Bank Merger Transactions

FEDERAL DEPOSIT INSURANCE CORPORATION

Bank Merger Transactions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed statement of policy.

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SUMMARY: The FDIC is proposing to revise its Statement of Policy on

Bank Merger Transactions by updating it to reflect legislative and

other developments that have occurred since the Statement of Policy was

last revised in 1989. The proposed revision also gives additional

guidance by including new provisions and clarifying some existing

provisions. The proposal is a part of the FDIC's systematic review of

its regulations and written policies under the Riegle Community and

Regulatory Improvement Act of 1994 and is intended to be read in

conjunction with the merger provisions of the FDIC's proposed

amendments dealing with applications filed with the FDIC, which also

appears in this issue of the Federal Register.

DATES: Comments must be received by January 7, 1998.

ADDRESSES: Send written comments to Robert E. Feldman, Executive

Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th Street NW, Washington, DC 20429. Comments may be

hand delivered to the guard station located at the rear of the 17th

Street building (located on F Street), on business days between 7:00

a.m. and 5:00 p.m. (FAX number (202) 898-3838; Internet address:

[email protected]). Comments may be inspected and photocopied at the

FDIC Public Information Center, Room 100, 801 17th Street NW,

Washington, DC, between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Kevin W. Hodson, Review Examiner,

Division of Supervision, (202) 898-6919; Martha Coulter, Counsel, Legal

Division, (202) 898-7348, Federal Deposit Insurance Corporation,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION: Section 303(a) of the Riegle Community

Development and Regulatory Improvement Act of 1994 (CDRI Act), 12

U.S.C. 4803(a), requires that each of the federal banking agencies (the

FDIC, the Office of the Comptroller of the Currency, the Board of

Governors of the Federal Reserve System, and the Office of Thrift

Supervision) conduct a review of its regulations and written policies,

for two general purposes. These purposes are: (1) To streamline and

modify the regulations and policies in order to improve efficiency,

reduce unnecessary costs, and eliminate unwarranted constraints on

credit availability; and (2) to remove inconsistencies and outmoded and

duplicative requirements.

As part of this review, the FDIC has determined that its Statement

of Policy on Bank Merger Transactions (Policy Statement or Statement)

should be revised. The primary purpose of the revision is to update the

Statement to reflect statutory changes and other developments that have

taken place since its last revision in 1989. In addition, certain

clarifications and refinements are being proposed, as well as new

provisions intended to give guidance in areas not previously addressed

by the 1989 Statement. The proposed revisions are discussed more fully

below.

Recent Developments. Among the proposed revisions to the Statement

are those resulting from statutory changes, including the CDRI Act, the

Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994

(Interstate Act), and the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA).1 Section 321(b) of the

CDRI Act reduced the post-approval, pre-consummation waiting period for

certain merger transactions from 30 days to 15 days (see 12 U.S.C.

1828(c)(6)). Section 102 of the Interstate Act, codified at 12 U.S.C.

1831u, provided for interstate bank mergers. FIRREA broadened the

coverage of the Bank Merger Act, 12 U.S.C. 1828(c), to include savings

associations and eliminate the Federal Savings and Loan Insurance

Corporation (FSLIC).2

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\1\ The citations for these statutes are, respectively, Pub. L.

103-325, 108 Stat. 2160; Pub. L. 103-328, 108 Stat. 2338; and Pub.

L. 101-73, 103 Stat. 183.

\2\ FIRREA sections 201 and 221.

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Each of these changes caused related references in the 1989

Statement to become out-dated or incomplete, a situation the proposed

new Statement corrects. For example, because the Bank Merger Act now

applies to thrift institutions as well as banks, the proposed Statement

replaces the term ``bank'' with ``depository institution.'' It also

deletes a reference to the FSLIC. In addition, the proposed Statement

includes references to interstate mergers and to the CDRI Act's 15-day

post-approval waiting period.

In addition to statutory changes, there have been other

developments that warrant revision of the 1989 Statement. For example,

the 1989 Statement refers to the use of ``IPC'' deposits (deposits of

individuals, partnerships, and corporations) in FDIC merger analysis.

However, IPC deposit data is no longer collected by the FDIC.

Accordingly, the proposed revisions indicate that the FDIC now uses

``total deposits'' in evaluating the competitive effects of a proposed

merger.

