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FDIC Federal Register Citations

[Federal Register: October 9, 1997 (Volume 62, Number 196)]
[Notices]               
[Page 52869-52877]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09oc97-159]

[[Page 52869]]

FEDERAL DEPOSIT INSURANCE CORPORATION
 
Applications for Deposit Insurance
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Proposed statement of policy.
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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, the FDIC is 
revising its Statement of Policy on ``Applications for Deposit 
Insurance.'' These revisions include changes to FDIC's policies 
regarding initial capitalization when a de novo bank is organized by 
certain well managed and well capitalized holding companies. Policies 
regarding stock benefit plans are amended and regional directors are 
given more discretion to act under delegated authority. Changes are 
also made to eliminate outdated information and to reflect current 
polices and practices that have not previously been incorporated into 
the Statement of Policy.
DATES: Comments must be submitted on or before 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, D.C. 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, D.C., between 9:00 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Cary H. Hiner, Associate Director, 
Division of Bank Supervision, (202) 898-6814; Jesse G. Snyder, 
Assistant Director, Division of Supervision, (202) 898-6915; Mark S. 
Schmidt, Assistant Director, Division of Supervision, (202) 898-6915; 
or Susan van den Toorn, Counsel, Regulation and Legislation Section, 
Legal Division, (202) 898-8707, FDIC, 550 17th Street, N.W., 
Washington, D. C. 20429.
SUPPLEMENTARY INFORMATION: The FDIC is conducting a systematic review 
of its regulations and written policies. Section 303(a) of the Riegle 
Community Development and Regulatory Improvement Act of 1994 (CDRIA) 
(12 U.S.C. 4803(a)) requires the FDIC to streamline and modify its 
regulations and written policies in order to improve efficiency, reduce 
unnecessary costs, and eliminate unwarranted constraints on credit 
availability. Section 303(a) also requires the FDIC to remove 
inconsistencies and outmoded and duplicative requirements from its 
regulations and written policies. Also as part of the CDRIA review, on 
December 6, 1995, the FDIC published in the Federal Register a Notice 
of opportunity to comment on specific FDIC regulations and written 
policies. See 60 FR 62345. In response to that request, the FDIC 
received one comment regarding the Statement of Policy on 
``Applications for Deposit Insurance'' (Statement of Policy). The 
commenter urged the FDIC to re-evaluate its position with regard to 
stock benefit plans established to compensate organizers and investors 
who place funds at risk during the organizational phase. Specifically, 
the commenter stated that the FDIC has objected to stock options 
proposed to be awarded to organizers who have placed funds at risk and 
noted that the Office of the Comptroller of the Currency (OCC) and the 
Federal Reserve Board (FRB) do not object to such plans. The commenter 
urged the FDIC to take a position similar to the OCC and the FRB. The 
issues raised by the commenter are addressed below in the discussion of 
stock benefit plans and in the Statement of Policy.
    Also as a part of the CDRIA review, the FDIC has determined that 
the Statement of Policy remains an important communication device with 
the banking industry. However, certain information has become outdated, 
while some issues of current importance either are not addressed or are 
not adequately addressed. As a consequence, the basic organizational 
structure of the Statement of Policy has been retained, while much of 
the content has been revised.
    Four significant changes to the Statement of Policy are described 
below. In each of these instances, the change will provide the 
appropriate FDIC regional director, Division of Supervision (DOS), with 
the authority to approve deposit insurance applications which 
previously would have been forwarded to the FDIC's Washington Office 
for review and decision.
Wholly Owned Subsidiary of a Holding Company
    The current Statement of Policy requires an initial capitalization 
in an amount that is sufficient to provide an 8 percent Tier 1 leverage 
capital ratio throughout the first three years of operation. The 
revised Statement of Policy provides that, in certain circumstances, 
the amount of the initial capital injection for a de novo institution 
may be reduced to a minimum of $2,000,000, or an amount that is 
sufficient to provide an 8.0 percent Tier 1 leverage capital ratio at 
the end of the first year of operation, whichever is greater. This 
option will be available when the proposed depository institution is to 
be formed as a wholly owned subsidiary of a holding company which meets 
the standards established for an ``eligible holding company,'' as set 
forth in Sec. 303.22 of the FDIC's regulations. However, the holding 
company would also be required to provide a written commitment to 
maintain the proposed depository institution's Tier 1 leverage capital 
ratio at no less than 8.0 percent throughout the first three years of 
operation. This revision will allow a well managed holding company to 
provide less initial capital than would have been required under the 
former standard. This change is considered appropriate in recognition 
of the ability of the FDIC to reasonably quantify the financial 
capacity of the parent organization, and to allow the holding company 
to more efficiently allocate the resources of the entire organization. 
This amendment will permit the appropriate FDIC regional director (DOS) 
to act on proposals that contain these provisions when the other 
factors necessary for delegated authority have been met.
Operating Insured Offices
    In certain instances, the applicant may request that the benchmark 
for evaluating the adequacy of capital be established such that the 
resultant proposed depository institution would be classified as well 
capitalized, as defined by its primary federal regulator. This 
provision would become applicable when the proposal involves the 
formation of a depository institution through the acquisition of an 
existing insured operating office (or offices). Criteria established 
for this lower initial capital benchmark would be that the acquisition 
involves substantially all of the assets and liabilities of the 
operating insured office, that the applicant provide reasonable 
evidence that the de novo institution's operations will be stabilized 
at inception, and that the proponent for the applicant be either an 
eligible holding company or an established banking group. The Statement 
of Policy uses an identified chain banking group as an example of one 
type of ``established banking group.'' However, the term is intended to 
cover a group of individuals that have served as directors or officers 
of an operating insured depository institution.
