Federal Register / Vol. 62, No. 196 / Thursday, October 9, 1997 / Notices 52877

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.

be ‘‘adequately capitalized,’’ as defined

in the capital regulations of its primary

federal regulator, which should be

augmented by an adequate allowance

for loan and lease losses. It is

emphasized that this is a minimum

standard, and a higher capital level may

be required. The initial capital

requirements may be based on a realistic

projection of the estimated retained

deposits. However, the proposed

depository institution will be required

to provide a written commitment to

achieve the minimum capital position

shortly after consummation if the

volume of deposits is underestimated.

Proponents should contact the

appropriate FDIC regional office (DOS)

as soon as possible if they intend to bid

on a failing institution. Due to the time

constraints involved with this type of

transaction, information submissions

and applications will be abbreviated.

Generally, a letter request accompanied

by copies of applications filed with

other federal or state regulatory

authorities will be sufficient. Other

information will be requested only as

needed by the appropriate FDIC official.

Relationships With Other Federal

Regulators

Nothing in these guidelines is

intended to relieve the applicant of any

requirements imposed by a depository

institution’s primary federal regulator.

Any differences in requirements

between the FDIC and the institution’s

primary federal regulator will be

resolved during the investigation

process.

By order of the Board of Directors.

Dated at Washington, DC, this 23rd day of

September, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97–26234 Filed 10–8–97; 8:45 am]

BILLING CODE 6714–01–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

Bank Merger Transactions

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Proposed statement of policy.

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:

comments@FDIC.gov). 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, preconsummation 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

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 postapproval 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.
52878 Federal Register / Vol. 62, No. 196 / Thursday, October 9, 1997 / Notices

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, nonsubstantive 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

§ 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

§ 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), § 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 § 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 § 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
Federal Register / Vol. 62, No. 196 / Thursday, October 9, 1997 / Notices 52879

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.

4The 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.

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.

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).

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
52880 Federal Register / Vol. 62, No. 196 / Thursday, October 9, 1997 / Notices

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 § 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 selfdealing 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

FEDERAL DEPOSIT INSURANCE

CORPORATION

Applications To Establish a Domestic

Branch (Includes Remote Service

Facilities); Rescission of Statement of

Policy

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Proposed rescission of statement

of policy.

SUMMARY: As part of the FDIC’s

systematic review of its regulations and

written policies under section 303(a) of

the Riegle Community Development and

Regulatory Improvement Act of 1994

(CDRI), the FDIC proposes to rescind its

Statement of Policy ‘‘Applications to

Establish a Domestic Branch (Includes

Remote Service Facilities)’’ (Statement

of Policy).

The Statement of Policy provides

information and guidance to state

nonmember banks planning to establish