Overview of Activity Reporting Period Ending June 30, 2014

The Federal Reserve reviewed 630 proposals in the first half of 2014 (table 1), of which 587 were approved, 42 were withdrawn, and 1 was denied. In the first half of 2014, total dispositions declined to 630 compared with 708 in the first half of 2013, primarily because of a smaller number of FIRREA notices, which is characteristic of an improving banking system.²

The number of proposals withdrawn as a percentage of total dispositions declined in recent years from a high of 17 percent in 2009 to 7 percent in the first half of 2014. Proposals are withdrawn most often at the initiative of the applicant. However, proposals also may be withdrawn after the Federal Reserve informs the applicant that a significant issue exists that precludes an approval recommendation by staff based on staff's review of the statutory standards for approval.³

For example, the applicant or resulting banking organization's financial or managerial condition may be less than satisfactory, the Community Reinvestment Act (CRA) or consumer compliance record, including fair lending, may be less than satisfactory, or there may be significant competitive issues.⁴ Of the 42 withdrawn proposals in the first half of 2014, 30 proposals were withdrawn at the initiative of the applicant without input from the Federal Reserve. Twelve proposals raised significant issues regarding the statutory factors that must be considered by the Federal Reserve and were withdrawn after consultation with staff. Specifically, 4 proposals were withdrawn because of CRA/fair lending issues at the applicant, 3 were withdrawn because of financial issues, 2 were withdrawn because of managerial issues, and the remaining 3 proposals that were withdrawn presented both managerial and legal issues.

Table 1 also illustrates that the average number of days to act on a proposal was 44 days in the first half of 2014, compared with 34 days in the first half of 2013. The higher average for the first half of 2014 primarily resulted from a larger volume of more complex proposals. In addition, the processing time for a number of merger and acquisition (M&A) proposals by BHCs was significantly extended because of the receipt of adverse public comments that required extensive investigations. For foreign banking organizations, processing time frames often were longer due to the complexity of the proposal and required consultation and coordination with other agencies, including foreign supervisors. Annual average processing days for all proposals from 2009 through 2013 peaked at 50 days in 2011 and declined to 36 days for all of 2013.

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Applications

Mergers and Acquisitions

The Federal Reserve, in reviewing M&A proposals, considers the applicant's current and pro forma financial condition and future prospects, managerial resources, consumer compliance record and performance under the CRA and the Bank Secrecy Act/anti-money-laundering compliance programs, and the competitive and financial stability effects of the proposal.⁵ The applicant is required to publish notice of its proposal, typically in newspapers serving certain communities in which the applicant or target has operations. The Federal Reserve also publishes notice in the Federal Register. The notices inform the public of the opportunity to submit written comments on any proposal.

As table 2 illustrates, M&A proposals have represented approximately 15 percent of approvals over the past three years. During 2013, the average and median number of days to process M&A proposals was 57 and 40 days, respectively, compared with 36 and 28 days, respectively, for all proposals (table 1).

M&A proposals generally are more complex than other types of proposals and require extensive review. As they involve the integration of multiple operations, the Federal Reserve considers the impact on the pro forma consolidated entity's financial condition, its proposed business and capital plans, and its pro forma risk-management infrastructure. M&A proposals also can require a review of ownership changes, raise competitive concerns, or raise policy questions.

The Federal Reserve may receive adverse comments on M&A proposals from the public. Such proposals typically require additional time to allow the applicant the opportunity to respond to the comments, for the commenter to address the applicant's response, and for the Federal Reserve to evaluate the merits, including conducting internal analyses and investigations of the assertions. The majority of public comments received by the Federal Reserve are based on the convenience and needs factor, which includes the CRA and the fair lending record of the applicant. Proposals that involve an adverse public comment are required to be acted on by the Board as opposed to the Reserve Banks.⁶

Table 3 illustrates M&A processing times according to proposals that did not receive adverse public comments and those that did receive adverse public comments. Although M&A proposals receiving adverse public comments represent a small proportion of total M&A proposals approved by the Federal Reserve, processing times are considerably greater than for M&A proposals not receiving such comments. In the first half of 2014, the average number of days to approve an M&A proposal not receiving an adverse public comment was 50 days, whereas the average was 212 days for M&A proposals receiving an adverse public comment.

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Other Analysis

Community Banking Organizations

Table 4 shows the processing time for most proposals reviewed and acted on by the Federal Reserve for community banking organizations (CBOs) according to the asset size of the applicant. Small CBOs are those under $1 billion in assets and large CBOs are those with $1 billion to $10 billion in assets. The majority of proposals submitted by CBOs, in aggregate, are
FIRREA notices and M&A applications followed by CIBCA notices, for 2013 and the first half of 2014.

A review of processing times for 2013 and the first half of 2014 by bank asset size reveals that M&A proposals submitted by large CBOs generally took more time to process compared with small CBOs. For instance, in 2013, the average and median number of days to process M&A proposals for large CBOs was 77 and 43 days, respectively, compared with 51 and 39 days for small CBOs. Adverse public comments were received with respect to proposals involving large CBOs, which extended processing times. M&A proposals receiving adverse public comments accounted for approximately 12 percent of the M&A proposals involving large CBOs during 2013.

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