Another Notable Merger Approval Order
Including: (1) potential implications for the USDF consortium, (2) allegations of regulatory arbitrage and (3) a dividend restriction
Last week the OCC approved Flagstar’s proposed merger with New York Community Bank, and today the OCC made the approval order available on its FOIA website.1
I realize this is the third post in a row about bank mergers, but there is enough that is interesting in the order, including about things unrelated to bank merger policy, that this short post may be worth your time.
Background
In April 2021 New York Community Bancorp, Inc. announced that it had agreed to acquire Flagstar Bancorp, Inc. in an all stock deal worth approximately $2.6 billion at the time of announcement. The merger contemplated that Flagstar’s subsidiary bank, a federal savings bank supervised by the OCC, would merge into NYCB’s subsidiary bank, a New York State savings bank supervised by the NYDFS and the FDIC, with NYCB’s subsidiary bank as the surviving entity following the merger. Federal Reserve Board, FDIC and NYDFS approval were required for the transaction.
In April 2022 plans changed. The parties announced that their merger would be restructured such that (i) Flagstar’s federal savings bank would convert into a national bank and (ii) NYCB’s bank would then merge into Flagstar’s newly converted national bank, with Flagstar’s national bank as the surviving entity following the merger. This had the effect of obviating the need for FDIC approval, and meant that only Federal Reserve Board and OCC approval were required for the transaction.2
The parties explained their change in approach by saying that they had concluded that a “national bank charter is an appropriate charter for the combined company's banking operations, especially taking into account Flagstar's national mortgage banking business.”
That explanation struck many as incomplete,3 but in any case the parties have since April 2022 been awaiting Board and OCC approval for the revised transaction. OCC approval was provided last week, and Board approval remains pending.4
The OCC Approval Order
On first read, I see at least three interesting things in the OCC’s approval order.
Potential Implications for the USDF Consortium
The USDF Consortium is an association of FDIC-insured institutions that in January 2022 announced that its members intended to create USDF, a stablecoin “minted exclusively by U.S. banks and … redeemable on a 1:1 basis for cash from a Consortium member bank.”
The state-chartered New York Community Bank was a founding member of the USDF Consortium. Assuming the NYCB-Flagstar merger closes, will the surviving national bank be permitted to continue its membership?
The OCC isn’t sure. From the order:
Flagstar NA shall divest its interest in USDF Consortium LLC, and any related holdings of Hash, within two years from the date of consummation of the merger unless the OCC determines in writing that it is permissible for the bank to retain these investments. Additionally, Flagstar NA shall not increase its membership interest in USDF Consortium LLC or its Hash holdings, or holdings of any other crypto-related currency or token, unless and until the OCC determines that the membership interest and Hash or other crypto-related holdings are permissible for a national bank
Earlier in the order, the OCC says it is “currently reviewing the permissibility of this investment [i.e., membership in the USDF Consortium] in an unrelated case.” It is not clear if this is a reference to an ongoing review by the OCC of an interest held by an existing consortium member (a few of which are national banks) or if the review arose in some other context.5
Accusations of Regulatory Arbitrage
The OCC’s approval order notes that it received one public comment in opposition to the transaction, which the OCC summarizes in relevant part as follows:
In its comment letter, the commenter requested that the OCC require the resulting bank to follow all applicable laws and guidance for New York state-chartered banks, requested that examiners from the New York Department of Financial Services (NYDFS) be permitted to participate with the OCC in examinations of the resulting bank, and suggested that the application for a national bank charter for the resulting bank is motivated by “regulatory arbitrage.” The commenter noted that the initial application did not result in Federal Deposit Insurance Corporation (FDIC) approval.
The OCC’s order, unsurprisingly, declines to require the post-merger national bank to follow New York state banking law or to allow DFS examiners to tag along on OCC examinations, but does point out that the bank will be subject to the OCC’s own “comprehensive consumer protection regulatory framework.”
As for the fact that the FDIC did not approve the transaction,6 the OCC does not respond directly to this point, although it does describe Flagstar's response to the comment letter.
Flagstar noted that the choice to apply for a national bank charter is ultimately a business decision available to it under the existing legal framework governing the United States’ dual banking system and that the commenter’s preference of charters does not constitute a statutorily relevant consideration under the BMA.
A Dividend Restriction
Finally, the OCC’s order also includes as a condition the following limitation on the payment of dividends by the post-merger bank to its parent company.
To ensure Flagstar NA has sufficiently allocated resources to address any supervisory issues that arise post-merger, for a period of two years from the merger consummation date, the Bank shall not declare or pay any dividend without receiving a prior written determination of no supervisory objection from the OCC. Any request submitted pursuant to this condition shall occur at least 30 days prior to the declaration date and certify that the proposed dividend is in compliance with applicable capital distribution requirements.
As with certain other aspects of the order, it is not clear how much of this is a generic “just-in-case” type condition or whether the OCC has in mind specific supervisory issues that are likely to arise if the merger does indeed obtain Board approval and close later this quarter.
This is available by looking in the “Merger Applications” folder and downloading the associated PDF. A web link does not yet appear to be available.
The parties did obtain NYDFS approval as well, but given the restructuring of the merger such approval is no longer necessary.
For example, from NYCB’s earnings call shortly after the announcement:
Operator: Thank you. Our next question comes from Steven Alexopoulos with JPMorgan. Please proceed with your question.
Steven Alexopoulos: Hey, good morning, everyone. Can you give more color on the decision to go the route of the national bank charter? And you said, you received NYS [DFS] approval. Was the FDIC a roadblock in getting this deal approved?
Thomas Cangemi: Well, I'm not going to comment on any agency. I will tell you that we truly believe that with the National Banking platform and where we're heading in the bank in the future that the OCC charter is the way to go. So clearly, we're very much appreciative of [DFS] approval, and I'm not going to comment on any other regulatory discussions there.
Steven Alexopoulos: Okay. But what -- can you go into the decision to switch to the national charter?
Thomas Cangemi: I just did. As we -- I do appreciate the question and it can be sensitive on the commentary, but we went to a journey through this process. It's now a year through the approval process, and as we went through this process, we feel very confident that the business model is focused on a national mortgage banking platform and a national commercial banking platform that will be more inclined for an OCC Charter.
As a result of an amendment also executed last week, the parties now have agreed to give themselves until December 31, 2022 to complete the merger.
There is also a separate condition in the order relating to crypto activities more generally:
Within 30 days of consummation of the merger, Flagstar NA shall submit a written request for supervisory non-objection pursuant to OCC Interpretive Letter 1179 if it is engaged in any crypto-asset, distributed ledger, or stablecoin activities addressed in OCC Interpretive Letters 1170, 1172, or 1174. Flagstar NA will cease and divest of these activities within two years from the date of consummation of the merger unless the OCC provides supervisory non-objection to the request.
Of course, nor did the FDIC disapprove it.