Now pending before the Office of the Comptroller of the Currency are applications from national banks to form interstate branch networks. The applications are of more than routine interest.
It the applications are approved, it would be the first time that the OCC has stitched together various lines of decision-making and authorized national banks to relocate a main office across state lines and retain bank branches in two states.
Some have suggested that the applicants - NationsBank Corp. and First Fidelity Bancorp. - are merely exploiting a legal loophole to achieve results not contemplated by the regulators or Congress.
Not so. Each prong of the NationsBank and First Fidelity applications finds ample support in prior judicial and OCC decisions, and the applications are sounds as a matter of public policy.
NationsBank owns Maryland National Bank of Baltimore and American Security Bank, a national bank in the District of Columbia. NationsBank proposes to relocate the headquarters of American Security across state lines from the District of Columbia to Silver Spring, Md. - a distance of less than 30 miles - under 12 USC 30.
Straightforward Merger
NationsBank thereafter proposes to merge American Security into Maryland National - a simple merger of two national banks located in the same state - under 12 USC 215a.
Finally, NationsBank requests an OCC determination that it may retain all of the branches of Maryland National and American Security in both jurisdictions - under 12 USC 30 and 36.
First Fidelity's proposal is strikingly similar. It proposes to relocate the headquarters of its Pennsylvania bank from Philadelphia to Salem, N.J. Thereafter, First Fidelity would merge the Salem bank into its lead bank located in Newark, N.J. Once again, branches would be retained.
Relocating Headquarters
The National Bank Act has long provided that, with OCC and shareholder approval, a national bank may relocate its headquarters office up to 30 miles. Until 1959, the National Bank Act provided that such a relocation had to be within the same state.
In 1959, Congress amended the statute by deleting this requirement. It has been commonly understood since that time that the National Bank Act does not prohibit a headquarters relocation from one state to another.
More important than common understanding, the OCC has applied the statute on numerous occasions over the past 30 years to permit a national bank to relocate headquarters across state lines.
Several years ago, for example, the OCC approved an application of SouthTrust's subsidiary national bank to relocate from Phenix City, Ala., to Columbus, Ga., (and the courts ultimately rebuffed an attempt by the Federal Reserve to assert jurisdiction).
These cases did not, however, involve the retention of branches following the headquarters relocation.
The OCC therefore has the legal power to authorize the relocations proposed by NationsBank and First Fidelity.
Merging the Banks
The second step is to merge the relocated headquarters (for instance, American Security, which would be headquartered in Maryland) into the other bank (i.e., Maryland National, which is presently located in Maryland). This is an easy and obvious step for the OCC to approve. The National Bank Act has long authorized national banks located in the same state to merge.
Although the proposals do not need authority for the merger transaction other than 12 USC 215 or 215a, there is an additional basis in the National Bank Act for the second step of the transaction.
Under 12 USC 215c, added by the '91 bank law, "any national bank may acquire or be acquired by any insured depository institution," and "acquire" is defined to include a merger transaction.
Retaining the Branches
Obviously it would make little sense to relocate the headquarters and merge the Banks if the heart of the retail franchise - the branches - could not be retained. The pending applications to retain branches again find ample authority on the books.
First, the McFadden Act, which generally governs branching by national banks, has no application to the retention of a former headquarters site following relocation. The McFadden Act is codified at 12 USC 36, and the headquarters relocation provision is codified at 12 USC 30.
The OCC has held, in considering this issue in several cases over the years. that the McFadden Act's restrictions do not govern relocations under section 30.
In addition, the McFadden Act authorizes the retention of all of the branches. The McFadden Act authorizes national banks that are merging to retain branches that were in existence on Feb. 25, 1927.
Explicit Permission
These grandfathered branches permit a national bank to be "located" or "situated" in more than one state and, once there, to branch within the state to the fullest extent permitted under law. Reading the McFadden Act to reach this result is, again, exactly what the OCC and the courts have long held.
The leading case is the Seattle Trust decision. There, Bank of California contended that it was located in both California and Washington by virtue of Washington branches that were in existence in 1927. Bank of California therefore applied to the OCC for permission to branch in Washington to the extent that state banks then were authorized to do.
The OCC approved the Bank of California proposal and, in rejecting a suit brought by competitor banks, the Ninth Circuit affirmed the OCC decision. The court found that nothing in the National Bank Act, its legislative history, or OCC law and lore was inconsistent with this result.
Another section of the McFadden Act also authorizes the retention of branches. The McFadden Act gives the OCC authority to approve the retention of branches that were not in existence in 1927, unless state law would prohibit the retention.
The OCC has previously determined that, for this prohibition to apply, states' laws must expressly prohibit the branch retention. In NationsBank's case, neither Maryland nor District of Columbia law prohibits the branch retention. The same is true with respect to New Jersey and Pennsylvania law.
Comptroller Eugene Ludwig recently indicated a willingness to authorize new bank products and services if they do not cause material safety and soundness problems and if they, on balance, benefit consumers of financial services. This logic suggests quick approval of the applications.
There is no doubt that it is inefficient, unnecessarily expensive, and excessively burden-some to operate two separate banking businesses in jurisdictions that are close together (such as Maryland and the District, or Pennsylvania and New Jersey), and there is no doubt that consumers (businesses and individuals) will gain from what is essentially an internal corporate reorganization.
For the future, an OCC approval order should help national banks achieve a cohesive retail banking franchise in more than one state, with less regulatory and administrative burden.
State banks would have to change charters in order to use the statutory route that NationsBank and First Fidelity are using.
Bank holding companies with banks located in more than one state will want to examine the geographic location of their subsidiary banks and the available regulatory options for the conduct of core banking businesses more efficiently.
