Bank Regulators Set New Expectations for Approving Bank Mergers

In recent years, the path to approval for bank mergers has often been uncertain, meandering and frustrating for all parties. Often, the merging institutions have been forced to extend the drop-dead dates in the face of regulatory uncertainty and, in some cases, deals have been abandoned because the parties lacked a clear path to agency approval. This situation is likely to improve as two federal regulators — the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) — have issued final guidance that should provide greater clarity about the prospects for regulatory approval before financial institutions sign a merger agreement.

The OCC adopted a “what will and what won’t work” approach to its consideration of a bank merger application. The guidance identifies a series of indicators that are consistent with approval:

• The transaction will result in an institution with less than $50 billion in assets.
• The acquirer has a strong supervisory record relative to capital, liquidity and earnings.
• The acquirer has management exam ratings of one or two, and management has demonstrated an ability to deal with any increased risks to the resulting institution.
• The acquirer has a strong Community Reinvestment Act (CRA), consumer compliance and fair lending record.
• The acquirer has a strong supervisory record with no pending enforcement actions and maintains an effective anti-money laundering program.

The guidance also identifies factors that are inconsistent with approval unless adequately addressed by the acquirer, including:

• The acquirer has a less-than-satisfactory financial or supervisory record.
• The acquirer has deficient CRA, consumer and fair lending compliance.
• The acquirer has open or pending enforcement actions.
• The acquirer has a management exam ratings of 3 or worse.
• The acquirer fails to implement remediations required by an enforcement action.

In addition to the checklist factors, a significant component of the OCC’s review will be an assessment of sufficiency of an acquirer’s due diligence review of the target to understand possible weaknesses. The OCC will review the adequacy of an acquirer’s plans to integrate the resulting institution’s operations, IT and security processes, products and services, employees and culture, as well as the resulting institution’s governance structure, including the board’s oversight of management and the adequacy of the risk management function.

Finally, the OCC will consider the prospects of the resulting institution in light of:

• The agency’s assessment of financial and managerial resources.
• The acquirer’s integration track record in past acquisitions.
• The efficacy of the resulting institution’s business strategy and management’s ability to implement the strategy in a safe and sound manner.

With the release of new guidance, the OCC has eliminated the expedited review timeline for certain bank mergers and the streamlined merger application, opting for an approach that creates a more-complete record for consideration of a proposed transaction.

The FDIC’s guidance adheres to a prescriptive approach that focuses on whether a proposed merger satisfies the statutory factors specified in the Bank Merger Act (BMA), including whether:

• The proposed merger would substantially lessen competition, taking into consideration both geographic and product markets.
• The proposed merger would result in the control of more than 10% of deposits nationwide.
• The resulting institution will reflect sound financial performance and condition.
• Management of the resulting institution has the capacity to manage risk and ensure safe and sound operation.
• The prospects of the resulting institution, taking into account the economic environment, the competitive landscape, the institution’s planned business strategy and the acquirer’s history of integrating prior acquisitions.
• The transactions meet the convenience and needs of the communities served by the resulting institution.
• The transaction poses a risk to the stability of the banking or financial system.
• The resulting institution will maintain an effective program to combat money laundering.

With the new guidance, regulators have opened a window into a process that has often been opaque to banks that have navigated the merger approval process in recent years. Going forward, it will be critical for the parties to benchmark the transaction against the appropriate guidance and assess the prospects for regulatory approval. Parties should engage with their regulators before they announce a deal and prior to submitting a merger application to understand agency expectations and to gain an advance look at areas of regulatory concern. With greater transparency around the approval process, more transactions may be approved along a more rapid timeline.