[[Page 52870]]
For either a chain banking group or a group of individuals to be 
considered an established group, the association must be in existence 
for at least three years. This provision has been added to the 
Statement of Policy in recognition that deposit insurance for a 
depository institution being established from operating offices does 
not present the same risks to the insurance funds as does the 
chartering of a start-up de novo institution. This provision also seeks 
to remove capital requirement inequities that may have existed under 
prior procedures with respect to certain corporate reorganization 
activities. This amendment will permit the appropriate FDIC regional 
director (DOS) to act on proposals that contain these provisions when 
the other factors necessary for delegated authority have been met.
Stock Financing by Insiders
    Guidelines for borrowing arrangements by insiders have been 
revised. The reference to borrowing arrangements by an individual 
insider of more than 75 percent of the purchase price of the stock 
subscribed, or more than 50 percent of the purchase price of the 
aggregate stock subscribed by the insiders as a group, has been 
retained as a point of emphasis. However, the Statement of Policy has 
been amended by deleting the statement that borrowing arrangements in 
excess of the referenced percentage limits will ordinarily be presumed 
to be excessive. The burden of providing appropriate supporting 
information regarding borrowing arrangements will remain with the 
affected insiders. However, this amendment will permit the appropriate 
FDIC regional director (DOS) to evaluate all insider borrowing 
arrangements on their own merits, without having a set limit for those 
that will be considered excessive or otherwise inappropriate. This 
amendment will permit the appropriate FDIC regional director (DOS) to 
act on the proposal when insider borrowing arrangements are 
inconsequential to the total proposal, or are otherwise not 
detrimental, when the other factors necessary for delegated authority 
have also been met.
    Similarly, borrowings by a holding company to capitalize a proposed 
depository institution will be evaluated in the context of the holding 
company's consolidated operations, rather than based on a 50 percent 
limit of the total initial capital of the proposed depository 
institution. However, the borrowing arrangement would need to meet any 
leverage guidelines established by the holding company's primary 
federal regulator and be reasonable. This amendment will permit the 
appropriate FDIC regional director (DOS) to act on a proposal that 
involves holding company debt financing of more than 50 percent, when 
the other factors necessary for delegated authority have been met.
Stock Benefit Plans
    It is becoming increasingly common for organizers of de novo 
depository institutions to propose stock benefit plans. Such plans 
often include not only active officers, but also directors and, in some 
cases, organizers. Guidance in the current Statement of Policy on 
Applications for Deposit Insurance states that: ``It is anticipated 
that options or bonuses will be tied to specific performance criteria 
and will be limited to active management of the institution.''
    This proposal provides for participation of both active officers 
and outside directors in stock benefit plans, although it is 
anticipated that such plans will focus primarily on active officers. It 
is also recognized that plans may be established to compensate 
organizers who placed funds at risk to finance the organization or who 
have provided professional or other services during the organizational 
phase. FDIC will separately review such plans designed to compensate 
organizers for services rendered.
    The proposed directors and officers are a critical element in 
evaluating a proposed depository institution's application for deposit 
insurance, and the FDIC has found that management stability is 
generally an essential element for the ultimate success of a de novo 
depository institution. Therefore stock benefit plans which are being 
adopted in conjunction with the establishment of a depository 
institution should encourage the continued involvement in the 
depository institution by key management officials.
    Guidelines are included in the Statement of Policy to provide 
standards to be used in evaluating the appropriateness of stock benefit 
plans. These guidelines are considered necessary to provide the 
applicant with basic guidance as well as to promote consistency within 
the FDIC itself. Some concepts are retained from the former Statement 
of Policy, such as a maximum 10 year limit on options. FDIC's current 
practice, although not explicitly stated in the current policy 
statement, of requiring that the strike price be established at no less 
than fair market value at the time of the grant, has now been 
explicitly stated. New concepts have been added which emphasize that 
the plan should encourage the continued involvement of the proposed 
management. It is believed that a vesting period covering the first 
three years of operation would be appropriate to assure continued 
involvement. A three year vesting was selected based on the FDIC's 
experience that a three year period provides reasonable assurance that 
the business plan will have been fully implemented and stabilized 
operations achieved. An additional concept adopted is a requirement 
that a stock benefit plan provide for an exercise or forfeiture clause 
which may be invoked by the depository institution's primary federal 
regulator in the event the capital falls below minimum requirements. 
This is believed necessary to ensure that the dilutive effects of 
outstanding stock options will not make it unduly difficult for an 
institution in need of additional capital to increase capitalization in 
a timely manner. The OCC also has an established policy of requiring 
exercise or forfeiture clauses in certain instances.
    Stock benefit plans designed to compensate incorporators for 
personal funds placed at risk during the organization or for services 
rendered during the organization will be viewed somewhat differently 
than plans for active management and directors. Plans designed to 
compensate for past services need not be subject to vesting periods or 
restrictions on transferability, but FDIC will review the duration of 
the rights, strike price, and exercise or forfeiture clauses in the 
same manner as for plans designed to reward continuing management 
service. In addition, the FDIC will consider the incorporator's time, 
expertise, and financial commitment to the proposal and the amount and 
basis of any cash payments made or to be made to the incorporators for 
services rendered or funds placed at risk.
    Stock appreciation rights and similar plans that involve a cash 
payment based directly on the market value of the depository 
institution's stock have been specifically identified as objectionable. 
These types of plans can result in an expense which would reduce the 
depository institution's capital. Such compensation plans cannot be 
quantified in relation to the capital adequacy factor and could be 
detrimental to the overall capital of a depository institution, 
particularly in its formative years.
    If the proposed insured depository institution is to be a 
subsidiary of a de novo holding company, and a stock benefit plan is 
being proposed at the holding company level, that stock benefit plan 
will be reviewed by the FDIC in the same manner as a plan
[[Page 52871]]
involving stock issued by the proposed depository institution.
