[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also made to eliminate outdated information and to reflect current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
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