Regulatory Note — Bank Mergers — FDIC Proposed Policy Statement
Earlier today, March 21, the FDIC approved a notice of proposed rulemaking (“NPR”) for a Statement of Policy on Bank Merger Transactions (the “Proposed SoP”). [1] The Proposed SoP introduces new considerations in the review of merger applications. In at least one respect – completion of divestitures before consummation – the proposed policy would be at odds with common legal advice. Interestingly, the NPR is different from, although not inconsistent with, the merger policy statement that the OCC proposed in January (the “OCC Proposed SoP”).
The Proposed SoP, assuming it is finalized, affects all elements of a merger: due diligence, the terms of a merger agreement, the pre-filing meeting with FDIC staff, preparation of the merger application, and the participation of community groups in the application process. Some highlights of the Proposed SoP, beginning with the framework of FDIC review and then turning to the statutory factors:
Framework. The Proposed SoP modifies several aspects of the FDIC’s approach to its Bank Merger Act reviews.
Extent of the changes. The Proposed SoP entirely replaces (and does not simply supplement) the FDIC’s current statement of policy. The FDIC does not recommend any new legislation, propose amendments to its bank merger regulations (12 C.F.R. part 303, subpart D), or edit the agency’s Applications Procedures Manual.
Merger transactions. The Proposed SoP would treat acquisitions of all or substantially all the assets of non-insured entities as mergers subject to the FDIC’s merger review.
Expedited processing. Unlike the OCC, the FDIC does not propose to eliminate its rule on expedited processing under 12 C.F.R. § 303.64(a).
$100 billion threshold. The SoP is not explicit, but, in light of the Silicon Valley Bank and Signature Bank failures, the FDIC is to give more scrutiny to mergers where the resulting institution would exceed $100 billion in assets.
Conditions to approval orders. If an application presents “material concerns” with respect to any of the statutory factors, the FDIC will not attempt to remedy the situation by imposing conditions in an approval order. The FDIC will, however, continue to use non-standard conditions to address such matters as capital, liquidity, and affiliate transactions.
Withdrawn applications. The FDIC may make public comments on an application that is withdrawn rather than formally denied.
Competitiveness. A fundamental issue for the FDIC is substitutability – whether, after the merger closes, a consumer will still have access to similar goods and services from banks or other providers. The Proposed SoP indicates that the FDIC may increase its review of different product markets and geographic areas, including nonbank financial companies that may compete in these markets. Non-compete agreements are forbidden.
Financial resources. The nature of the FDIC’s review appears to be about the same although it would give greater attention to liquidity and uninsured deposits.
Managerial resources. This factor now includes a review of a bank’s compliance with consumer protection, fair lending, and other relevant consumer laws.
Future prospects. The Proposed SoP does not change the FDIC’s current approach in a material way.
Convenience and needs. Arguably the greatest number of changes relate to this factor. Three elements would materially alter due diligence, application preparation, and FDIC review:
Better serving the community. The applicant must show that the resulting institution would better serve the community than the previous two banks.
o Branch operations. An applicant must project out its branching strategy over three years. The FDIC presumably would hold the resulting institution to it.
o Public meetings. The FDIC will hold a meeting when the resulting institution would have more than $50 billion in assets or when the FDIC has received a “substantial number” of protests.
Financial stability. This factor, added in 2010 in the Dodd-Frank Act, has not previously been included in the merger policy statement. For this factor, the Proposed Statement essentially adopts the same elements in the OCC Proposed SoP. These elements include the size of the banks involved and, as to the resulting institution, the availability of substitute providers, interconnectedness with the financial system, its contribution to the financial system’s complexity, and its cross-border activities.
Money laundering. The Proposed SoP does not suggest the FDIC will change its review of this factor.
At least one problematic element in the Proposed SoP is to require the parties to sell branch offices to be divested before the merger closes. That is, one party could be required to shrink its footprint irretrievably in contemplation of a transaction that may not take place. The fact that the FDIC would require it probably relieves the parties from possible legal claims, but this prerequisite would pose a possibly material financial risk to the divesting party that the merger agreement could not mitigate.
[1] Comments are due within 60 days after publication in the Federal Register. The NPR mentions a second NPR to modify the FDIC’s supplemental requests in the Interagency Bank Merger Act application, but the FDIC board did not consider such an NPR make one public.