    The comments contained in this Statement of Policy relate solely to 
stock benefit plans which are being proposed in conjunction with the 
filing of a deposit insurance application and the establishment of an 
insured depository institution. The comments and guidelines are not 
intended to be applicable to established operating insured depository 
institutions. It is believed that this proposal would bring FDIC's 
policies into closer alignment with those of the other state and 
federal bank regulatory agencies.
Other Changes
    In addition to these four major areas, other changes are being 
proposed to clarify issues that have arisen or to remove outdated or 
duplicative information. Noteworthy changes include the following:
    <bullet> In conjunction with the FDIC's recent rescission of its 
Statement of Policy regarding Applications, Legal Fees, and Other 
Expenses (62 FR 15479, April 1, 1997), concise comments relative to 
fees incident to an application have been incorporated into the revised 
Statement of Policy.
    <bullet> The Statement of Policy is amended to replace the 
statement that ``no dividends are to be paid until all initial losses 
have been recaptured* * *'', with ``during the first three years of 
operation, cash dividends shall be paid only from net operating 
profits* * *'' The Statement of Policy retains the requirement that no 
dividends be paid until an appropriate allowance for loan and lease 
losses has been established and overall capital is adequate. This 
amendment reflects the FDIC's current practice and provides reasonable 
accommodation to possible Subchapter S Corporation applicants.
    <bullet> The Statement of Policy has been amended to authorize the 
appropriate FDIC regional director (DOS) to waive financial information 
for proposed officers and directors when the proposed depository 
institution is being formed as a wholly owned subsidiary of a holding 
company. This was adopted in recognition that, when the proposed 
depository institution is being formed as a wholly owned subsidiary of 
a holding company, personal financial information may not be not 
meaningful.
    <bullet> Other amendments to the Statement of Policy relating to 
proposed management include deleting the statement that the chief 
executive officer is expected to be a qualified and experienced lending 
officer, and deleting a requirement that a majority of the proposed 
directors will reside within, or have significant business interests 
within 100 miles of the proposed depository institution. It is expected 
that a qualified lending officer will be provided for in the management 
structure. However, the chief executive officer need not be that 
person. Also, while the FDIC encourages local involvement in proposed 
depository institutions, a specific residency requirement is not 
considered necessary.
    <bullet> The Statement of Policy has also been revised to require 
that the applicant commit the depository institution to obtain an audit 
by an independent public accountant annually for only a three year 
period, rather than the first five years. This will provide consistency 
with the other federal regulators regarding audit coverage requirements 
for de novo depository institutions.
    This Statement of Policy is applicable only to applications for 
deposit insurance, and it is not intended to establish policy for other 
applications or actions undertaken by established operating insured 
depository institutions.
Public Comment
    In addition to seeking public comments on the above revisions to 
the Statement of Policy, the FDIC also solicits specific comment on the 
issue of whether deposit insurance should be conferred upon certain 
applicants that are owned by public entities, specifically governmental 
units. The FDIC is concerned that due to their public ownership, such 
depository institutions present unique supervisory concerns which do 
not exist with privately-owned depository institutions. Leadership of a 
governmental unit is subject to change through elections and other 
means. The FDIC has concerns about the institution's ability to operate 
independently of the political process, a lack of continuity in the 
depository institution's policies, management and oversight which could 
result from changes in the public entity's leadership, and the 
institution's ability to raise capital through non-traditional sources. 
Moreover, such institutions may be formed to engage primarily in non-
profit or charitable activities such as the promotion of local 
affordable housing. This raises the prospect of deposit insurance 
coverage being used for purposes other than those for which the system 
was created, namely, to promote the stability of the nation's financial 
system and to protect depositors' funds. See section 1 of the FDI Act 
(12 U.S.C. 1811), see also 77 Cong. Rec. 3837, 3840, 3923, 3924, 3925 
(1933).
    In light of these concerns, the FDIC will scrutinize an application 
for deposit insurance by a publicly-owned applicant very closely. The 
agency is unlikely to resolve satisfactorily all of the statutory 
factors which must be considered under section 6 of the FDI Act (12 
U.S.C. 1816) in evaluating such an application. The FDIC is considering 
whether to add language to that effect to the Statement of Policy. The 
FDIC specifically solicits comment on this issue and whether language 
should be added to the Statement of Policy which addresses the 
question. The FDIC also requests comment on the advisability in general 
of conferring deposit insurance upon applicants which are owned by 
governmental units.
    Banks that are owned by foreign governments and their subdivisions 
and banks that are owned or controlled by Native American tribes or 
bands will not be subject to the heightened scrutiny given to other 
types of publicly-owned depository institutions. Overarching legal and 
policy considerations, unique to these two categories of insurance 
applicants, outweigh any concerns that the FDIC may have regarding the 
ownership of such depository institutions by governmental entities. The 
respective legal and policy considerations for each category of 
depository institution are discussed in detail below.
    With respect to banks that are owned by foreign governments and 
their subdivisions, the governing principle of the International 
Banking Act of 1978 (the IBA) (12 U.S.C. 3101 et seq.), the federal 
statute that governs the participation by foreign banks in domestic 
markets, is the concept of ``national treatment.'' This concept holds 
that a foreign bank operating in a particular nation should be accorded 
operating privileges which provide such banks with the opportunity for 
competitive equality with their host country counterparts. S. Rep. No. 
95-1073 at 18 (1978), reprinted in 1978 U.S.C.C.A.N. 1421, 1438.
    Congress adhered to the principle of national treatment in devising 
the IBA to help ensure that U.S. depository institutions operating 
overseas received equal treatment with their host country competitors. 
The financial systems of different nations have varying concentrations 
of privately-and publicly-owned enterprises. When seeking to promote 
the overseas operations of U.S. depository institutions in foreign 
countries through the principle of national treatment, the United 
States cannot draw a distinction
[[Page 52872]]
between a nation that has a bank owned by the government and a nation 
that does not. National treatment by its very logic requires that all 
foreign depository institutions, whether publicly-or privately-owned, 
receive the same, consistent treatment when operating in the United 
States. This includes eligibility for deposit insurance which is often 
a condition of either a state or federal charter. For these reasons, an 
applicant for deposit insurance which is owned by a foreign government 
will not be subjected to heightened scrutiny by the FDIC simply because 
it is publicly owned.
