[Federal Register: October 9, 1997 (Volume 62, Number 196)]
[Notices]
[Page 52880-52884]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09oc97-161]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Applications To Establish a Domestic Branch (Includes Remote
Service Facilities); Rescission of Statement of Policy
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Proposed rescission of 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 (CDRI), the FDIC
proposes to rescind its Statement of Policy ``Applications to Establish
a Domestic Branch (Includes Remote Service Facilities)'' (Statement of
Policy).
The Statement of Policy provides information and guidance to state
nonmember banks planning to establish
[[Page 52881]]
a domestic branch. However, the information and guidance contained in
the Statement of Policy is out of date.
The FDIC proposes to rescind the Statement of Policy because the
proposed revisions to its applications regulation, published elsewhere
in today's Federal Register update requirements and sufficiently
address all required application procedures.
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, DC 20429. Comments may
be hand-delivered to the guard station 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 in the
FDIC Public Information Center, Room 100, 801 17th Street, NW.,
Washington, DC 20429, between 9:00 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Jesse G. Snyder, Assistant Director,
(202) 898-6915, Division of Supervision; Susan van den Toorn, Counsel,
(202) 898-8707, Legal Division, FDIC, 550 17th Street, NW., Washington,
DC 20429.
SUPPLEMENTARY INFORMATION: The FDIC is conducting a systematic review
of its regulations and written policies. Section 303(a) of the CDRI (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.
The FDIC developed the Statement of Policy to provide general
supervisory information and guidance to state nonmember banks relative
to the application process and the evaluation of statutory factors in
establishing domestic branches. The FDIC last amended the Statement of
Policy September 8, 1980. 2 FDIC Law, Regulations, Related Acts (FDIC)
5105.
In the time since the Statement of Policy was last amended, the
application process for establishing domestic branches has changed
significantly. As a result, the supervisory information and guidance
contained in the Policy Statement, which although general in nature,
are now out-of-date.
As part of the FDIC's comprehensive review of its applications
process, the FDIC is proposing to amend part 303 elsewhere in today's
Federal Register. The proposed revisions to part 303 sufficiently
address all required application procedures. Commenters are invited to
review subpart C of part 303 in conjunction with the proposal to
rescind the Statement of Policy.
For the above reasons, the FDIC proposes to rescind the following
Statement of Policy:
Applications To Establish a Domestic Branch (Includes Remote
Service Facilities)
A. Introduction
Section 18(d) of the Federal Deposit Insurance Act (12 U.S.C.
1828(d); hereafter the (Act) requires the prior written consent of the
Corporation before any State nonmember insured bank may establish and
operate any new domestic branch, as defined in section 3(o) of the Act
(12 U.S.C. 1813(o)). In analyzing branch applications, the Corporation
must evaluate each application in relation to the six statutory factors
prescribed in section 6 of the Act (12 U.S.C. 1816) as well as the
requirements of the National Historic Preservation Act, the National
Environmental Policy Act of 1969, and the Community Reinvestment Act.
The six statutory factors under section 6 of the Act are: the financial
history and condition of the bank, the adequacy of its capital
structure, its future earnings prospects, the general character of its
management, the convenience and needs of the community to be served by
the bank, and whether its corporate powers are consistent with the
purposes of the Act.
Generally, the Corporation believes that active competition between
banks and other financial institutions, when conducted within
applicable law and in a safe and sound manner, is in the public
interest. Accordingly, applications to establish branches by well
managed and adequately capitalized banks with a record of responsive
service to their communities will generally be approved.
Federal appellate court decisions have determined that the term
``branch'' includes remote service facilities. In March 1979, the
Corporation adopted regulations which reflect these decisions and
recognize remote service facilities as branches if they are owned or
leased by the applicant. An abbreviated application form has been
designed and procedures implemented which lessen the administrative
burden for both the banks and the FDIC. Banks which enter a sharing
arrangement, not involving leasing or ownership of the facility, do not
have to obtain FDIC approval; shared facilities or shared systems of
terminals are not regarded as branches for the sharing bank.
B. Procedures
Application forms to establish branches, including remote service
facilities, and instructions for their completion may be obtained from
the regional office of the FDIC region in which the main office of the
applicant is located. Upon receipt of an application which is found
complete, the regional director will notify the bank, in writing, that
the application has been accepted for filing and the date thereof. The
procedures governing the administrative processing of branch and remote
service facility applications are contained in part 303 of the
Corporation's rules and regulations (12 CFR part 303), particularly
Secs. 303.2, 303.10, 303.11, 303.12, and 303.14. Section 303.14 sets
forth, among other things, the procedures controlling establishment of
a public file, publication requirements, and consideration of comments
and protests received in connection with an application.
