TBA Law Blog

Posted by: Kathryn Edge on Nov 29, 2018

Journal Issue Date: Dec 2018

Journal Name: Vol 54 No 12

From time to time, mergers of banks doing business in the same markets make so much business sense as to cause us to wonder why they have not yet decided to “partner up.” As lawyers engaged in assisting in these transactions, the first job is almost always an analysis of whether or not there are anti-competitive factors that may stall or completely derail in-market mergers. 

The antitrust standards in the Bank Merger Act of 1966 1 and the Bank Holding Company Act of 1956,2 as amended, effectively mirror those set out in the Sherman Antitrust Act of 18903 and the Clayton Antitrust Act of 1914.4 No bank merger may be consummated absent the approval of the Department of Justice and the federal banking agencies of “(1) any proposed merger transaction which would result in a monopoly or which would be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States; or (2) any other proposed merger transaction whose effect in any section of the country may be substantially to lessen competition or to tend to create a monopoly or which in any other manner would be in restraint of trade.”5 This article does not purport to be a comprehensive analysis of antitrust law in bank mergers (much scholarly work has been done in this area), but rather to remind practitioners that there are reasons other than regulatory defects that may cause a proposed bank merger to be disapproved.

Department of Justice Review

In addition to the prior approval of the prudential banking regulators, all bank and bank holding company mergers must be reviewed and approved by the Department of Justice. No bank or bank holding company merger may be consummated until the 15th day following the approval of the federal prudential banking regulator. If there are no market concentration issues, approval by the DOJ is usually pro forma, but in cases in which there are anticompetitive questions, the DOJ frequently asks for additional information.6 Once consummated, the DOJ may not challenge a bank merger, but a merger may not be consummated if the DOJ has filed a challenge until that challenge is satisfied. Our experience has been that the DOJ and the Federal Reserve Board caucus during the process, so it’s rare that the two 900-pound gorillas duke it out in the courts over whether a merger is anticompetitive.

One notable exception to the “let’s try not to argue in public” stance was the first case, decided 50 years ago, in which the United States Supreme Court considered a bank merger under the Bank Merger Act of 1966.7 In U.S. v. Third National Bank in Nashville, the District Court had ruled that the Bank Merger Act then in effect altered the antitrust standard applicable to bank mergers. The Supreme Court disagreed and ruled that the antitrust standard under the new law remained that of the Clayton Act and the Sherman Act. The Supreme Court noted that the “new public interest standard included in the  1966 Act … was a defense to an anticompetitive merger rather than part of the antitrust analysis itself.” The court ruled that Congress intended bank mergers first to be subject to the usual antitrust analysis and then, if a merger failed that scrutiny, it was “to be permissible only if the merging banks could establish that the merger’s benefits to the community would outweigh its anti-competitive disadvantages.”8 

In August 1964, Third National Bank in Nashville and Nashville Bank and Trust Company, the second and fourth largest banks in Davidson County, Tennessee, merged. After the merger, the three largest banks had 97.9 percent of the total bank assets in the county, and the two largest banks had 76.7 percent. The DOJ’s suit challenging the merger had not come to trial when the Bank Merger Act of 1966 took effect. The Act did not provide antitrust immunity for the merger but did state that courts “shall apply the substantive rule of law set forth” in the Act to pending cases. Section 5 of the Act prohibits approval of a merger whose effect “may be substantially to lessen competition” unless the anticompetitive effects “are clearly outweighed in the public interest by the probative effect of the transaction in meeting the convenience and needs of the community to be served.” The District Court found that the Act altered the standards used in determining whether a merger violated Section 7 of the Clayton Act and Section 1 of the Sherman Act and required a return to United States v. Columbia Steel.9

The District Court had found that Nashville Bank and Trust was a “stagnant and floundering bank,” suffering from ineffective management. It held that the merger would not tend substantially to lessen competition and also that any anticompetitive effect would be outweighed by benefits to the “convenience and needs of the community.”10 The Supreme Court remanded the case to the District Court to consider again the Act’s application to the facts of the merger, noting that “since the District Court heard this case before Houston Bank11 was decided, it may wish to consider reopening the record to permit the presentation of new evidence in light of the intervening interpretations of the Act.”12

Mathematical Anticompetitive Analysis

Unlike the role of banking regulators, the DOJ is a law enforcement agency, and its approach to antitrust enforcement differs from that of the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Every administration since Reagan has stringently viewed antitrust issues as detrimental to the economy and consumers, with the most robust enforcement occurring under the Clinton administration. It is too early to predict how the Trump administration’s enforcement will stack up over time.

The DOJ and the Federal Trade Commission issued comprehensive Horizontal Merger Guidelines in 2010 and updated the Guidelines in 2015.  The Guidelines describe a number of sources of evidence that are examined in merger reviews, as well as several analytic techniques that are commonly used.  Most common in the analysis of bank and bank holding company merger analysis is the Herfindahl-Hirschman Index or the “HHI.” This is an accepted measure of market concentration calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four banking firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600. The HHI also takes into account the relative size distribution of the firms in a market. The DOJ and the federal banking agencies consider markets in which the HHI is between 1,500 and 2,500 points to be “moderately concentrated,” and consider markets in which the HHI is above 2,500 points to be “highly concentrated.” Under the Guidelines, any transaction that increases the HHI by more than 200 points in highly concentrated markets or that result in a post-merger HHI of over 1,800 points is presumed to enhance market power.  Happily for those of us who are mathematically challenged, there are reliable HHI calculators available that will demonstrate quickly whether market concentration is likely to be a negative factor in a merger transaction.