    Native American tribes or bands that own or control depository 
institutions can also be distinguished from a conventional governmental 
unit that seeks to open or acquire a depository institution. This is 
because under federal law, Native American tribes and bands function as 
both governmental and economic, for-profit entities. The Indian 
Reorganization Act of 1934 (the IRA) (25 U.S.C. 461 et seq.) authorizes 
not only the creation of tribal governments (see section 16 of the IRA, 
12 U.S.C. 476), but also provides for the creation of tribal business 
corporations pursuant to section 17 of the IRA (25 U.S.C. 477). At the 
same time, however, a tribal government organized under section 16 of 
the IRA is not precluded from engaging in business activities. See S. 
Unique Ltd. v. Gila River Pima-Maricopa Indian Community, 138 Ariz. 
384, 674 P.2d 1376 (Ct. App. 1984). Both tribal governments and 
corporations are restricted by the IRA with respect to their ability to 
sell, mortgage, or lease Native American trust or restricted land, but 
are otherwise free to engage directly in economic activity. This 
situation is in contrast to conventional governmental units which 
seldom engage in direct economic activity for profit. For this reason, 
the FDIC considers Native American tribes and bands that own or control 
a depository institution to be more analogous to private, for-profit 
entities than to governmental units in the context of their ownership 
or control. The FDIC therefore will not subject an applicant for 
deposit insurance which is owned or controlled by an Native American 
tribe or band to heightened scrutiny simply because of that ownership.
    The Board of Directors of the FDIC hereby proposes the following 
revised Statement of Policy on Applications for Deposit Insurance.
Applications for Deposit Insurance
Introduction
    The Board of Directors of the FDIC is charged by statute with the 
responsibility of acting upon applications for federal deposit 
insurance by all depository institutions 1 including any 
national bank, district bank, state bank, federal savings association, 
state savings association, savings bank, or trust company. In addition, 
the Board of the FDIC will also act upon applications for federal 
deposit insurance by an industrial bank (or similar depository 
institution which the Board of Directors finds to be operating 
substantially in the same manner as an industrial bank), or any other 
depository institution which is engaged in the business of receiving 
deposits, other than trust funds.
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    \1\ In the case of any interim federal depository institution 
that is chartered by the appropriate federal banking agency, the 
depository institution shall be an insured depository institution 
upon the issuance of the institution's charter by the agency. An 
application for federal deposit insurance generally is not required 
even if the federal interim is the surviving charter of a merger 
with another insured depository institution. See 12 CFR 303.62(b)(2) 
and the FDIC's Statement of Policy on Bank Merger Transactions 
(section 4.2). Any depository institution whose insured status is 
continued pursuant to section 4 of the Federal Deposit Insurance Act 
is not required to apply to continue its insured status. 12 U.S.C. 
1814.
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    An insured depository institution which wishes to continue its 
insured status after withdrawing from the Federal Reserve System, or 
when converting from a mutual to a stock form of ownership by the 
chartering of an interim savings association under the provisions of 
section 10(o) of the Home Owners Loan Act, also must file an 
application with the FDIC for deposit insurance.
Procedures
    Forms and instructions for applying for deposit insurance may be 
obtained from any regional office of the FDIC Division of Supervision 
(DOS). Completed applications should be filed with the appropriate 
regional office as that term is defined in Sec. 303.2(g) of the FDIC's 
rules and regulations. Incorporators of proposed new depository 
institutions should file their applications with the FDIC and the 
appropriate chartering authority at the same time. Information provided 
to the chartering authority that is also needed as part of the deposit 
insurance application may be provided to the FDIC by appending a copy 
of the information to the FDIC application. Although use of the FDIC 
application form is not required, the material submitted to the FDIC 
must contain all information requested in the FDIC application form, 
unless otherwise indicated by FDIC. All incorporators must sign the 
FDIC's deposit insurance application certification page (pages 1 and 2 
of the application form). It is strongly recommended that a 
representative(s) of the organizing group meet with the chartering 
authority and FDIC prior to filing an application to reach an 
understanding of the information requirements of each agency. It is 
believed this practice would facilitate processing and eliminate 
unnecessary delays. Information requirements may not be as extensive 
for applications sponsored by existing holding companies or other well 
established banking groups. Final action may be taken by the FDIC prior 
to final action by other regulatory authorities in those cases in which 
the FDIC has determined that there is no material disagreement on the 
action to be taken.
    The procedures governing the administrative processing of an 
application for deposit insurance are contained in part 303, subpart B, 
of the FDIC's rules and regulations (12 CFR part 303). Processing of an 
application will not commence until it is substantially complete. An 
incomplete application may be returned to the applicant. The applicant 
must satisfy all terms of a conditional approval prior to deposit 
insurance becoming effective.
    The policies contained herein are applicable for all proposed de 
novo depository institutions and operating institutions applying for 
deposit insurance, with the exception of applications submitted for the 
sole purpose of acquiring assets and assuming liabilities of an insured 
institution in danger of default. Policies are modified in those 
situations to reflect the urgent nature of the transaction. Guidance 
for those situations is contained in a separate section of this policy 
statement.
    Subpart B of part 303 contains special filing and processing 
procedures for a state member bank which seeks to continue its insured 
status upon termination of membership in the Federal Reserve System and 
for interim institutions chartered to facilitate mergers.