The Corporation will normally not render a decision on any
application for a branch or remote service facility which is subject to
state approval until the state authority has approved or expressed its
intent to approve the proposal; however, applicants are urged to submit
their applications to the Corporation at the same time an application
is forwarded to the state authority in order to promote concurrent and
more timely processing of the proposal.
Notification of the granting or denial of an application will be
provided together with a statement supporting the decision. Under
Sec. 303.10(e), within 15 days of receipt of notice that its
application has been denied, an applicant may petition the Board of
Directors for reconsideration of the application. Opinions will be
published when the Corporation determines that the decision represents
a new or change in policy or presents issues of general importance to
the public or the banking industry.
Under Sec. 303.14(i) of the Corporation's rules and regulations,
where the Board of Directors, based upon available information at the
time, plans to deny an application and no hearing has been held under
Sec. 303.14(e), the Director of the Division of Bank Supervision may
[[Page 52882]]
be instructed to notify the applicant in writing of the tentative
denial. The applicant has 15 days from receipt of the notice to file a
written request to amend the application or to submit information in
rebuttal of the deficiencies noted. Upon filing of such a request, the
applicant has 30 days to amend its application or to provide rebuttal
information.
An application to establish a remote service facility is required
to be filed only for the applicant's initial facility and the
procedures for traditional branch applications are followed. In order
to establish any subsequent remote service facility, the applicant need
only notify the regional director of its intention and comply with the
appropriate publication requirements. Unless otherwise notified by the
regional director, the remote service facility may be established 30
days after the last publication date. If the regional director
determines that the notification warrants further consideration, he
shall advise the applicant within the 30-day period that additional
information is needed and that the remote service facility may not be
established until the Corporation issues a formal order.
C. Statutory Factors--Application To Establish a Domestic Branch Other
Than Remote Service Facility
1. Financial History and Condition
In connection with applications for branches the emphasis will be
placed on the financial history and condition of the existing bank
rather than the proposed branch. The establishment of branches,
particularly where these involve the development of new markets,
normally encompasses risks or a degree of management attention which
banks that are experiencing financial difficulties are not generally
prepared to undertake. Banks with excessive volumes of subquality
assets, significant liquidity problems, or other problems threatening
the soundness of the institution would fall in this category.
Under this factor, as well as under the general character of
management factor, the current asset condition of the bank and its
compliance with applicable laws and regulations are primary areas of
consideration. Other primary areas of consideration here are investment
in fixed assets, including leases, and insider transactions, all of
which also impact importantly on the evaluation of the general
character of management factor. Lease transactions shall be reported in
accordance with Financial Accounting Standards Board Statement 13 as
required by the Instructions for the Preparation of Consolidated Report
of Income and Condition.
(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 bases for consideration. Except
where state law obviates the need, lease agreements should contain a
bankruptcy termination clause acceptable to the Corporation. An example
of such clause may be obtained from the regional office.
It is recommended that applicants not purchase any fixed assets or
enter into any noncancelable construction contracts, lease agreements,
or other binding arrangements related to the proposed branch unless and
until the Corporation approves the application. The Corporation expects
applicants to follow closely the representations made in the
application regarding fixed asset arrangements. If any substantive
changes become necessary in fixed asset arrangements, including
increases of 10% or more in the cost of any major category of fixed
assets (such as land, building, or furniture fixtures and equipment),
after submission of the application, applicant must promptly advise the
regional director of these changes. Major changes could result in
reconsideration.
(b) Insider Transactions---Any financial arrangement or transaction
involving the applicant, its directors, officers, 5% shareholders, or
their associates and interests (hereafter referred to as ``insiders'')
should ordinarily be avoided. If there are arrangements or transactions
of that type, the applicant must demonstrate clearly that any proposed
transactions with insiders are made on substantially the same terms as
those prevailing at the time for comparable transactions with non-
insiders and do not involve more than normal risk or present other
unfavorable features to the applicant bank. In addition, full
disclosure of any arrangements with an insider must be made to all
directors and shareholders and, in the event any new capital offering
is to be made, included in any new capital offering material
distributed in connection with the application.
Whenever any transaction between the applicant and an insider
involves the purchase of real property or a construction contract, the
purchase price must be supported by an independent appraisal or in the
case of a construction contract by competitive bids. Further, with
respect to any lease arrangement between the applicant and an insider,
the applicant must submit reliable evidence showing that the lease
arrangement is as beneficial to the applicant as the purchase of the
property and direct ownership. Normally, this type of lease arrangement
will also be required to include terms protecting the bank against
unreasonable escalation of payments under the lease and granting the
bank the option to purchase the property during the life of the lease
on appropriate terms.
