Applications for Deposit Insurance

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also made to eliminate outdated information and to reflect current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:

[email protected]). 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:

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.

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.

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.

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.

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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]]

The financial history and condition of the depository

institution;

The adequacy of its capital structure;

Its future earnings prospects;

The general character and fitness of its management;

The risk presented by such depository institution to the

deposit insurance fund;

The convenience and needs of the community to be served by

the depository institution; and

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:

There is a realistic three year business plan which

evidences stabilized operations at inception;

The proposal involves substantially all assets and

deposits attributable to the respective insured operating office(s);

and

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:

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

Financial institution and other business experience;

Duties and responsibilities in the proposed depository

institution;

Personal and professional financial responsibility;

Reputation for honesty and integrity; and

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:

The duration of rights granted should be limited, and in

no event should the exercise period exceed ten years;

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.

Rights granted should not be transferable by the

participant;

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;

Rights under the plan must be exercised or expire within a

reasonable time after termination as an active officer, employee or

director; and

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:

The incorporator's time and expertise, and financial

commitment to the proposal; and

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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:

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

Adequate policies, procedures, and management expertise to

operate the proposed depository institution in a safe and sound manner;

Ability to achieve a reasonable market share;

Reasonable earnings prospects;

Ability to attract and maintain adequate capital; and

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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