Proposed New Depository Institutions
    In considering applications for deposit insurance for a proposed 
new depository institution, the FDIC must evaluate each application in 
relation to the factors prescribed in section 6 of the Federal Deposit 
Insurance Act (hereafter the Act) (12 U.S.C. 1816). Those factors are:
[[Page 52873]]
    <bullet> The financial history and condition of the depository 
institution;
    <bullet> The adequacy of its capital structure;
    <bullet> Its future earnings prospects;
    <bullet> The general character and fitness of its management;
    <bullet> The risk presented by such depository institution to the 
deposit insurance fund;
    <bullet> The convenience and needs of the community to be served by 
the depository institution; and
    <bullet> Whether its corporate powers are consistent with the 
purposes of the Act.
    The applicant will receive deposit insurance if all of these 
statutory factors plus the considerations required by the National 
Historic Preservation Act and the National Environmental Policy Act of 
1969 are resolved favorably. Additional guidance regarding the National 
Historic Preservation Act and the National Environmental Policy Act may 
be found in the respective FDIC Statements of Policy for each of these 
statutes.
    If the proposal contemplates the simultaneous establishment of a 
holding company, the application should discuss and disclose the 
proposed activities of the parent holding company as well as those of 
the proposed bank.
    In those instances where the proposal involves the ownership of the 
depository institution as a subsidiary of an existing bank or thrift 
holding company, the FDIC will consider the financial and managerial 
resources of the parent organization in assessing the overall proposal 
and in evaluating the statutory factors prescribed in section 6 of the 
Act. In such circumstances, the application for deposit insurance 
should contain a copy of any information submitted to the holding 
company's primary federal regulator. Subpart B of part 303 of the 
FDIC's regulations discusses certain expedited procedures that may be 
available to eligible depository institutions or eligible holding 
companies (as those terms are defined in the regulation).
    The FDIC may conduct examinations and/or investigations to develop 
essential information with respect to deposit insurance applications. 
The need to conduct an investigation, and its scope, will be determined 
by the appropriate regional director (DOS). Every effort will be made 
to coordinate any FDIC investigation with those conducted by other 
regulators.
    The FDIC has formulated guidelines for evaluating deposit insurance 
applications which are designed to ease administration, prevent 
arbitrary judgment, and assure uniform and fair treatment to all 
applicants. A discussion of these guidelines follows.
Statutory Factors
1. Financial History and Condition
    Proposed and newly organized depository institutions have no 
financial history to serve as a basis for determining qualifications 
for deposit insurance. Thus, the primary areas of consideration under 
this statutory factor are the ability of proponents to provide 
financial support to the new institution, investment in fixed assets, 
including leasing arrangements, and insider transactions. Lease 
transactions shall be reported in accordance with Financial Accounting 
Standards Board Statement 13 (Accounting for Leases). Applicants are 
expected to provide procedures, security devices, and safeguards at 
least equivalent to the minimums specified in the Bank Protection Act 
of 1968 (12 U.S.C. 1881-1884).
    (a) Investment in Fixed Assets and Leases--The applicant's 
aggregate direct and indirect fixed asset investment, including lease 
obligations, must be reasonable in relation to its projected earnings 
capacity, capital, and other pertinent matters of consideration. 
Applicants are cautioned against the purchase of any fixed assets or 
entering into any noncancelable construction contracts, lease 
agreements, or other binding arrangements related to the proposal 
unless and until the FDIC approves the application.
    (b) Insider Transactions--Any financial arrangement or transaction 
involving the applicant and an insider should be documented by the 
applicant to demonstrate that: (1) The proposed transaction with 
insiders is made on substantially the same terms as those prevailing at 
the time for comparable transactions with non-insiders and does not 
involve more than normal risk or present other unfavorable features to 
the applicant depository institution; and (2) the transaction must be 
approved in advance by a majority of the depository institution's 
incorporators. In addition, full disclosure of any arrangements with an 
insider must be made to all proposed directors and prospective 
shareholders. An insider means a person who is proposed to be a 
director, officer, or incorporator of an applicant; a shareholder who 
directly or indirectly controls 10 percent or more of a class of the 
applicant's outstanding voting stock; or the associates or interests of 
any such person.
2. Adequacy of the Capital Structure
    Normally, the initial start-up capital of a proposed depository 
institution should be sufficient to provide a Tier 1 capital to assets 
leverage ratio (as defined in the appropriate capital regulation of the 
institution's primary federal regulator) of not less than 8.0% 
throughout the first three years of operation. In addition, the 
depository institution must maintain an adequate allowance for loan and 
lease losses.
    The adequacy of the capital structure of a newly organized 
depository institution is closely related to its deposit volume, fixed 
asset investment and the anticipated future growth in liabilities. 
Deposit projections made by the applicant must, therefore, be fully 
supported and documented. Projections should be based on established 
growth patterns in the specific market, and initial capitalization 
should be provided accordingly. Special purpose depository institutions 
(such as credit card banks) should provide projections based on the 
type of business to be conducted and the potential for growth of that 
business. Initial capital should normally be in excess of $2,000,000, 
net of any pre-opening expenses that will be charged to the 
institution's capital after it commences business.
    (a) Initial offering of stock--All stock of a particular class in 
the initial offering should be sold at the same price, and have the 
same voting rights. Proposals which allow the insiders to acquire a 
separate class of stock with greater voting rights are generally 
unacceptable. Insiders should not be offered stock at a price more 
favorable than the price for other subscribers. A price disparity 
provides insiders with a means to gain control disproportionate to 
their investment.
    When securities are sold to the public, the disclosure of all 
material facts is essential. The FDIC's Statement of Policy regarding 
Offering Circulars provides additional guidance. A copy of the offering 
circular prepared by the applicant, together with the stock 
solicitation material and subscription agreement, should be submitted 
to the FDIC when they become available.