2. Adequacy of Capital Structure
The establishment of branches generally involves an expansion of
deposits and/or an increase in expenses not immediately offset by
additional income. This normally results in some dissipation of
relative capital strength. Capital, earnings, and retention of earnings
should be sufficient to support the current level of operations as well
as the proposed expansion. In the case of capital deficiencies not
considered overly extreme, the bank should set forth a plan which will
improve capital to an extent which will more than offset any
deterioration expected as a result of the branch proposed.
Generally, the applicant bank's adjusted capital and reserves,
including written commitments for additional capital funds, should be
adequate relative to its adjusted gross assets. In the case of a
commercial bank, regional directors may approve an application to
establish a branch where the applicant's adjusted capital and reserves,
including written commitments for additional capital funds, is not less
than 7.5% of its adjusted gross assets. For mutual or guaranty savings
banks, regional directors may grant approval where the adjusted capital
and reserves ratio is not less than 6%. Such factors as the quality of
assets, earnings capacity, volume of risk assets, liquidity, capability
of management, and other factors affecting the relative strength of a
bank will exert either positive or negative influences on the level of
capital protection needed. In all instances where the adjusted capital
and reserves ratio of the applicant is less than the applicable level
set forth above, the determination of the adequacy of that ratio will
be made in the Washington Office.
3. Future Earnings Prospects
This factor will be measured in terms of the ability of overall
bank earnings to absorb the anticipated expenses resulting from the
proposal. In all cases, anticipated future earnings for the bank as a
whole should be adequate, after expenses, to absorb normal losses, pay
reasonable dividends, and provide some meaningful contribution to
capital. In
[[Page 52883]]
the case of newly organized banks which are seeking branches, the
proposed branch should not unduly delay the original forecast for
achieving profitability.
4. General Character of Management
To be acceptable under this factor a management must have
demonstrated, or be expected to demonstrate, an ability to operate the
bank in a manner which is free of excessive criticism or concern as to
the overall soundness and viability of the institution. The management
must also display, or be willing to acquire, the degree of depth
necessary to permit the establishment of additional offices. The
appraisal of management ability and depth will take into consideration
the size and activities of the existing bank, the expected scope of
activity of the proposed branch, and the extent of impact the branch is
expected to have on the bank's overall operation. In summary, the
Corporation views the quality of a bank's management as critical to its
overall success and will seriously question the expansion of the bank
via the branch route if the quality of management is not considered
adequate prior to the proposed expansion.
The Board of Directors of the Corporation has adopted a Statement
of Policy regarding legal fees and other expenses incident to
applications for deposit insurance, consent to establish branches or
relocate main or branch offices, and mergers. In brief, this policy
states that, since prudent management will not commit a bank seeking a
new branch to excessive expenses, the payment of unreasonable or
excessive fees incident to applications is considered by the
Corporation to reflect adversely upon management of the applicant bank,
irrespective of whether payments have been ratified or otherwise
approved by formal action by the incorporators or shareholders. The
Corporation will not question fees for legal services or other
organizational expenses solely because of an amount but will consider
the reasonableness of fees in relation to the services performed.
Applicants are required to furnish the amounts of fees for such
services which have been incurred and estimates of additional fees to
be incurred in connection with the proposed transaction. All fees for
legal, organizational or similar services should be disclosed whether
directly or indirectly related to the application pending before the
Corporation. If legal or other organizational fees appear to be
excessive in relation to fees for comparable services, or if the volume
of services performed exceeds that usually incurred with respect to
comparable applications, supportive documentation will be required. In
the case of legal fees, such documentation may consist of materials
such as itemized time sheets showing the time actually expended by
counsel on the applications concerned, the hourly rate charged, and the
specific circumstances, including unusual complexities, the necessity
for agency or court appearances, and the like necessitating the time
expended. In reviewing legal fees for reasonableness, the following
factors will ordinarily serve as guides:
(a) The time and labor required, the novelty and difficulty of the
questions involved, and the skill requisite to perform the services
obtained;
(b) The fee customarily charged in the locality for similar legal
services;
(c) The time limitations imposed by the client or by the
circumstances; and
(d) The experience and ability of the lawyer or lawyers performing
the services.