Another development was the 1995 amendment of the FDIC's

regulations implementing the Community Reinvestment Act (CRA) (see 60

FR 22156 (May 4, 1995)). Changes the FDIC made to its CRA regulations

include elimination of the requirement for CRA statements and revision

of the CRA performance standards to be applied by the FDIC. These

changes are reflected in the proposed new Statement.

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Other developments affecting the Statement include the proposed

amendment by the FDIC of its Bank Merger Act regulations in 12 CFR part

303, which appear elsewhere in this issue of the Federal Register.

Among these proposed amendments (which would comprise new subpart D to

part 303) is a new expedited processing procedure for applications

meeting certain eligibility criteria. Another amendment to the merger

regulations would be replacement of the term ``phantom'' merger with

the term ``interim'' merger. These changes have been incorporated into

the proposed new Statement. In addition, the Statement's citations to

the FDIC's merger regulations would be revised consistent with the new

section designations in the proposed new part 303.

Additions, Deletions and Clarifications. In addition to the updates

discussed above, the Statement would be expanded to address several

elements not previously covered. These include optional conversion

transactions (commonly referred to as Oakar transactions) under 12

U.S.C. 1815(d)(3), branch closings in connection with merger

transactions, and interstate and interim mergers. Also included is a

new section addressing legal fees and other expenses, which has been

transferred from the FDIC's recently-rescinded Statement of Policy on

Applications, Legal Fees, and Other Expenses (see 62 FR 15479 (April 1,

1997)).

The proposed Statement includes a number of clarifications and

refinements, as well. For example, a new sentence in the initial

paragraph would incorporate the FDIC's existing view that transactions

that do not involve a transfer of deposit liabilities typically do not

require prior FDIC approval under the Bank Merger Act, unless the

transaction involves the acquisition of all or substantially all of an

institution's assets. Other such clarifications include pluralization

of the term ``relevant geographic market'' (to read ``relevant

geographic market(s)'') to make clear that a merger can involve more

than one distinct market area.

The proposed Statement further includes a number of minor, non-

substantive wording changes intended only to refine or clarify. None of

these minor changes reflects any change in the FDIC's merger-analysis

practices or policies.

The FDIC has found in its experience that few if any issues

regarding the FDIC's obligations under the National Environmental

Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq.) or the National

Historic Preservation Act (NHPA) (16 U.S.C. 470 et seq.) are presented

in the context of bank merger transactions. Since the FDIC is in the

process of reviewing its policies on NEPA and NHPA, the FDIC believes

it is not advisable to include a reference to NEPA and NHPA in the

Statement of Policy at this time.

The proposed Statement is set forth below. It is intended to be

read in conjunction with the proposed new merger provisions of part 303

(Applications) of the FDIC's regulations, notice of which is published

elsewhere in this issue of the Federal Register.

For the above reasons, the FDIC proposes the following Statement of

Policy:

Proposed FDIC Statement of Policy on Bank Merger Transactions

I. Introduction

Section 18(c) of the Federal Deposit Insurance Act (12 U.S.C.

1828(c)), popularly known as the Bank Merger Act, requires the prior

written approval of the FDIC before any insured depository institution

may:

(1) Merge or consolidate with, purchase or otherwise acquire the

assets of, or assume any deposit liabilities of, another insured

depository institution if the resulting institution is to be a state

nonmember bank, or

(2) Merge or consolidate with, assume liability to pay any deposits

or similar liabilities of, or transfer assets and deposits to, a

noninsured bank or institution.

Institutions undertaking one of the above described ``mergers'' or

``merger transactions'' must file an application with the FDIC.

Transactions that do not involve a transfer of deposit liabilities

typically do not require prior FDIC approval under the Bank Merger Act,

unless the transaction involves the acquisition of all or substantially

all of an institution's assets.

The Bank Merger Act prohibits the FDIC from approving any proposed

merger that would result in a monopoly, or which would further a

combination or conspiracy to monopolize or to attempt to monopolize the

business of banking in any part of the United States. Similarly, the

Bank Merger Act prohibits the FDIC from approving a proposed merger

whose effect in any section of the country may be substantially to

lessen competition, or which in any other manner would be in restraint

of trade. An exception may be made in the case of a merger whose effect

would be to substantially lessen competition, tend to create a

monopoly, or otherwise restrain trade, if the FDIC finds that the

anticompetitive effects of the proposed transaction are clearly

outweighed in the public interest. For example, the FDIC may approve a

merger to prevent the probable failure of one of the institutions

involved.