    (b) Wholly owned subsidiary of a holding company--If the applicant 
is being established as a wholly owned subsidiary of an eligible 
holding company (as defined in part 303, subpart B), the FDIC will 
consider the financial resources of the parent organization as a factor 
in assessing the adequacy of the proposed initial capital injection. In 
such cases, the appropriate regional director (DOS) may find favorably 
with respect to the adequacy of capital factor, when the initial 
capital injection is sufficient to provide for a Tier 1 leverage 
capital ratio of at least 8.0% at the end of the first year of
[[Page 52874]]
operation, based on a realistic business plan, or the initial capital 
injection meets the $2,000,000 minimum capital standard set forth in 
this Statement of Policy, or any minimum standards established by the 
chartering authority, whichever is greater. However, the holding 
company shall also provide a written commitment to maintain the 
proposed institution's Tier 1 leverage capital ratio at no less than 
8.0 percent throughout the first three years of operation.
    (c) Operating insured offices--If the proposal involves the 
acquisition of an insured operating office, or offices, the applicant 
may request that the benchmark for evaluating the adequacy of capital 
be an amount necessary for the resultant newly chartered institution to 
be classified as well capitalized, as defined by its primary federal 
regulator. In such cases, the appropriate regional director (DOS) may 
find favorably with respect to the capital factor based on a favorable 
finding with respect to the following:
    <bullet> There is a realistic three year business plan which 
evidences stabilized operations at inception;
    <bullet> The proposal involves substantially all assets and 
deposits attributable to the respective insured operating office(s); 
and
    <bullet> The proponent is either an eligible holding company (as 
defined in part 303, subpart B) or is a banking group that the FDIC 
determines has demonstrated its ability to successfully manage an 
insured depository institution. (A qualified banking group should have 
an established association of at least three years. A chain banking 
group which is recognized as such by the FDIC is one type of banking 
group that is contemplated in this paragraph.)
    (d) Stock financing by insiders--Financing arrangements by insiders 
of their investment in stock of the proposed new depository institution 
will also be carefully reviewed. Financing arrangements by an insider 
to purchase stock will be considered acceptable only if the party 
financing the stock can demonstrate the ability to service the debt 
without reliance on dividends or other forms of compensation from the 
applicant. When stock financing arrangements of insiders are 
anticipated, information should be submitted with the application 
demonstrating that adequate alternative independent sources of debt 
servicing are available. Direct or indirect financing arrangements by 
insiders of more than 75 percent of the purchase price of the stock 
subscribed to by any one individual, or more than 50 percent of the 
purchase price of the aggregate stock subscribed by the insiders as a 
group, will require supporting comments in the application regarding 
the reason that the financing arrangements should be considered 
acceptable. If the insider financing arrangements are not considered 
appropriate, the FDIC may find unfavorably on the adequacy of the 
capital structure.
    When the proposed depository institution is being established as a 
subsidiary of an existing holding company, the funding source being 
utilized by the holding company for its capital contribution will be 
evaluated in the context of the holding company's consolidated 
operations.
    In such cases, the FDIC will need to be provided with assurance 
that the holding company's proposed leverage is within the guidelines 
of its primary federal regulator.
    No loans for stock purchases are to be refinanced by the newly 
established institution. Deposits or other funds of the proposed 
depository institution at correspondent banks are not to be used as 
compensating balances for loans to insiders. During the first three 
years of operations, cash dividends shall be paid only from net 
operating profits, and shall not be paid until an appropriate allowance 
for loan and lease losses has been established and overall capital is 
adequate.
3. Future Earnings Prospects
    Before approving an application for deposit insurance, the FDIC 
must have reasonable assurance that the new institution can be operated 
profitably. Therefore, the incorporators will need to demonstrate 
through realistic and supportable estimates that, within a reasonable 
period (normally three years), the earnings of the applicant will be 
sufficient to provide an adequate profit.
    The applicant must also maintain its books and records in 
accordance with the principles of accrual accounting.
4. General Character and Fitness of the Management
    To satisfy the FDIC's criteria under this factor, the evidence must 
support a management rating which, in an operating institution, would 
be tantamount to a rating of 2 or better under the Uniform Financial 
Institution Rating System.2 Since in most instances the 
management of a proposed depository institution will not have an 
operating record as a functioning unit, the individual directors and 
officers will be evaluated largely on the basis of the following:
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    \2\ A 2 rating under the Uniform Financial Institution System is 
generally indicative of a satisfactory record of performance in 
light of the institution's particular circumstances.
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    <bullet> Financial institution and other business experience;
    <bullet> Duties and responsibilities in the proposed depository 
institution;
    <bullet> Personal and professional financial responsibility;
    <bullet> Reputation for honesty and integrity; and
    <bullet> Familiarity with the economy, financial needs, and general 
character of the community in which the depository institution will 
operate.
    All proposed depository institutions shall provide at least a five-
member board of directors. The identity and qualifications of the 
proposed full-time chief executive officer should be made known to the 
FDIC as soon as possible, preferably when the application is filed with 
the appropriate FDIC regional director (DOS). Proponents must advise 
the FDIC, in writing, of any change in the directorate, senior active 
management, or a change in the ownership of stock by any person of 10% 
or more of the total shares of either the depository institution or its 
holding company prior to opening.
    (a) Fees and expenses--The commitment to or payment of unreasonable 
or excessive fees and other expenses incident to an application will 
reflect adversely upon the management of the applicant institution. 
Fees and other organizational expenses incurred or committed to should 
be fully supported.
    Expenses for professional or other services rendered by insiders 
will receive special review for any indication of self-dealing to the 
detriment of the bank and its other shareholders. 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 an FDIC application be approved 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.
    (b) Stock benefit plans--Stock benefit plans, including stock 
options, stock warrants, and similar stock based compensation plans 
will be reviewed by FDIC and must be disclosed to all potential 
subscribers. A description of any such plans proposed should be 
included in the application submitted to the regional director. It is 
expected that stock benefit plans will be primarily focused on active 
management of the institution, although some participation by outside 
directors is not objectionable. The structure of stock benefit plans 
should encourage the continued
[[Page 52875]]
involvement of the participants, and serve as an incentive for the 
successful operation of the institution. It is recognized that plans 
may be proposed to compensate organizers for funds placed at risk 
during the organization phase or as remuneration for services provided.
