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4000 - Advisory Opinions


Request for Approval to Continue Management Official Interlock Under Section 348.4(b)(1) of FDIC's Regulations

FDIC-81-11

April 23, 1981

Pamela E. F. LeCren, Attorney

The Legal Division has been requested to furnish its comments and opinion regarding the subject application. In brief the application is a request by *** for approval to continue an existing management official interlock between it and *** for a period of five years under § 348.4(b)(1) of FDIC's regulations.1 Part 348 in general implements the Depository Institution Management Interlocks Act (12 U.S.C. 3201, "Interlocks Act"). Section 348.4(b)(1) permits two banks to engage in an otherwise prohibited interlock where one of the organizations is located in a "low income or other economically depressed area" and it is determined that the service of the management official in question at the organization so located is necessary to provide management or operating expertise to that organization. If granted, the maximum time period during which an individual may serve under § 348.4(b)(1) is five years.

The Legal Division has construed the phrase "low income or other economically depressed area" to have the following meaning:

an area, without regard to political or other subdivisions or boundaries, which has some or all of the following characteristics:

(1) The rate of unemployment is substantially above the national rate;

(2) The median level of family income is significantly below the national median;

(3) The economy of the area has traditionally been dominated by only one or two industries, which are in a state of long-term decline;

(4) The rate of outmigration of labor or capital is substantial;

(5) The area is adversely affected by changing industrial technology;

(6) The area is adversely affected by changes in national defense facilities or production.2

We are of the opinion that an area will qualify as "low income" if the first and second items are present and as "economically depressed" if two or more of the third, fourth, fifth, and sixth items are present.

According to information supplied by the applicant pertaining to *** (the county in which *** is located and in which *** established its new branches) *** unemployment rate is 14.2%, whereas the national rate is 6.9% and the county's median family income is 44.3% of the national rate ($5,992 vs. $8,431). The statistics are not current and therefore may be entirely unreliable. We will presume, however, for the purposes of this opinion, that current figures, if they were available, would either be the same or have altered proportionately, i.e., if the national unemployment rate were higher, *** rate would be slightly more than two times that rate. The applicant did not provide any information regarding ***, the county in which *** main office and three of its six branch offices are located.

The Legal Division is of the opinion that although "located in" may be a term of art which normally encompasses only the location of a bank's main office, inasmuch as three of *** six branch offices are located in *** and its remaining three in *** we are prepared to say that, for the purposes of applying § 348.4(b)(1), *** is "located in" *** as well as "located in" ***. We come to this conclusion partially because of the fact that the bank will have Community Reinvestment Act responsibilities in *** and because a significant portion of the bank's business will probably be attributed to that county. We have concluded that *** is a "low income" area because its rate of unemployment is substantially above the national rate and its median level of family income is significantly below the national median. We can come to no conclusion regarding *** due to the total lack of information with regard thereto.

The exception provided by § 348.4(b)(1) is designed to extend the benefit of management or operating expertise to an organization in need thereof that is located in a low income or economically depressed area when that expertise is not available without utilizing the services of an individual who is currently serving elsewhere. The exception is built on the premise that such management or operating expertise is not likely to be readily available in low income or economically depressed areas without sharing management with another bank. We have determined that ***, the institution which would suffer the loss of *** services, is "located in" a low income area. If the FDIC determines that *** services are "necessary" to provide operating or management expertise to ***, then the exception would be available. The application presents arguments that the Legal Division finds on their face to be persuasive and upon which the Board of Directors, in our opinion, could grant the exception request.3 In brief the bank makes the argument that since a large portion of its business is located in ***, *** has extensive knowledge of the county, its businesses, and needs and is himself a local businessman; *** is the only *** director with any knowledge of or relationship to *** the bank ventured into the county because of *** expertise with regard thereto; and the bank would find it difficult if not impossible to replace his expertise from within the county due to its depressed condition, *** presence at the bank is necessary to provide operating or management expertise as to its operations in ***.

The regional office, as reflected in Regional Director Meadow's April 1, 1981 memorandum, is of the opinion that the bank has not substantiated the need for *** services. It is stated therein that "while the replacement of *** may involve a lengthy process, and the pool of highly qualified candidates may be small, no evidence has been presented that either bank involved would suffer and that no others, whose service would not violate the Interlocks Act, are available for the position." There is in fact no evidence that the applicant has tried to locate other persons who would fill its needs without violating the Interlocks Act. The bank may be able to demonstrate that no such persons are available, however, it has done no more at this time than to say that it would be difficult to locate someone who could serve the interests of the bank and the *** community as well as ***.

To what extent the FDIC will insist on an active search for a replacement where the affected management official is already serving an institution in a low income area and he or she will resign therefrom absent relief is primarily a policy decision. The alternative to requiring an active search would be to accept some lesser showing of the likelihood of inability to find replacements because of the depressed nature of the community. In short, the Board, in our opinion, can equally as well extend the exception based on the arguments presented by the bank or deny the exception in view of the lack of an actual search and other factors unfavorable to the request which may be present.

1 The existing interlocking relationship became prohibited on June 30, 1980 when *** established an office in ***. The Board of Directors has already granted the affected management official, *** an extension under § 348.6(a)(2) which permits him to serve on the boards of *** *** and *** until September 30, 1981. Without that extension he would have been required to terminate his dual service by February 9, 1981. According to the application, *** will terminate his service at *** *** by or before September 30, 1981 if the subject request is denied. Go back to Text

2 This interpretation is the same as that used by the Federal Reserve Board under old 12 C.F.R. Part 212 which implemented § 8 of the Clayton Act. Section 8 of the Clayton Act, which predated the Interlocks Act, applied to interlocks involving member banks. Section 212.3(g) contained an exception for banks located in low income or other economically depressed areas. Go back to Text

3 Although the request asks for the full five year period, it is within the discretion of the Board to grant the exception for a shorter period should a full five year period be unwarranted. Go back to Text


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