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FDIC Federal Register Citations

[Federal Register: October 9, 1997 (Volume 62, Number 196)]
[Page 52880-52884]
From the Federal Register Online via GPO Access []
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.
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 
    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the Statement of Policy is out of date.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 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) 
    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 
    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 
    (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 
    (b) The fee customarily charged in the locality for similar legal 
    (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 
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]

Last Updated 10/09/1997

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