Federal Reserve Proposes Updates to Merger-Related Application Form
Also, FirstSun CEO elaborates on decision to seek Fed rather than OCC approval for merger
This year the OCC and FDIC have each proposed to adopt or update policy statements regarding their approaches to reviewing transactions the agencies believe fall under their respective Bank Merger Act jurisdictions.
At an appearance in April Federal Reserve Board Vice Chair for Supervision Michael Barr said the Board is “not currently planning” to follow suit, instead intending to stick with its “pretty robust process that follows our existing guidelines in this area.”
There is one set of updates the Board does have planned, however, that though not necessarily as significant as the FDIC and OCC proposals, still may be of interest to some readers.1
According to documents released today,2 the Board intends to update its FR Y-3 and FR Y-4 reporting forms. The FR Y-3 is the form that companies are required to file when seeking to become a bank holding company for the first time (for instance if a nonbank company is acquiring a bank) or when a company that is already a bank holding company is seeking to acquire another bank holding company. The FR Y-4 is the form that companies are required to use (sometimes) when seeking to acquire a nonbank company3 or to engage in nonbanking activities.
In addition to miscellaneous minor updates, the revised forms would make the following changes.
Integration Plan
Most significantly, the revised forms would require acquirers to provide an “integration plan to merge the operations of the combined organization.” The plan would be required to:
specify how risk management systems, operational processes, products and services, and other functions/processes of the applicant and target companies would be combined to achieve the strategic, financial, and operational goals of the proposed transaction;
delineate the expected timeline to complete the integration process, focusing on core system conversions,
identify the integration plan leadership and/or key personnel responsible for monitoring and completing the principal elements of the plan; and
as appropriate, specify completion dates for key elements of the integration plan.
For some acquirers and some transactions, this change would likely be incremental. Merger applications relating to large or significant transactions typically include information about the acquirer’s integration plans that hit on some or all of these points, even if not currently required by the instructions.
Still, for some acquirers or some transactions this could be a more significant change. Echoing this, Federal Reserve Governor Bowman, somewhat unusually, issued a statement on a proposed reporting form update.
. . . Applications often include plans for integration, as this can factor into the consideration of an application's likelihood of approval. Depending upon how this requirement is implemented, it could result in significantly increased upfront costs and burdens for banks in preparing for and submitting applications for mergers and acquisitions. . . .
Ultimately, while banks are mindful of and do plan for integration, my concern is that increased upfront requirements may lead to additional delays in processing applications. I encourage industry stakeholders to review and provide comment on the proposed changes.
Financial Projections
Currently, the FR Y-3 instructions say that when providing the required pro forma financial projections, an acquirer must provide support for “all assumptions that deviate from historical performance.” Under the revised instructions, acquirers would be required to describe all the assumptions underlying their projections, whether consistent with historical performance or otherwise.
In its OMB supporting statement the Federal Reserve Board explains that this change is intended to allow the Board to “better assess the validity of financial projections under any circumstances.”
Other Changes
Most of the changes described below, for many acquirers, reflect either information acquirers already provide with their initial application or information that the Board and Reserve Bank staff reviewing applications typically ask for in their initial set of additional information requests, if raised by the transaction and not addressed in the application itself. Still, these changes may be suggestive of one or two interesting areas of focus for the Board, particularly for smaller targets or acquirers.
Groups Acting in Concert and Significant Shareholders
Applicants would be required to list all shareholders (individuals and companies) owning 10 percent or more the pro forma company, as well as all companies owning 5 percent or more of the pro forma company.
In addition, applicants would need to “identify those shareholders who are, or would be, presumed to be acting in concert” under the Federal Reserve Board’s Change in Bank Control Act regulations.
The Federal Reserve Board states that these changes would “allow the Federal Reserve to identify groups of individuals who would have the ability to exercise control over the applicant” and “would allow the Federal Reserve to determine who is exercising control of the applicant as a principal shareholder and whether an investing company may be required to file an FR Y-3 application separately to become a BHC.”