In every proposed merger transaction, the FDIC must also consider

the financial and managerial resources and future prospects of the

existing and proposed institutions, and the convenience and needs of

the community to be served.

II. Application Procedures

1. Application filing. Application forms and instructions may be

obtained from any FDIC Division of Supervision regional office.

Completed applications and any other pertinent materials should be

filed with the appropriate regional director as specified in

Sec. 303.2(g) of the FDIC rules and regulations (12 CFR 303.2(g)). The

application and related materials will be reviewed by regional office

staff for compliance with applicable laws and FDIC rules and

regulations. When all necessary information has been received, the

application will be processed and a decision rendered by the regional

director pursuant to the delegations of authority set forth in

Sec. 303.66 of the FDIC rules and regulations (12 CFR 303.66) or the

application will be forwarded to the FDIC's Washington office for

processing and decision.

2. Expedited processing. Section 303.64 of the FDIC rules and

regulations (12 CFR 303.64) provides for expedited processing, which

the FDIC will grant to eligible applicants. In addition to the eligible

institution criteria provided for in section 303.2 (12 CFR 303.2),

Sec. 303.64 provides expedited processing criteria specifically

applicable to proposed merger transactions.

3. Publication of notice. The FDIC will not take final action on a

merger application until notice of the proposed merger is published in

a newspaper or newspapers of general circulation in accordance with the

requirements of section 18(c)(3) of the Federal Deposit Insurance Act.

See Sec. 303.65 of the FDIC rules and regulations (12 CFR 303.65). The

applicant must furnish evidence of publication of the notice to the

regional director following compliance with the publication

requirement. (See Sec. 303.7(b) of the FDIC rules and regulations (12

CFR 303.7(b)).)

4. Reports on competitive factors. As required by law, the FDIC

will request reports on the competitive factors involved in a proposed

merger from the Attorney General, the Comptroller of the

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Currency, the Board of Governors of the Federal Reserve System, and the

Director of the Office of Thrift Supervision. These reports must

ordinarily be furnished within 30 days, and the applicant will, if it

so requested, be given an opportunity to submit comments to the FDIC on

the contents of the competitive factors reports.

5. Notification of the Attorney General. After the FDIC approves

any merger transaction, the FDIC will immediately notify the Attorney

General. Generally, unless it involves a probable failure or an

emergency exists requiring expeditious action, a merger may not be

consummated until 30 calendar days after the date of the FDIC's

approval. However, the FDIC may prescribe a 15-day period, provided the

Attorney General concurs with the shorter period.

6. Merger decisions available. Applicants for consent to merge may

find additional guidance in the reported bases for FDIC approval or

denial in prior merger cases compiled in the FDIC's annual ``Merger

Decisions'' report. Reports may be obtained from the FDIC Office of

Corporate Communications, Room 100, 801 17th Street NW., Washington, DC

20434.

III. Evaluation of Merger Applications

The FDIC's intent and purpose is to foster and maintain a safe,

efficient, and competitive banking system that meets the needs of the

communities served. With these broad goals in mind, the FDIC will apply

the specific standards outlined in this statement of policy when

evaluating and deciding proposed merger transactions.

Competitive Factors

In deciding the competitive effects of a proposed merger

transaction, the FDIC will consider the extent of existing competition

between and among the merging institutions, other depository

institutions, and other providers of similar or equivalent services in

the product markets within the relevant geographic market(s).

1. Relevant Geographic Market

The relevant geographic market(s) includes the areas in which the

offices to be acquired are located and the areas from which those

offices derive the predominant portion of their loans, deposits, or

other business. The relevant geographic market also includes the areas

where existing and potential customers impacted by the proposed merger

may practically turn for alternative sources of banking services. In

delineating the relevant geographic market, the FDIC will also consider

the location of the acquiring institution's offices in relation to the

offices to be acquired.

