[Federal Register Volume 63, Number 161 (Thursday, August 20, 1998)]
[Notices]
[Pages 44761-44764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21489]


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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

[[Page 44762]]

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