[Federal Register Volume 62, Number 196 (Thursday, October 9, 1997)]
[Notices]
[Pages 52877-52880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26233]


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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.

[[Page 52878]]

    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

[[Page 52879]]

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

[[Page 52880]]

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