Applications To Establish a Domestic Branch (Includes Remote Service Facilities); Rescission of Statement of Policy

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the Statement of Policy is out of date.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:

[email protected]). 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