New memories are stored in different areas of the brain, depending on which sensory system they first came through. They are transformed into long-term memories by a process of consolidation. This starts with synaptic consolidation, which occurs immediately after the memory is formed, then continues with system consolidation, a longer process in which memories are moved from the hippocampal area of the brain to the neo-cortex, for more permanent storage.Similarly, the financial industry may soon undergo a new wave of consolidation, particularly among community financial institutions (CFIs). After a quiet 2023, easing financial conditions and the growing demands of digitalization are driving substantial technology investments that could lead to more industry mergers and acquisitions (M&A).However, institutions aspiring to acquire or merge with another will have to contend with the new M&A approval guidelines that regulators finalized on September 17, 2024. The updates to the existing guidelines are intended to ensure financial stability, healthy competition, and consumer protection, with the ultimate aim of benefitting the customers and communities they serve. Below is a summary of the key points the agencies have outlined.
- Federal Deposit Insurance Corporation (FDIC). The areas evaluated by the FDIC include financial stability risk, particularly for institutions with over $100B in assets; effect on the level of competition; financial resources of the applicants and the resulting FI, such as capital adequacy, asset quality, and liquidity risk; effectiveness of their anti-money laundering (AML) activities; and the extent to which the merger meets the convenience and needs of the community. For M&A transactions that will result in an institution valued at more than $50B, the FDIC intends to hold public hearings.
- Office of the Comptroller of the Currency (OCC). Areas that would lead to a merger being considered favorably by the OCC include well-capitalized institutions with less than $50MM in assets; high Community Reinvestment Act (CRA), composite and management, and consumer compliance ratings; and a positive compliance record. What’s more, the OCC has removed the option for an expedited review, which means that even smaller, less controversial mergers will face more scrutiny.
- Department of Justice (DOJ). In September, the DOJ announced that it would withdraw from the 1995 Bank Merger Guidelines in favor of the 2023 merger guidelines, which would be effective across all industries. The DOJ’s guidelines highlight merger conditions that would be concerning to the agency, such as: mergers that would significantly raise market concentration, substantially weaken competition, heighten the risk of coordination, remove a potential new entrant to a concentrated market, affect the availability of products and services, or strengthen a dominant position.
- Federal Reserve (Fed). So far, the Fed has not released any updates to its framework but has indicated that it has been working with the other agencies.
What This Means for CFIsMany industry organizations have criticized the new guidelines for creating an “opaque and uncertain process.” While there is consensus that the existing guidelines needed to be updated, the revised guidelines “do not provide the needed transparency, greater predictability and more timely merger approvals banks deserve,” said Rob Nichols, ABA President and CEO. Although the agencies have clearly stated which areas will be evaluated and could raise concerns, the guidelines give them greater discretion, generating uncertainty for the industry. It will be up to applicants to demonstrate that the proposed merger has a positive impact on the communities they serve. Institutions with over $50B in assets will be particularly scrutinized, while smaller, well-capitalized banks are likely to be less impacted by the changes.Moreover, a lengthier approval process is to be expected. As pending applications will be evaluated according to the new guidelines, the industry is watching closely to see how they will be treated.How CFIs Can Better Prepare for M&AGive regulators a heads-up. Engaging early with the relevant regulators can help CFIs determine whether they should pursue the deal and where objections are likely to come from.
- Raise capital. Since capital concerns have been top of mind for regulators, raising capital to support a merger is likely to increase the chances of the deal going through. The Provident-Lakeland merger and Fulton’s Bank acquisition of First Republic both adopted this strategy.
- Ensure capital adequacy post-merger. Proving a healthy capital ratio for a fixed period after the merger is popping up as a “behind the scenes” condition in several deals. Looking at conditions set for similar existing mergers can help CFIs plan successfully. For example, in the Provident-Lakeland deal, the combined entity needs to maintain a Tier 1 capital to total assets leverage ratio of 8.5% and a total capital to risk-based assets ratio of 11.25%.
- Change charters. Given the different guidelines being applied by the different agencies, it can be worth exploring a change of charter. This would put the deal under the purview of a regulator whose criteria are more aligned with the proposed merger. For example, when buying Flagstar, New York Community Bank switched from a state to a national charter, making the deal subject to approval by the OCC instead of the FDIC.
Industry observers expect an uptick in M&A activity. The updated guidelines mean the deals are going to be more heavily scrutinized and the process could be lengthier. CFIs will be more likely to succeed if they take the time to understand the guidelines, engage with their regulators early on, and ensure the merger is financially viable and has a positive impact on the community.
