Bank Merger Transactions

FEDERAL DEPOSIT INSURANCE CORPORATION

Bank Merger Transactions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Statement of policy.

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SUMMARY: The FDIC is revising its Statement of Policy on Bank Merger

Transactions (Statement of Policy) by updating it to reflect

legislative and other developments that have occurred since the

Statement of Policy was last revised in 1989. The revision also gives

added guidance by including new provisions and clarifying some existing

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

its regulations and written policies under the Riegle Community

Development and Regulatory Improvement Act of 1994. The revised

Statement of Policy is intended to be read in conjunction with the

merger provisions of the FDIC's revised regulations governing

applications filed with the FDIC, which also appear in this issue of

the Federal Register.

EFFECTIVE DATE: October 1, 1998.

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, D.C. 20429.

SUPPLEMENTARY INFORMATION: On October 9, 1997, the FDIC issued for a

public comment a proposal to revise the existing Statement of Policy

(62 FR 52877). The proposal was issued in connection with section

303(a) of the Riegle Community Development and Regulatory Improvement

Act of 1994 (CDRI Act), 12 U.S.C. 4803(a), which required that each of

the federal banking agencies conduct a review of its regulations and

written policies, for two general purposes. These purposes were: (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 determined that the Statement of

Policy should be revised. The primary purpose of the revision was to

update the Statement of Policy to reflect statutory changes and other

developments since its last revision in 1989. In addition, certain

clarifications and refinements were proposed, as well as new provisions

intended to give guidance in

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areas not addressed by the existing Statement of Policy.

The recent developments reflected in the proposed revisions

included those resulting from statutory changes, such as changes made

by the CDRI Act; the Riegle-Neal Interstate Banking and Branching

Efficiency Act of 1994; and the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989.1 Changes in each of

those statutes caused related references in the existing Statement of

Policy to become out-dated or incomplete.

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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.

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Also reflected in the proposed revision were such other

developments as the discontinuation of FDIC collection of data on

``IPC'' deposits (deposits of individuals, partnerships, and

corporations), previously used as a measure in FDIC merger analysis.

The proposal also reflected amendments to certain FDIC regulations,

such as the 1995 amendment of the FDIC's regulations implementing the

Community Reinvestment Act (see 60 FR 22156 (May 4, 1995)) and, more

recently, the proposed amendments to the FDIC's regulations governing

merger applications (see 62 FR 52810 (October 9, 1997)).

In addition to the updates discussed above, the proposed revision

expanded the Statement of Policy to include elements not previously

covered, such as references to optional conversion transactions, branch

closings in connection with merger transactions, and interstate and

interim merger transactions. The proposed Statement of Policy also

included a number of clarifications and refinements, such as a

clarification 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.

The FDIC received two letters specifically commenting on the

proposed revisions. Both letters were from depository institution trade

associations and both expressed support for the revisions. No

unfavorable comments were received. No changes were made as a result of

comments received; however, a reference to the recently adopted

Interagency Statement on Branch Names was added to the section

discussing related considerations. The Interagency Statement, which

addresses the potential for customer confusion about deposit insurance

when an insured institution operates a branch under a trade name

different from that of the institution, was adopted May 1, 1998, with

an effective date of July 1, 1998. See FDIC, Financial Institution

Letter 46-98, (May 1, 1998).

With this exception, and with the exception of a few minor

editorial changes, the Board is adopting the revised Statement of

Policy as proposed. The revised Statement of Policy is intended to be

read in conjunction with the revised merger provisions of newly-amended

part 303 (Applications) of the FDIC's regulations, which is published

elsewhere in this issue of the Federal Register.

The Statement of Policy is revised by the Board to read as follows:

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 ``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 transaction that would result in a monopoly, or 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

transaction 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 transaction 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 transaction 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 (DOS) 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 Sec. 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 transaction 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 appropriate regional director (DOS)

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

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reports on the competitive factors involved in a proposed merger

transaction from the Attorney General, the Comptroller of the 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 upon request will 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 transaction 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 engage in

a merger transaction may find additional guidance in the reported bases

for FDIC approval or denial in prior merger transaction 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 N.W., Washington, D.C. 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 acting on 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 relevant product market(s) 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 transaction 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. Relevant 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 transaction. 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 1 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

transaction would not significantly increase concentration in an

unconcentrated market, a favorable finding will be made on the

competitive factor.

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\1\ 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 the merging institutions 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) 2 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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\2\ 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: 100\2\ = 10,000; for a market with five

competitors with equal market shares, the HHI would be: 20\2\ +

20\2\ + 20\2\ + 20\2\ + 20\2\ = 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 it is more than 1,800, it reflects an increase of

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

transaction 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 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

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evidence that the mere possibility of such entry tends to encourage

competitive pricing and to maintain the quality of services offered by

the existing competitors in the market.

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

transaction likely would create a stronger, more efficient institution

able to compete more vigorously in the relevant geographic markets.

4. Consideration of the public interest. The FDIC will deny any

proposed merger transaction whose overall effect likely would be 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

transaction 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(s) and that the expected benefits cannot reasonably

be achieved through other, less anticompetitive means.

Where a proposed merger transaction is the only reasonable

alternative to the probable failure of an insured depository

institution, the FDIC may approve an otherwise anticompetitive merger

transaction. The FDIC usually will 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 transaction are clearly greater

than those costs 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 transaction 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 its

fiduciary duties.

Convenience and Needs Factor

In assessing the convenience and needs of the community to be

served, the FDIC will consider such elements as the extent to which the

proposed merger transaction is likely to benefit the general public

through higher lending limits, new or expanded services, reduced

prices, increased convenience in utilizing the services and facilities

of the resulting institution, or other means. 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 merger transactions. Where a proposed

transaction is an interstate merger transaction 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. 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 merger transactions 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. See 2 FDIC Law, Regulations, Related Acts 5391.

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.

6. Trade names. Where an acquired bank or branch is to be operated

under a different trade name than the acquiring bank, the FDIC will

review the adequacy of the steps taken to minimize the potential for

customer confusion about deposit insurance coverage. Applicants may

refer to the Interagency Statement on Branch Names for additional

guidance. See FDIC, Financial Institution Letter, 46-98 (May 1, 1998).

By order of the Board of Directors.

Dated at Washington, D.C., this 7th day of July, 1998.

Federal Deposit Insurance Corporation.

James LaPierre,

Deputy Executive Secretary.

[FR Doc. 98-21489 Filed 8-19-98; 8:45 am]

BILLING CODE 6714-01-P