2. Product Market

The relevant product market(s) includes the banking services

currently offered by the merging institutions and to be offered by the

resulting institution. In addition, the product market may also include

the functional equivalent of such services offered by other types of

competitors, including other depository institutions, securities firms,

or finance companies. For example, share draft accounts offered by

credit unions may be the functional equivalent of demand deposit

accounts. Similarly, captive finance companies of automobile

manufacturers may compete directly with depository institutions for

automobile loans, and mortgage bankers may compete directly with

depository institutions for real estate loans.

3. Analysis of Competitive Effects

In its analysis of the competitive effects of a proposed merger

transaction, the FDIC will focus particularly on the type and extent of

competition that exists and that will be eliminated, reduced, or

enhanced by the proposed merger. The FDIC will also consider the

competitive impact of providers located outside a relevant geographic

market where it is shown that such providers individually or

collectively influence materially the nature, pricing, or quality of

services offered by the providers currently operating within the

geographic market.

The FDIC's analysis will focus primarily on those services that

constitute the largest part of the businesses of the merging

institutions. In its analysis, the FDIC will use whatever analytical

proxies are available that reasonably reflect the dynamics of the

market, including deposit and loan totals, the number and volume of

transactions, contributions to net income, or other measures.

Initially, the FDIC will focus on the respective shares of total

deposits 3 held by the merging institutions and the various

other participants with offices in the relevant geographic market(s),

unless the other participants' loan, deposit, or other business varies

markedly from that of the merging institutions. Where it is clear,

based on market share considerations alone, that the proposed merger

would not significantly increase concentration in an unconcentrated

market, a favorable finding will be made on the competitive factor.

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\3\ In many cases, total deposits will adequately serve as a

proxy for overall share of the banking business in the relevant

geographic market(s); however, the FDIC may also consider other

analytical proxies.

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Where the market shares of merger participants are not clearly

insignificant, the FDIC will also consider the degree of concentration

within the relevant geographic market(s) using the Herfindahl-Hirschman

Index (HHI) 4 as a primary measure of market concentration.

For purposes of this test, a reasonable approximation for the relevant

geographic market(s) consisting of one or more predefined areas may be

used. Examples of such predefined areas include counties, the Bureau of

the Census Metropolitan-Statistical Areas (MSAs), or Rand-McNally

Ranally Metro Areas (RMAs).

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\4\ The HHI is a statistical measure of market concentration and

is also used as the principal measure of market concentration in the

Department of Justice's Merger Guidelines. The HHI for a given

market is calculated by squaring each individual competitor's share

of total deposits within the market and then summing the squared

market share products. For example, the HHI for a market with a

single competitor would be: 1002 = 10,000; for a market

with five competitors with equal market shares, the HHI would be:

202+202+202+202+202

= 2,000.

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The FDIC normally will not deny a proposed merger transaction on

antitrust grounds (absent objection from the Department of Justice)

where the post-merger HHI in the relevant geographic market(s) is 1,800

points or less or, if more than 1,800, reflects an increase of less

than 200 points from the pre-merger HHI. Where a proposed merger fails

this initial concentration test, the FDIC will consider more closely

the various competitive dynamics at work in the market, taking into

account a variety of factors that may be especially relevant and

important in a particular proposal, including:

The number, size, financial strength, quality of

management, and aggressiveness of the various participants in the

market;

The likelihood of new participants entering the market

based on its attractiveness in terms of population, income levels,

economic growth, and other features;

Any legal impediments to entry or expansion; and

Definite entry plans by specifically identified entities.

In addition, the FDIC will consider the likelihood that other

prospective new entrants might enter the market by less direct means;

for example, electronic banking with local advertisement of the

availability of such services. This consideration will be particularly

important where there is evidence that the mere possibility of such

entry tends to encourage competitive pricing and to maintain the

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quality of services offered by the existing competitors in the market.

The FDIC will also consider the extent to which the proposed merger

would likely create a stronger, more efficient institution able to

compete more vigorously in the relevant geographic market.

4. Consideration of the Public Interest

The FDIC will deny any proposed merger whose overall effect would

be likely to reduce existing competition substantially by limiting the

service and price options available to the public in the relevant

geographic market(s), unless the anticompetitive effects of the

proposed merger are clearly outweighed in the public interest by the

convenience and needs of the community to be served. For this purpose,

the applicant must show by clear and convincing evidence that any

claimed public benefits would be both substantial and incremental and

generally available to seekers of banking services in the relevant

geographic market. Moreover, the applicant must show that the expected

benefits cannot reasonably be achieved through other, less

anticompetitive means.