Mitigating Factors

The Federal Reserve Board may approve a merger or acquisition in a highly concentrated market where the HHI increase ordinarily would raise antitrust concerns if the board finds special circumstances or other mitigating factors that would tend to diminish any anticompetitive effects of the proposal. The board has approved bank mergers, despite market concentrations above accepted norms, where there were an abundance of other competitors in the market; where the market was particularly attractive for entry by other competitors; in situations in which the deposits of a failed bank had been acquired by one market player, thus skewing the HHI analysis; where the post-merger HHI increase could be accounted for by non-local deposits; where the market was small and rural and had other significant competitors; where the target bank was no longer able to function as a viable competitor due to financial and/or managerial issues; and where the bank was in danger of failing.  The Board has also approved proposed acquisitions by bank holding companies where the target banks were controlled by the same shareholders as the acquirer.13 That said, if the DOJ disagrees with the Federal Reserve Board’s approval, the merger cannot be finalized until the DOJ issues are resolved, regardless of mitigation.


When an antitrust concern arises, the typical solution proposed by the DOJ involves the divestiture of certain assets to bring the HHI back in line with the Guidelines. For example, in 2006, when Birmingham-based Regions Financial Corp and AmSouth Bancorporation agreed to a stock swap valued at almost $10 billion, AmSouth sold 39 of its Alabama branches to RBC Centura Bank, a subsidiary of Royal Bank of Canada; six Mississippi branches to Citizens Bank of Russellville, Alabama; and seven Tennessee branches to FirstBank of Lexington, Tennessee (now domiciled in Nashville).  The 52 divested branches held approximately $2.7 billion in deposits in Alabama, Mississippi, and Tennessee. The Regions/AmSouth merger followed the 1999 acquisition of First American Corporation by AmSouth in which the Board and DOJ required certain divestitures in the Rhea County, Tennessee, market where both companies were strong competitors. One First American branch with $41.4 million in deposits was divested to meet the Guidelines.14 These divestitures provided opportunities for expansion for other banks which scrambled to bid on branches in these competitively-concentrated markets, thus providing more competition and choices for consumers.


The wave of bank mergers and acquisitions has raised concerns about decreased competition and loss of local involvement, but it may be too early to tell whether consolidation will actually mean increased costs to consumers or fewer options for banking services.  The last time we had a tsunami of bank mergers, we had a corresponding flood of de novo bank formations.  In this business, all things are cyclical. 

KATHRYN REED EDGE is a member in the Nashville office of Butler Snow LLP with offices in Tennessee, Mississippi, Alabama, Colorado, Pennsylvania, Georgia, Louisiana, New York, Texas, New Mexico, North Carolina, Massachusetts, Virginia, Washington, D.C., Singapore, Hong Kong and London, England. She is a member of the firm’s Finance, Real Estate and Restructuring Group and concentrates her practice in representing regulated financial services companies. She is past president of the Tennessee Bar Association and a former member of the editorial board for the Tennessee Bar Journal.

1. Bank Merger Act, 12 U.S.C. 1826(c).
2. Bank Holding Act of 1956, as amended, Pub. L. No. 84-511, 84th Cong., 2d Sess. (1956), 70 Stat.133.
3. Sherman Antitrust Act of 1890, 15 U.S.C. §§ 1-7.
4. Clayton Antitrust Act of 1914, 15 U.S.C. §18.
5. 12 U.S.C. § 1828(c).
6. See, FRB Order No. 2017-36, describing the merger of a Tennessee bank holding company and its subsidiary bank with an into a com.
7. United States v. Third National Bank in Nashville, 390 U.S. 171, 88 S. Ct. 882, 19 L.Ed.2d 1015 (1968); see, also, United States v. Philadelphia National Bank, 201 F. Supp. 348 (E.D. Pa 1962), filed under the Bank Merger Act of 1960. See also, James L. Griffith, Antitrust – Bank Mergers by Assets Acquisitions Prohibited under Section 7 of Clayton Act, 9 Vill. L. Rev. 317 (1964).
8. 390 U.S. at 182.
9. United States v. Columbia Steel Co., 334 U.S. 495 (1948).
10. Syllabus, U.S. v. Third National Bank, 390 U.S. 171 (1968).
11. 386 U.S. 361 (1967).
12. 390 U.S. at 192.
13. BancTenn Corp., Kingsport, Tennessee, merged with Carter County Bancorp Inc., Elizabethton, Tennessee, thereby acquiring Carter County Bank; approved Nov. 13, 2012.  The same shareholder owned a controlling interest in both bank holding companies.
14. Federal Reserve Board Order Approving the Merger of Bank Holding Companies, Aug. 30, 1999.