12 C.F.R. § 5, subpt. C, app A to Subpart C of Part 5
Factors Under the Bank Merger Act
I. Introduction
The purpose of this policy statement is to provide insured depository institutions (institutions) and the public with a better understanding of how the Office of the Comptroller of the Currency (OCC) considers certain statutory factors under the Bank Merger Act (BMA), 12 U.S.C. 1828(c) . The matters discussed in this statement are intended to provide greater transparency, facilitate interagency coordination, and enhance public engagement.
II. General Principles of OCC Review
The OCC aims to act promptly on all applications. The agency's range of potential actions on applications includes approval, denial, and requesting that an applicant withdraw the application because any shortcomings are unlikely to be resolved in a timely manner. Applications that tend to withstand scrutiny more easily and are more likely to be approved expeditiously generally feature all of the following indicators:
1. The acquirer is well capitalized under § 5.3 , and the resulting institution will be well capitalized;
2. The resulting institution will have total assets less than $50 billion;
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 ROCA rating system;
5. The acquirer has a consumer compliance rating of 1 or 2 under the Uniform Interagency Consumer Compliance Rating System (CC Rating System), if applicable;
6. The acquirer has no open formal or informal enforcement actions;
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 activities;
9. The target's total assets are less than or equal to 50% of acquirer's total assets;
10. The target is an eligible depository institution as defined in § 5.3 ;
11. The proposed transaction clearly would not have a significant adverse effect on competition;
12. The OCC has not identified a significant legal or policy issue; and
13. No adverse comment has raised a significant CRA or consumer compliance concern.
If certain indicators that raise supervisory or regulatory concerns are present, the OCC is unlikely to find that the statutory factors under the BMA are consistent with approval unless and until the applicant has adequately addressed or remediated the concern. The following are examples of indicators that raise supervisory or regulatory concerns:
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 or subsidiary thereof.
5. The acquirer has open or pending Bank Secrecy Act/Anti-money Laundering, fair lending, or consumer compliance actions, including enforcement actions, 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 there have been multiple enforcement actions against the acquirer executed or outstanding during a three-year period.
III. Financial Stability
A. Factors Considered
The BMA requires the OCC to consider "the risk to the stability of the United States banking or financial system" when reviewing transactions subject to the Act. In reviewing a BMA application under this factor, the OCC considers the following factors:
1. Whether the proposed transaction would result in a material increase in risks to financial system stability due to an increase in size of the combining institutions.
2. Whether the proposed transaction would result in a reduction in the availability of substitute providers for the services offered by the combining institutions.
3. 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.
4. Whether the proposed transaction would materially increase the extent to which the combining institutions contribute to the complexity of the financial system.
5. Whether the proposed transaction would materially increase the extent of cross-border activities of the combining institutions.
6. 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.
7. Any other factors that could indicate that the transaction poses a risk to the U.S. banking or financial system.
B. Balancing Test
1. In general: The OCC applies a balancing test when considering the factors in section III.A. of this appendix in light of all the facts and circumstances available regarding the proposed transaction, including weighing the financial stability risk posed by the proposed transaction against the financial stability risk posed by denial of the proposed transaction, particularly if the proposed transaction involves a troubled target. The OCC considers each factor both individually and in combination with others. Even if only a single factor indicates that the proposed transaction would pose a risk to the stability of the U.S. banking or financial system, the OCC may determine that there would be an adverse effect of the proposal on the stability of the U.S. banking or financial system. Finally, the OCC also considers whether the proposed transaction would provide any stability benefits and whether enhanced prudential standards applicable as a result of the proposed transaction would offset any potential risks.
2. Conditions: The OCC's review of the financial stability factors will include, as appropriate, whether to impose conditions on approval of the transaction. The OCC may impose conditions, enforceable under 12 U.S.C. 1818 , to address and mitigate financial stability risk concerns, such as requiring asset divestitures by the resulting institution, imposing higher minimum capital requirements, or imposing other financial stability-related conditions.
3. Recovery planning and heightened standards: The OCC's review of the financial stability factors will consider the impact of the proposed transaction in light of:
b. Standards applicable to the resulting institution pursuant to 12 CFR part 30, appendix D, "OCC Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches"; and
c. Standards applicable to the resulting institution's recovery planning pursuant to 12 CFR part 30, appendix E, "OCC Guidelines Establishing Standards for Recovery Planning by Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches".
4. Concurrent filings: the OCC's review of the financial stability factors may consider the facts, circumstances, and representations of concurrent filings for related transactions, including the impact of the related transactions to the proposed transaction under review by the OCC.
IV. Financial and Managerial Resources and Future Prospects
The OCC is required by the BMA to consider the managerial resources, financial resources, and future prospects of the combining and the resulting institutions. The OCC considers each of these factors independently for both the combining and resulting institutions. However, because these factors are directly related to one another, the OCC also considers these factors holistically.