Where a proposed merger is the only reasonable alternative to the

probable failure of an insured depository institution, the FDIC may

approve an otherwise anticompetitive merger. The FDIC will usually not

consider a less anticompetitive alternative that is substantially more

costly to the FDIC to be a reasonable alternative unless the potential

costs to the public of approving the anticompetitive merger are clearly

greater than those likely to be saved by the FDIC.

Prudential Factors

The FDIC does not wish to create larger weak institutions or to

debilitate existing institutions whose overall condition, including

capital, management, and earnings, is generally satisfactory.

Consequently, apart from competitive considerations, the FDIC normally

will not approve a proposed merger where the resulting institution

would fail to meet existing capital standards, continue with weak or

unsatisfactory management, or whose earnings prospects, both in terms

of quantity and quality, are weak, suspect, or doubtful. In assessing

capital adequacy and earnings prospects, particular attention will be

paid to the adequacy of the allowance for loan and lease losses. In

evaluating management, the FDIC will rely to a great extent on the

supervisory histories of the institutions involved and of the executive

officers and directors that are proposed for the resultant institution.

In addition, the FDIC may review the adequacy of management's

disclosure to shareholders of the material aspects of the merger

transaction to ensure that management has properly fulfilled their

fiduciary duties.

Convenience and Needs Factor

The FDIC will consider the extent to which the proposed merger is

likely to improve the service to the general public through such

capabilities as higher lending limits, new or expanded services,

reduced prices, increased convenience in utilizing the services and

facilities of the resulting institution, or other means. In assessing

the convenience and needs of the community served, the FDIC, as

required by the Community Reinvestment Act, will also note and consider

each institution's Community Reinvestment Act performance evaluation

record. An unsatisfactory record may form the basis for denial or

conditional approval of an application.

IV. Related Considerations

1. Interstate bank mergers. Where a proposed transaction is an

interstate merger between insured banks, the FDIC will consider the

additional factors provided for in section 44 of the Federal Deposit

Insurance Act, 12 U.S.C. 1831u.

2. Interim merger transactions. An interim institution is a state-

or federally-chartered institution that does not operate independently,

but exists, normally for a very short period of time, solely as a

vehicle to accomplish a merger transaction. In cases where the

establishment of a new or interim institution is contemplated in

connection with a proposed merger transaction, the applicant should

contact the FDIC to discuss any relevant deposit insurance

requirements. In general, a merger transaction (other than a purchase

and assumption) involving an insured depository institution and a

federal interim depository institution will not require an application

for deposit insurance, even if the federal interim depository

institution will be the surviving institution.

3. Optional conversion transactions. Section 5(d)(3) of the Federal

Deposit Insurance Act, 12 U.S.C. 1815(d)(3), provides for ``optional

conversions'' (commonly known as Oakar transactions) which, in general,

are mergers that involve a member of the Bank Insurance Fund and a

member of the Savings Association Insurance Fund. These transactions

are subject to specific rules regarding deposit insurance coverage and

premiums. Applicants may find additional guidance in Sec. 327.31 of the

FDIC rules and regulations (12 CFR 327.31).

4. Branch closings. Where banking offices are to be closed in

connection with the proposed merger transaction, the FDIC will review

the merging institutions' conformance to any applicable requirements of

section 42 of the FDI Act concerning notice of branch closings as

reflected in the Interagency Policy Statement Concerning Branch Closing

Notices and Policies.

5. Legal fees and other expenses. The commitment to pay or payment

of unreasonable or excessive fees and other expenses incident to an

application reflects adversely upon the management of the applicant

institution. The FDIC will closely review expenses for professional or

other services rendered by present or prospective board members, major

shareholders, or other insiders for any indication of self-dealing to

the detriment of the institution. As a matter of practice, the FDIC

expects full disclosure to all directors and shareholders of any

arrangement with an insider. In no case will the FDIC approve an

application where the payment of a fee, in whole or in part, is

contingent upon any act or forbearance by the FDIC or by any other

federal or state agency or official.

By order of the Board of Directors.

Dated at Washington, D.C., this 23rd day of September, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97-26233 Filed 10-8-97; 8:45 am]

BILLING CODE 6714-01-P