Forewarned is Forearmed: Bank Merger Act Application Rule Updates

The first quarter of 2024 was a busy time for regulatory action in the bank M&A space. Coming off a slow year for bank deal announcements in 2023, many bankers and bank advisors believed that 2024 would be a rebound year for bank combinations. Those expectations may be scaled back now that the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) released proposed updates to their bank merger application rules and policies. Both updates suggest the regulatory agencies’ intention to provide greater certainty in the application process, but also to apply greater scrutiny when reviewing applications.

OCC Notice of Proposed Rulemaking
On January 29, 2024, the OCC issued a notice of proposed rulemaking for business combinations under the Bank Merger Act (BMA). The proposal would make two substantive changes to the OCC’s business combination regulations, both of which are significant departures from the process with which banks and advisors are accustomed.

Under the current regulations, transactions of certain sizes, complexities and riskiness are eligible to utilize a streamlined business combination application, which requires less information than the standard BMA application. Additionally, certain less risky transactions are eligible for an expedited review process, which deems the deal approved on the 15^th day after the comment period expires unless the OCC denies or removes that application from expedited processing. Under the proposed rules, no business combinations, regardless of size or complexity, would be eligible for the streamlined application or expedited review.

During a speech announcing the proposed rulemaking, Acting Comptroller Michael Hsu stated that applications fall into one of three general categories:

1. Those that are consistent with timely approval.
2. Those that are approvable if identified concerns can be resolved or remediated.
3. Those that are inconsistent with approval.

The OCC has proposed the adoption of a policy statement outlining the general principles it uses in reviewing and approving applications. This proposed statement sets forth the categories of information the OCC will consider — financial condition, Community Reinvestment Act/consumer compliance, Bank Secrecy Act/anti-money laundering (BSA/AML) compliance, target size, CAMELS, and overall effects on competition. Breaking new ground, the proposed statement also provides specificity regarding what circumstances would hinder an application’s approval, including:

• CRA rating needs to improve.
• Management or Compliance rating of 3 or worse
• BSA/AML or Fair Lending violations or concerns.
• Uncorrected enforcement action items or multiple enforcement actions within three years.
• Designation as a Global Systemically Important Bank.

FDIC Statement of Policy
On March 21, 2024, the FDIC issued its own proposed Statement of Policy (SOP) on bank merger transactions that’s intended to update, clarify and strengthen the agency’s approach to bank merger applications. Chairman Martin Gruenberg reiterated the statutory factors the FDIC considers when reviewing applications under the BMA. The SOP details each of the statutory factors, and provides some important clarification on what it would consider when evaluating an application.

• Monopolistic or Anticompetitive Effects — The FDIC would evaluate the competitive effects most relevant to each transaction. Acknowledging that geographic markets remain paramount, it would also consider other relevant, non-market financial service providers that influence a market.
• Financial Resources — The FDIC indicates that, if the resulting institution would be a weaker institution overall from a capital perspective, the transaction likely would not be approved.
• Managerial Resources — The FDIC would consider the background and experience of management given the size, complexity and risk profile of the resulting institution and its succession plans.
• Future Prospects — The FDIC would review pro formas and the underlying assumptions and valuations supporting the same, as well as business and strategic plans.
• Convenience and Needs of the Community — The FDIC is looking for the resulting institution to better meet the convenience and needs of the community than its predecessors and would expect specific and forward-looking information on the benefits to the community.
• BSA/AML Compliance — Unresolved BSA/AML concerns, including informal enforcement action would receive an unfavorable finding. The FDIC expects applicants to detail BSA compliance plans following the merger.
• Risk to the US Banking System — Resulting institutions of greater than $100 billion would be subject to added scrutiny.

Assuming the proposed rules and policy statements become final, banks and their advisors will benefit from meeting with the appropriate federal regulator prior to submitting an application under the BMA. Forewarned is forearmed.