    Stock benefit plans should contain no feature that would encourage 
speculative or high risk activities, serve as an obstacle or otherwise 
impede the sale of additional stock to the general public, or be 
structured in such a manner as to serve as a conduit to convey control 
of a depository institution to the insiders. Listed below are factors 
that the FDIC will consider in reviewing stock benefit plans proposed 
for directors and active officers:
    <bullet> The duration of rights granted should be limited, and in 
no event should the exercise period exceed ten years;
    <bullet> Rights granted should encourage the recipient to remain 
involved in the proposed depository institution. For example, a vesting 
of approximately equal percentages each year over the initial three 
years of operations is a type of provision that would be appropriate to 
ensure such continued involvement. This requirement may be waived for 
participants awarded only a nominal number of shares.
    <bullet> Rights granted should not be transferable by the 
participant;
    <bullet> The exercise price of stock rights shall not be at less 
than the fair market value of the stock at the time that the rights are 
granted;
    <bullet> Rights under the plan must be exercised or expire within a 
reasonable time after termination as an active officer, employee or 
director; and
    <bullet> Stock benefit plans should contain a provision allowing 
the institution's primary federal regulator to direct the institution 
to require plan participants to exercise or forfeit their stock rights 
if the institution's capital falls below the minimum requirements, as 
determined by its primary state or federal regulator.
    The FDIC will separately review stock benefit plans established to 
compensate incorporators who have placed personal funds at risk to 
finance the organization of the institution or who have provided 
professional or other services in conjunction with the organization. In 
reviewing the reasonableness of such plans, the FDIC will not require 
vesting or restrictions on transferability, but will review the 
duration of the rights, strike price and exercise or forfeiture clauses 
in the same manner as discussed above. In addition, the FDIC will 
consider:
    <bullet> The incorporator's time and expertise, and financial 
commitment to the proposal; and
    <bullet> The amount and basis of any cash payments which will be 
made to the incorporator for services rendered or as return on funds 
placed at risk.
    It is recognized that the incorporators may wish to adopt different 
types of compensation plans which are structured to meet the unique 
circumstances of the proposed depository institution. In evaluating 
benefit and compensation plans for insiders, the FDIC will look to the 
substance of the proposal. Those proposals that are determined to be 
substantively stock based plans will be evaluated based on the 
foregoing stock benefit plan criteria. Stock appreciation rights and 
other similar plans that include a cash payment to the recipient based 
directly on the market value of the depository institution's stock are 
unacceptable.
    If the proposal involves the formation of a de novo holding company 
and a stock benefit plan is being proposed at the holding company 
level, that stock benefit plan will be reviewed by the FDIC in the same 
manner as a plan involving stock issued by the proposed depository 
institution.
    (c) Background and biographical information--Insiders must file 
financial and biographical information in connection with the deposit 
insurance application. The FDIC may request a report from the Federal 
Bureau of Investigation or other investigatory agencies on these 
individuals. Fingerprinting of individuals may be required. Background 
checks and fingerprinting may be waived by the appropriate FDIC 
regional director (DOS) for individuals who are currently associated 
with, or have had a recent past association with, an insured depository 
institution. When the proposed depository institution is being 
established as a wholly owned subsidiary of an eligible holding 
company, the appropriate FDIC regional director (DOS) may waive 
financial information for those persons who are being proposed as 
directors or officers of the applicant. Background checks conducted by 
other federal financial institution regulators in connection with 
charter applications are generally adequate for the FDIC if the other 
regulators agree to notify the FDIC of instances in which further 
investigation is warranted.
    In the event any present or prospective director, officer, 
employee, controlling stockholder, or agent of the applicant has been 
convicted of any criminal offense involving dishonesty, breach of 
trust, or money laundering, or has agreed to enter into a pretrial 
diversion or similar program in connection with a prosecution of such 
offense, the applicant must obtain the FDIC's written consent, under 
section 19 of the Act (12 U.S.C. 1829), before any such person may 
serve in one or more of those capacities. Guidelines regarding section 
19 applications may be obtained from the appropriate FDIC regional 
office (DOS).
    Proponents should be aware of the prohibitions against interlocking 
management officials which are applicable to depository institutions 
and depository institution holding companies and which are contained in 
the Depository Institution Management Interlocks Act (12 U.S.C. 3201).
    (d) Fidelity insurance, policies, and audit coverage--An insured 
depository institution should maintain sufficient fidelity bond 
coverage on its active officers and employees to conform with generally 
accepted industry practices. Primary coverage of no less than $1 
million is ordinarily expected. Approval of the application may be 
conditioned upon acquisition of adequate fidelity coverage prior to 
opening for business.
    Applicants are expected to develop appropriate written investment, 
loan, funds management and liquidity policies. Establishment of an 
acceptable audit program is required for proposed depository 
institutions. Applicants for deposit insurance coverage are expected to 
commit the depository institution to obtain an audit by an independent 
public accountant annually for at least the first three years after 
deposit insurance coverage is granted. The FDIC may determine, 
3 on a case-by-case basis, that a separate audit is 
unnecessary where the applicant is owned by another company and the 
proposed depository institution will undergo an audit performed by an 
independent public accountant as part of an audit of the consolidated 
financial statements of its parent company.
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    \3\ ln a situation in which the FDIC is not to be the primary 
federal regulator, these determinations will be made in consultation 
with the primary federal regulator.
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5. Risk Presented to the Bank Insurance Fund or Savings Association 
Insurance Fund
    This factor is intended to be broadly interpreted. For example, 
this factor may be resolved unfavorably based on an unsound business 
plan. The FDIC expects that an applicant will submit a business plan 
commensurate with the capabilities of its management and the financial 
commitment of the
[[Page 52876]]
incorporators. 4 Applicants must demonstrate the following:
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    \4\ Any significant deviation from the business plan within the 
first three years of operation must be reported by the insured 
depository institution to the appropriate federal regulator before 
consummation of the change.
