Overview of Activity

The Federal Reserve reviewed 681 proposals in the second half of 2014, of which 629 were approved and 52 were withdrawn (table 1). Total dispositions declined to 681 in the second half of 2014 compared with 718 in the second half of 2013 mainly because of a continued decline in FIRREA notices as the health of the banking industry continues to improve.² Despite an overall decline in volume in the second half of 2014, the number of nonbank and public welfare investment proposals doubled from levels in the second half of 2013. Table 1 also illustrates that the average number of days to approve a proposal was 41 days in the second half of 2014, compared with 38 days in the second half of 2013.

Eight percent of the proposals disposed of in the second half of 2014 were withdrawn, which is similar to the percentage in recent years. Proposals are withdrawn most often at the initiative of the applicant. However, proposals also may be withdrawn after the Federal Reserve informs the applicant that a significant issue exists that precludes an approval recommendation by staff based on staff's review of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 (see section on Consumer Compliance and CRA), may be less than satisfactory, or there may be significant competitive issues.⁴

Of the 52 proposals withdrawn in the second half of 2014, 35 proposals were withdrawn at the initiative of the applicant without input by the Federal Reserve. Seventeen proposals raised significant issues regarding the statutory factors that must be considered by the Federal Reserve and were withdrawn after consultation with staff. Specifically, these proposals raised managerial issues at the applicant (including three proposals raising Bank Secrecy Act/anti-money-laundering compliance program issues), control issues, financial issues at the applicant, or competitive concerns.

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Applications

Mergers and Acquisitions

Merger and acquisition (M&A) proposals have accounted for 15 to 20 percent of total approved proposals over the past four years (table 2).⁵ These types of proposals generally are more complex than other proposals, as they involve the integration of systems and operations. In reviewing M&A proposals, the Federal Reserve 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, public benefits, and the competitive and financial stability effects of the proposal. Other considerations may include a review of ownership changes of the resultant banking organization or the proposal may raise Federal Reserve policy questions.

As table 2 illustrates, the average and median number of days to approve an M&A proposal in 2014 was 60 and 41 days, respectively. In comparison, for the same period, the average and median number of days to approve all proposals was 43 and 30 days, respectively (table 1).

In reviewing M&A proposals, the Federal Reserve may receive adverse comments on the proposal from the public.⁶ Such proposals typically require additional time to allow the applicant the opportunity to respond to the comments and for the Federal Reserve to evaluate the comments. The majority of public comments received by the Federal Reserve are based on the CRA and the fair lending records of the applicant. Comments also may be directed at other considerations of a proposal. Proposals that involve an adverse public comment are required to be acted on by the Board as opposed to the Reserve Banks.⁷

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 for these proposals are considerably greater than those M&A proposals not receiving such comments. In the second half of 2014, the average number of days to approve M&A proposals not receiving adverse public comments was 56 days, whereas the average was 206 days for the five M&A proposals receiving adverse public comments.

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Pre-filing Process

Processing delays can be avoided by using the pre-filing process, which provides applicants the opportunity to work with Federal Reserve staff to receive critical feedback on potential issues related to acquisitions or other proposals before filing a formal application. The pre-filing process is described in the Federal Reserve's Supervisory Letter titled "Implementation of a New Process for Requesting Guidance from the Federal Reserve Regarding Bank and Nonbank Acquisitions and Other Proposals."⁸

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Consumer Compliance and CRA

In evaluating M&A proposals, the Federal Reserve reviews the consumer compliance and CRA records of the acquiring and target organizations as part of its assessment of the managerial factor and convenience and needs factors. An organization's strong consumer compliance and CRA records can facilitate the review process. Conversely, unaddressed consumer compliance and CRA weaknesses in an organization can cause significant delays in the review process and may pose barriers to approval. With respect to M&A proposals, an applicant should ensure that its consumer compliance program, policies, and procedures are adequate to ensure successful integration of the target and that the combined organization would maintain satisfactory consumer compliance and CRA programs following consummation.

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Other Analysis

Community Banking Organizations

Table 4 provides the volume and processing times of proposals most commonly submitted by community banking organizations (CBOs) according to their asset size. Small CBOs are those under $1 billion in assets, and large CBOs are those with $1 billion to $10 billion in assets. The data reflect a sharp increase in the number of bank mergers among large CBOs, with 82 M&A proposals approved in 2014 compared with 44 M&A proposals approved in 2013. While the volume of M&A proposals almost doubled for large CBOs over the two-year period, the processing times shortened.

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