Even though a fee may be wholly or partially absorbed by another
entity such as a holding company, that fee or organizational expense
will nonetheless be reviewed by the Corporation under the terms of this
policy statement in view of the fact that the commitment for the fee or
organizational expense is a commitment of management of the proposed or
existing institution. Expenses for legal or other services rendered by
organizers, present or prospective board members or major shareholders
will receive special scrutiny in this regard for any evidence of self-
dealing to the detriment of the bank and its other shareholders. As a
matter of practice, the FDIC requires full disclosure to all directors
and shareholders of any fee in excess of $5,000 paid to insiders or
their interests. In no case, states the policy, will an FDIC
application be approved when the payment of a fee, in whole or in part,
is contingent upon any act or forebearance by the Corporation or by any
other federal or state agency or official.
The applicant bank should at all times maintain sufficient surety
bond coverage on its active officers and employees to conform with
generally accepted banking practices and should at all times maintain
an excess employee dishonesty bond in the amount of $1 million or more
if the primary blanket bond coverage is less than $1 million.
5. Convenience and Needs of the Community To Be Served
It should be noted that the provisions of the Community
Reinvestment Act are especially relevant in evaluating this statutory
factor. Guidelines on the Community Reinvestment Act may be obtained
from the appropriate regional office.
The essential considerations in evaluating this factor are the
legitimate deposit and credit needs of the community to be served and
the nature and extent of the banking opportunity available to the
applicant in that location and the willingness and ability of the
applicant to serve those needs.
In keeping with the Corporation's policy of promoting competition
among financial institutions, this factor will generally be considered
favorably when there is a reasonable assurance of successful operation
of the branch (as measured by future earning prospects). However,
competitive considerations will also include an assessment of whether
the applicant is already a dominant bank in a particular market and has
applied for the purpose of saturating that market as well as whether
the potential viability of a newly organized bank within a market would
be threatened significantly by a proposed branch.
The applicant bank must clearly define the community it intends to
serve and provide the type of information on that community discussed
below. It is emphasized, however, that the degree of detail that must
be provided may vary depending on the size, type of service and
location of the facility proposed. For example, the same amount of
detail would not be required for an extension of an existing facility,
or for the establishment of a limited service facility in the same
community as an existing office of the bank, as would be required for
the establishment of a full service branch in a different community.
(a) Economic Data--The economic condition and growth potential of
the area in which the branch proposes to operate, both presently and in
the near term, are important in evaluating the business potential
available to the branch, the amount of that business it can reasonably
expect to secure, and the probable success of the operation. Indicators
of the available business would include, but not be limited to, a
description of the principal industrial, trade, or agricultural
activity as well as the annual value of the primary products in the
geographic area. In addition, trends in employment, residential and
commercial construction, sales, company payrolls, and businesses
established are also important indicators.
(b) Demographic Data--Population figures within the community or
trade area as well as the surrounding areas are
[[Page 52884]]
important determinants in considering convenience and needs. These
population figures should include not only the present population but
also data on population trends for the future. Population
characteristics such as income, age distribution, educational level,
occupation, and stability should be considered.
(c) Competition--Some consideration will be given to the adequacy
or inadequacy of existing bank facilities in the community and in
nearby communities. The growth rate and size of banks and other
financial institutions in the community or trade area may provide
meaningful indications of the economic condition of the area and the
potential business for a branch. Other financial institutions such as
savings and loan associations, credit unions, finance companies,
mortgage companies and insurance companies may be considered competing
institutions to the extent their services parallel those of the branch.
(d) Other Supporting Data--The extent of new or proposed
residential, commercial and industrial development and construction is
a significant secondary consideration in resolving the convenience and
needs factor. Evidence of plans for development of shopping centers,
apartment complexes and other residential subdivisions, factories, or
other major facilities near the proposed site of the branch are also
relevant.
6. Consistency of Corporate Powers
This factor will rarely be applicable to branch proposals, except
in those instances where a bank may contemplate some additional
corporate power, not normally exercised by banks, in connection with
its application.
D. Statutory Factors--Application or Notification To Establish Remote
Service Facility
In view of the nature of the remote service facility, including
that it offers limited service and is generally an unmanned electronic
unit, the six statutory factors will not be applied to the same degree
and extent as in the case of a traditional branch. For instance, with
respect to the earnings factor, detailed projections of deposits,
income and expenses are not necessary. A determination that operating
expenses of the facility will not burden the bank's future earnings
will generally suffice. Similarly, detailed or extensive economic
information and demographic data are not required when considering the
convenience and needs factor.
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. 97-26232 Filed 10-8-97; 8:45 am]
BILLING CODE 6714-01-P
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