On October 13, the Board of Governors of the Federal Reserve System (Board) issued guidance that applies to insured depository institutions that are seeking to become state chartered member banks of the Federal Reserve System (state member banks), as well as to insured depository institutions merging with another institution where a state member bank would be the surviving entity, including those with $10 billion or less in total consolidated assets.

The Federal Reserve explained that it is issuing the guidance to provide further explanation on its criteria for waiving or conducting pre-membership safety-and-soundness and consumer compliance examinations of insured depository institutions that are either (1) seeking to become state member banks; or (2) merging with another institution where a state member bank would be the surviving entity. Further, the guidance provides clarification to previously issued guidance as to the eligibility criteria for when the Federal Reserve may waive a pre-membership or pre-merger examination.

A safety-and-soundness or consumer compliance examination of a state nonmember bank, national bank or savings association seeking to convert its status to a state member will not generally be required prior to the conversion if the institution seeking membership meets the criteria for “eligible bank,” as set forth in the Board’s Regulation H, plus the additional safety-and-soundness and consumer compliance criteria listed below (together referred to as “eligibility criteria”). To meet the Regulation H “eligible bank” criteria, an insured depository institution must:

  • be well capitalized under Regulation H, subpart D, Prompt Corrective Action;
  • have a composite capital, asset quality, management, earnings and liquidity (CAMELS) rating of 1 or 2 (or equivalent composite rating for a savings association);
  • have a Community Reinvestment Act (CRA) rating of “outstanding” or “satisfactory;”
  • have a consumer compliance rating of 1 or 2; and
  • have no major unresolved supervisory issues outstanding (as determined by the Board or appropriate Federal Reserve Bank in its discretion), including adverse supervisory findings or ratings by the current primary regulator or Consumer Financial Protection Bureau (CFPB).

In addition, the insured depository institution seeking membership must meet the following additional safety-and-soundness criteria:

  • the management component of CAMELS is rated 1 or 2;
  • the on-site “close date” of the most recent full-scope safety-and-soundness examination is less than nine months from the date of the application for membership;
  • there have been no material changes to the bank’s business model since the most recent report of examination and no material changes are planned for the next four quarters; and
  • the annual growth in total assets, measured as of the most recent quarter end on the institution’s Consolidated Reports of Condition and Income, is under 25 percent and planned growth over the next year is less than 25 percent.

In cases where a state nonmember bank, national bank or savings association is merging with a state member bank and the surviving institution is a state member bank, a safety-and-soundness or consumer compliance examination of the state nonmember bank, national bank or savings association will not be required so long as the state member bank meets all of the eligibility criteria on an existing and pro-forma basis. For example, the state member bank would not meet all of the eligibility criteria if its total assets were to increase by 25 percent or more on a pro-forma basis considering both organic growth and assets from the merging institution. Other examples of situations that may cause the merging state member bank to not meet the eligibility criteria include, but would not be limited to, a change in senior leadership, a change in strategy, and a situation where the institution with which it is merging is rated less than satisfactory, has major unresolved supervisory issues or brings new business lines or products to the state member bank.

In all cases, the Federal Reserve Bank must consult with Board supervisory staff when determining whether to waive a safety-and-soundness examination under this policy. Under certain circumstances, a pre-merger or pre-membership examination may be waived even when an institution fails to meet one or more of the safety-and-soundness related eligibility criteria. This can occur if the Federal Reserve Bank, in consultation with Board supervisory staff, determines that conducting a safety-and-soundness examination would be unlikely to provide information that would assist in evaluating the statutory and regulatory factors that the Board is required to consider in acting on the membership or merger application.

The full guidance may be found here.