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    <bullet> Adequate policies, procedures, and management expertise to 
operate the proposed depository institution in a safe and sound manner;
    <bullet> Ability to achieve a reasonable market share;
    <bullet> Reasonable earnings prospects;
    <bullet> Ability to attract and maintain adequate capital; and
    <bullet> Responsiveness to community needs.
    Operating plans that rely on high risk lending, a special purpose 
market, or significant funding from sources other than core deposits or 
that otherwise diverge from conventional bank-related financial 
services will require specific documentation as to the suitability of 
the proposed activities for an insured institution. Similarly, 
additional documentation of plans is required where markets to be 
entered are intensely competitive or economic conditions are marginal.
6. Convenience and Needs of the Community To Be Served
    The essential considerations in evaluating this factor are the 
deposit and credit needs of the community to be served, the nature and 
extent of the opportunity available to the applicant in that location, 
and the willingness and ability of the applicant to serve those 
financial needs.
    The applicant must clearly define the community it intends to serve 
and provide information on that community, including economic and 
demographic data and a description of the competitive environment. The 
applicant should also define the services to be offered in relation to 
the needs of the community. The proposed depository institution's 
Community Reinvestment Act documentation, including any applicable 
public file information, prepared in accordance with the requirements 
of the institution's primary federal regulator, plays an integral part 
in the FDIC's evaluation of the convenience and needs of the community 
to be served.
7. Consistency of Corporate Powers
    Pursuant to section 24 of the Act (12 U.S.C. 1831a), no insured 
state bank may engage as principal in any type of activity that is not 
permissible for a national bank unless the FDIC has determined that the 
activity would pose no significant risk to the appropriate deposit 
insurance fund and the state bank is, and continues to be, in 
compliance with applicable capital standards prescribed by its primary 
federal banking agency. Similarly, the Home Owners' Loan Act (12 U.S.C. 
1464) provides that a state savings association may not engage in any 
type of activity that is not permissible for a federal savings 
association unless the FDIC has determined that the activity would pose 
no significant risk to the affected deposit insurance fund and the 
savings association is, and continues to be, in compliance with the 
capital standards for the association. Applicants shall agree in the 
application not to exercise prohibited powers, whether granted by 
charter or statute, after deposit insurance has been granted, unless 
prior approval has been obtained from its federal regulator.
    State nonmember banks may not exercise trust powers without the 
prior written approval of the FDIC.
Operating Noninsured Institutions
    This section discusses the evaluation of applications for federal 
deposit insurance submitted by operating noninsured institutions. The 
FDIC's criteria for evaluating applications submitted by operating 
institutions are generally the same as those for proposed depository 
institutions.
    The FDIC must consider the seven factors found in section 6 of the 
Act, which are discussed above.
    The condition of an applicant institution will be determined from 
all available information and will generally include an on-site 
examination as part of the investigation process. Results of the 
examination should reflect an institution that is fundamentally sound, 
although some modest weaknesses may exist. The nature and severity of 
deficiencies found should not be material, and the institution must be 
stable and able to withstand business fluctuations.
    Capital ratios will be calculated using financial statements 
prepared in accordance with the ``Instructions--Consolidated Reports of 
Condition and Income'' or ``Thrift Financial Reports'' in use for FDIC-
insured institutions at the time. An applicant's capital adequacy will 
be measured in relation to the capital ratios established in the 
capital regulations of the institution's primary federal regulator. 
Based on an analysis of the type and quality of the institution's 
assets, the kind of powers exercised, the institution's funding 
sources, or other factors, an initial capital level higher than the 
minimum levels prescribed may be required. The analysis will include 
consideration of such matters as whether the applicant is relatively 
new,5 has embarked upon a substantive change in powers 
exercised, or has experienced erratic growth patterns in recent years.
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    \5\ This statement of policy provides that the initial capital 
for a new or proposed depository institution should be sufficient to 
provide a leverage ratio of Tier I capital to total estimated assets 
of at least 8.0% throughout the first three years of operations. 
This standard shall also be applied to a recently organized 
institution applying for insurance.
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    As part of the application investigation process, the FDIC will 
discuss with the applicant its future operating intentions. If any 
change in its kind or level of activity is expected following, or as a 
result of, the approval of its FDIC membership, the applicant may be 
requested to submit a plan for maintaining adequate capital in the 
future.
    Unless waived in writing by the FDIC, an applicant shall have a 
full scope audit conducted by an independent public accountant prior to 
submitting an application and shall submit a copy of the auditor's 
report as part of the application.
    Section 24 of the Act (12 U.S.C. 1831a) limits the powers of 
insured state banks, and the Home Owners' Loan Act (12 U.S.C. 1464) 
limits the powers of state savings associations. If the institution is 
exercising any powers not authorized under the applicable statute, the 
application should contain an agreement and plan for eliminating the 
activity as soon as possible, or a separate application should be 
submitted seeking the FDIC's consent to continue the activity.
Proposed Depository Institutions Formed for the Sole Purpose of 
Acquiring Assets and Assuming Liabilities of an Insured Institution in 
Default
    Because of the urgent nature of this type of transaction, the 
procedures described above for insuring proposed depository 
institutions are modified when the institution is being formed for the 
sole purpose of acquiring assets and assuming liabilities of an insured 
institution in danger of default. Such institutions are approved based 
on the statutory factors contained in section 6 of the Act; however, 
the procedures for resolving these factors are modified significantly.
    The financial history and condition of the institution is 
determined to a great extent on the quality of assets purchased and the 
types of liabilities assumed in the transaction.
    The minimum capital requirement for these transactions is such that 
the resultant depository institution would
[[Page 52877]]
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

Last Updated 10/09/1997 regs@fdic.gov