A. Overarching Considerations
1. The OCC tailors its consideration of the financial and managerial resources and future prospects of the combining and resulting institutions to their size, complexity, and risk profile.
2. The OCC considers these factors within the context of the prevailing economic and operating environment.
3. The OCC is more likely to approve combinations where the acquirer has sufficient financial and managerial resources to ensure safe and sound operations of the resulting institution than when:
a. The acquirer has a less than satisfactory supervisory record, including its financial and managerial resources;
b. The acquirer has experienced rapid growth;
c. The acquirer has engaged in multiple acquisitions with overlapping integration periods;
d. The acquirer has failed to comply with conditions imposed in prior OCC licensing decisions; or
e. The acquirer is functionally the target in the transaction.
4. The OCC normally does 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.
5. The OCC considers all comments received on proposed business combinations. However, the OCC's consideration of an institution's financial and managerial resources and future prospects are necessarily based on confidential supervisory information. While the OCC will provide an appropriate discussion of comments pertaining to the financial resources, managerial resources, and future prospects factors, it will generally not discuss or otherwise disclose confidential supervisory information in public decision letters.
B. Individual Factors
1. Financial Resources:
a. The OCC reviews the existing and proposed institutions' current and pro forma capital levels.
i. The OCC reviews for compliance with the applicable capital ratios required by 12 CFR part 3 and the Prompt Corrective Action capital categories established by 12 CFR 6.4 .
ii. The OCC may not approve a combination application filed by an insured depository institution that is undercapitalized as defined in 12 CFR 6.4 unless it has approved the institution's capital restoration plan or the Board of Directors of the Federal Deposit Insurance Corporation has determined that the transaction would fulfill the purposes of 12 U.S.C. 1831o .
b. The OCC closely scrutinizes transactions that increase the risk to the bank's financial condition and resilience, including bank capital, liquidity, and earnings, that can arise from any of the eight categories of risk included in the OCC's Risk Assessment System: credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation.
c. In relation to the financial resources factor, the OCC considers management's ability to address increased risks that would result from the transaction.
d. A transaction involving an acquirer with a strong supervisory record relative to capital, liquidity, and earnings is more likely to satisfy the review factors. By contrast, a transaction involving an acquirer with a recent less than satisfactory financial or supervisory record is less likely to satisfy this factor.
2. Managerial Resources: The OCC considers several factors when considering the managerial resources of the institutions.
a. The OCC considers the supervisory record and current condition of both the acquirer and target to determine if the resulting institutions will have sufficient managerial resources to manage the resulting institution.
i. A significant number of MRAs suggests there may be insufficient managerial resources. Additionally, the OCC considers both institutions' management ratings under the UFIRS or ROCA system and component ratings under the CC Rating System, Uniform Rating System for Information Technology, and Uniform Interagency Trust Rating System, as applicable.
ii. When applicable, the OCC also considers the relevant Risk Assessment System (RAS) conclusions for the combining institutions.
iii. The OCC considers the context in which a rating or RAS element was assigned and any additional information resulting from ongoing supervision.
iv. Less than satisfactory ratings at the target do not preclude the approval of a transaction provided that the acquirer can employ sufficiently robust risk management and financial resources to correct the weaknesses at the target.
b. The OCC considers whether the acquirer has conducted sufficient due diligence of the target depository institution to understand the business model, systems compatibility, and weaknesses of the target. To facilitate the OCC's review, the acquirer's management team should demonstrate its plans and ability to address the acquirer's previously identified weaknesses, remediate the target's weaknesses, and exercise appropriate risk management for the size, complexity, and risk profile of the resulting institution.
c. The OCC also considers the acquirer's analysis and plans to integrate the combining institutions' operations, including systems and information security processes, products, services, employees, and cultures. The OCC's consideration and degree of scrutiny reflects the applicant's track record with information technology governance, business continuity resilience, and, as applicable, integrating acquisitions.
d. The OCC considers the acquirer's plans to identify and manage systems compatibility and integration issues, such as information technology compatibility and the implications for business continuity resilience. Any combination in which the OCC identifies systems integration concerns may lead to additional review.
i. A critical component of these plans includes the acquirer's identification and assessment of overreliance on manual controls, strategies for automating critical processes, and the strategies and capacity for modernization of aging and legacy information technology systems.
ii. The OCC may impose conditions, enforceable pursuant to 12 U.S.C. 1818 , if it determines that information technology systems compatibility and integration represent a supervisory significant concern. These conditions may include requirements and time frames for specific remedial actions and specific measures for assessing and evaluating the depository institution's systems integration progress.
iii. The OCC may deny the application if the integration issues or other issues present significant supervisory concerns, and the issues cannot be resolved through appropriate conditions or otherwise.
e. The OCC also considers the proposed governance structure of the resulting institution. This includes governance in decision-making processes, the board management oversight structure, and the risk management system, including change management. This also includes expansion of existing activities, introduction of new or more complex products or lines of business, and implications for managing existing and acquired subsidiaries and equity investments. When applicable, the resulting institution's governance is also considered in the context of the institution's relationship with its holding company and the scope of the holding company's activities.
