approving the proposed transaction against the financial stability risk of denying the proposed transaction, particularly if the proposed transaction involves a troubled target; and
- The OCC’s ability to consider imposing conditions on the approval of any such transaction.
- The factors the OCC considers, such as;
- The Financial and Managerial Resources and Future Prosects section discusses the OCC’s approach to considering the managerial resources, financial resources, and future prospects of any proposed transaction. This section describes the OCC’s overarching considerations and what the OCC considers in its review, noting that the OCC will consider the size, complexity, and risk profile of the combining and resulting institutions. This section also expands on the discussion currently contained in the Comptroller’s Licensing Manual regarding types of transactions and acquirer characteristics that are less likely to result in an approval. Specifically, the OCC is less likely to approve an application when the acquirer:
- Has a less than satisfactory supervisory record;
- Has experienced rapid growth;
- Has engaged in multiple acquisitions with overlapping integration periods;
- Has failed to comply with conditions imposed in prior OCC licensing decisions; or
- Is functionally the target in the transaction.
Additionally, the OCC will normally not approve a combination that would result in a depository institution with less than adequate capital or liquidity, less than satisfactory management, or poor earnings prospects.
- The Convenience and Needs section clarifies that the OCC’s consideration of the impacts of any proposed combination on the convenience and needs of the community is prospective, considering the likely impact of the resulting institution, and takes into account:
- The proposed changes to branch locations, branching services, banking services or products, or credit availability offered by the target and acquirer, including in low- or moderate-income communities;
- Any job losses from branching changes; and
- Any community investment or development initiatives, particularly those that support affordable housing and small businesses.
- The Public Comments section articulates the circumstances under which the OCC may extend the comment period from the usual 30-days, and explains that, when determining whether to hold a public meeting, the OCC balances the public’s interest in the transaction with the value or harm of a public meeting to the decision-making process.
As Acting Comptroller of the Currency Michael J. Hsu explained in his remarks to the University of Michigan School of Business: “Merger 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.”
Interested parties may submit comments on the proposed rule for a period of 60 days after publication in the Federal Register.
For any questions about the OCC’s proposal or potential public comment submissions, please reach out to a member of your Troutman Pepper Financial Services team.