Breakdown of Pro Forma Equity
Applicants would “provide a breakdown of the pro forma equity of the applicant by dollar amount, number of shares and class of stock, as appropriate, including voting and non-voting shares.” The Board believes this change will allow it to “determine the quality of the capital of the applicant” and “determine which type of stock is the dominant form of capital.”
Management Interlocks
Applicants would identify any management official who is also a management official of another depository institution or depository institution holding company, to allow the Federal Reserve Board to determine whether the management interlock is prohibited by the Depository Institutions Management Interlocks Act.
FirstSun CEO Comments on Interactions with OCC, Choice to Seek Fed Approval for Homestreet Merger
As discussed earlier this week, FirstSun and Homestreet have restructured their pending merger agreement. One feature of the amended agreement is the contemplated conversion of FirstSun’s national bank subsidiary to a Texas state chartered bank. The effect of this change is to avoid the need to have the Office of the Comptroller of the Currency review and approve the transaction. Instead, the transaction now would require, at the federal level at least, only Federal Reserve Board approval.
In the parties’ press release on Tuesday announcing this change, they offered this explanation:
FirstSun and HomeStreet each believe that a Texas state bank charter is the appropriate charter for the combined company’s banking operations since Sunflower Bank is now headquartered in Dallas, Texas.
On a call with investors on Wednesday, FirstSun’s President and CEO offered a slightly different, or at least more complete, explanation (emphasis added throughout):
We will remain a Fed regulated bank holding company as previously announced.
However, we've also decided to proceed with an application to have the pro forma bank also be primarily regulated by the Federal Reserve and the State of Texas Department of Banking. After discussion with our respective boards, we decided this was a better long-term path for the combined organization. We believe the Fed and the State of Texas have a firm understanding of our business and the nature of our CRE risks.
In our discussions with the OCC in Washington, it became obvious that we would not gain near term approval given their recent experience with multifamily and other CRE positions. We believe their position also resided in the fact that they were not the primary regulator for HomeStreet. The Fed is taking a very different approach, in part due to the changes we have made to the transaction.
So this presents something like the inverse of the Flagstar-NYCB situation from 2022. There, the FDIC reportedly was not willing to approve a merger of Flagstar into state-chartered, non-member New York Community Bank, so the parties restructured the deal to have a national bank be the resulting entity in the merger, and thus seek OCC approval instead. Here it is the OCC who balked at approving a merger involving a national bank, so the parties are converting to a state bank to see if the Federal Reserve Board4 will be more receptive to approving the transaction.5
As with this blog’s previous commentary on Flagstar-NYCB, the point of highlighting this discrepancy is not necessarily to say that a given agency is right and that the other is wrong. But it is an odd (though not new) feature of the U.S. approach to banking regulation that two U.S. federal banking regulators can apply the same statutory factors under the same governing statute and reach different conclusions.
In addition to reviewing transactions under the Bank Merger Act that involve a resulting bank that would be supervised by the Federal Reserve Board, the Board reviews merger applications under the Bank Holding Company Act and the Home Owners’ Loan Act. The reporting forms discussed here are about transactions under the BHC Act, and are not necessarily directly relevant to the Board’s Bank Merger Act application form.
These changes were previewed in a brief paragraph in the Federal Register earlier this week, but the redlined forms showing the proposed changes were newly released today.
In this context nonbank company includes savings banks and some other deposit-taking institutions that do not count as banks for BHC Act purposes, so sometimes what is effectively an application to acquire a bank will use the FR Y-4 form.
The proposed FR Y-4 form updates are more limited than the FR Y-3 updates, but because the FR Y-4 form says that when using the FR Y-4 form to acquire a depository institution the applicant should use as a guide the questions on the FR Y-3 form, the changes to the FR Y-3 effectively amount to changes to the form for bank acquisitions using the FR Y-4.
Or the Federal Reserve Bank of Dallas, acting under delegated authority.
To be clear, it is not guaranteed that the deal gets done, and based on Homestreet’s stock price at least the market does not seem totally convinced that it will.