3. Future Prospects:
a. The OCC considers the resulting institution's future prospects in light of its assessment of the institutions' financial and managerial resources.
b. The OCC also considers the proposed operations of the resulting institution. The OCC's consideration and degree of scrutiny reflects the acquirer's record of integrating acquisitions.
i. The OCC considers whether the integration of the combining institutions would allow it to function effectively as a single unit.
ii. The OCC considers the resulting institution's business plan or strategy and management's ability to implement it in a safe and sound manner.
iii. The OCC also considers the combination's potential impact on the resulting institution's continuity planning and operational resilience.
V. Convenience and Needs
A. The OCC considers the probable effects of the proposed business combination on the community to be served. Review of the convenience and needs factor is prospective and considers the likely impact on the community of the resulting institution after the transaction is consummated, including but not limited to:
1. Any plans to close, consolidate, limit, or expand branches or branching services, including in low- or moderate-income (LMI) areas;
2. Any plans to reduce the availability or increase the cost of banking services or products, or plans to provide expanded or less costly banking services or products to the community;
3. Any plans to maintain, reduce, or improve credit availability throughout the community, including, for example, access to home mortgage, consumer, small business, and small farm loans;
4. Job losses or reduced job opportunities from branch staffing changes, including branch closures or consolidations;
5. Community investment or development initiatives, including, for example, community reinvestment, community development investment, and community outreach and engagement strategies; and
6. Efforts to support affordable housing initiatives and small businesses.
B. The OCC considers comments received during the comment period and information provided during any public hearing or meeting related to the proposed business combination. To the extent public comments or discussions address issues involving confidential supervisory information, however, the OCC generally will not discuss or otherwise disclose that confidential supervisory information in public decision letters and forums.
C. The OCC considers the CRA record of performance of an applicant in evaluating a business combination application. The OCC's forward-looking evaluation of the convenience and needs factor under the BMA is separate and distinct from its consideration of the CRA record of performance of an applicant in helping to meet the credit needs of the relevant community, including LMI neighborhoods.
VI. Public Comment Period and Public Meetings
A. Public Comment Period
1. Unless an exception applies, a combination under the BMA is subject to a 30-day comment period following publication of the notice of the proposed combination. The OCC may extend the comment period in certain instances:
a. When a filer fails to file all required publicly available information on a timely basis or makes a request for confidential treatment not granted by the OCC;
b. When requested and the OCC determines that additional time is necessary to develop factual information necessary to consider the filing; and
c. When the OCC determines that other extenuating circumstances exist.
2. The OCC may find that additional time is necessary to develop factual information if a filer's response to a comment does not fully address the matters raised in the comment, and the commenter requests an opportunity to respond.
3. Examples of extenuating circumstances necessitating an extension include:
a. Transactions in which public meetings are held to allow for public comment after the meeting;
b. Unusual transactions (e.g., novel or complex transactions); and
c. Natural or other disasters occurring in geographic regions affecting the public's ability to timely submit comments.
B. Public Meetings
1. While the BMA does not require the OCC to hold meetings or hearings, the OCC has three methods for seeking oral input: (1) public hearing, (2) public meeting, and (3) private meeting. Public meetings are the most-employed public option.
2. The OCC will balance the public's interest in the transaction with the value or harm of a public meeting to the decision-making process (e.g., although there may be increased public interest in a transaction, a public meeting will not be held if it would not inform the OCC's decision on an application or would otherwise harm the decision-making process).
3. Criteria informing the OCC's decision on whether to hold public meetings include:
a. The extent of public interest in the proposed transaction.
b. Whether a public meeting is appropriate in order to document or clarify issues presented by a particular transaction based on issues the public raises during the public comment process.
c. Whether a public meeting would provide useful information that the OCC would not otherwise be able to obtain in writing.
d. The significance of the transaction to the banking industry. Relevant considerations may include the asset sizes of the institutions involved (e.g., resulting institution will have $50 billion or more in total assets) and concentration of the resulting institution in one or more markets.
e. The significance of the transaction to the communities affected. Relevant considerations may include the effects of the transaction on the convenience and needs of the community to be served, including a consideration of a bank's CRA strategy and the extent to which the acquirer and target are currently serving the convenience and needs of their communities.
f. The acquirer's and target's CRA, consumer compliance, fair lending, and other pertinent supervisory records, as applicable.
12 C.F.R. 5, subpt. C, app A to Subpart C of Part 5