96-2

September 13, 1996

Re: Proposed Merger of ________ With and Into ________, National Association

Dear M ________:

Thank you for sending us a copy of the application (the “Proposal” or “Application”) of ________, National Association (“________” or “Applicant”) for approval to merge its affiliate, (“________”).

The Superintendent of Banks of the State of California hereby objects to the Proposal to the extent that ________, as the bank surviving the merger, proposes to retain the branch office of ________ located in Los Angeles, California (the “LA Branch”).

The basis of our objection is that retention of the LA Branch by ________ would violate Section 3824(a)(3) of the California Financial Code (hereinafter cited as the “Financial Code”). Section 3824(a)(3) embodies the election by California to opt-in early under federal statutes (12 U.S.C. Section 1831u) enacted in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”) which authorize interstate branching. Section 3824(a)(3) provides that an out-of-state bank may establish or maintain a branch in California only by means of merging with or acquiring substantially all of the business of a California bank (See Financial Code Section 126.5(a)) or a California industrial loan company (See Financial Code Section 3800(d)). The Proposal involves the merger of a national bank and a federal savings association, both of which maintain their main offices in Florida. In conformance with Riegle-Neal, Financial Code Section 3824 permits an out-of-state bank to branch into California neither through the acquisition of a savings association nor through the acquisition of a financial institution which maintains its main office outside of California. Accordingly, the proposal of to retain the LA Branch is prohibited by Section 3824(a)(3).

The Memorandum of Law appended as Attachment O to the Application fails to expressly address the interstate branching restrictions in California law. Instead, Applicant takes the position that, although the Oakar Amendment provides no express branching authority, if a merger of a savings association with a national bank is ________ described in paragraph (1) or (2) and in accordance with federal law, the law of the domicile of the foreign (other state) bank, and this chapter.

(b) This section constitutes:

(1) An election to permit early interstate merger transactions pursuant to Section 44(a) (3) of the Federal Deposit Insurance Act (12 U. S.C. Sec. 1831 u(a) (3)). (2) An express prohibition against interstate branching through the acquisition of a branch business unit located in this state of a California bank or California industrial loan company (without acquisition of the whole business unit of the California bank or California industrial loan company) pursuant to Section 44(a)(4) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1831u(a)(4)).

(3) An express prohibition against interstate branching through de novo establishment of California branch offices pursuant to Section 5155 of the Revised Statutes (12 U.S.C. Sec. 36) or Section 18(d) of the Federal Deposit Insurance Act (12 U.S.C. Sec. 1828(d)).”

Permissible under the Oakar Amendment (12 U.S.C. 1815(d)(3)) the right of the surviving national bank to retain the savings associations branches, wherever located, is implied, and any state law to the contrary is preempted.

Applicant’s theory of implied branching powers finds no support in law. The Supreme Court in First National Bank of St. Louis v. Missouri, 263 U.S. 640 (1924) decisively rejected the notion that the power to branch is an incidental or implied power of a national bank. The power of a national bank to branch must be expressly provided by statute. The McFadden Act, 12 U.S.C. Section 36, provides the exclusive authority for branching by a national bank. This is evidenced by the introductory language to 12 U.S.C. Section 36, which states, “[t]he conditions upon which a national banking association may retain or establish and operate a branch or branches are the following ….” Further, the power of a national bank to merge is separate and distinct from its power to branch. This is evidenced by the fact that such powers are set forth in different sections of federal law which make reference to each other. For example, 12 U.S.C. Section 1831u provides for approval by the appropriate federal regulator of mergers of banks with different home states, while 12 U.S.C. Section 36(e) provides for the retention and operation of interstate branches by a national bank which survives a merger under Section 1831u.

Any implication that the Oakar Amendment provides a source of authority for interstate branching is refuted by the related provisions of 12 U.S.C. Section 21 5c. Among other things, 12 U.S.C. Section 21 5c provides a general grant of authority for a national bank to acquire another insured depository institution, subject to the Oakar Amendment (12 U.S.C. Section 1815(d)(3)) and 12 U.S.C. Section 1828(c). Subsection (c) of 12 U.S.C. Section 21 5c states that 12 U.S.C. Section 21 5c may not be construed to grant any power to a national bank that is “not otherwise authorized under this chapter or any other law governing the powers of national banks.” Subsection (c) was clearly intended to prevent a national bank’s general authority to merge under any provision of federal law, including the Oakar Amendment, from being used as a device by which the national bank could assume powers, including branching powers, not clearly conferred by law.

Applicant cites no cases which establish its supposed implied power to branch interstate. In support of the implied power theory, Applicant cites cases decided by the OCC involving two general patterns that are factually distinguishable from the present case and which, in some cases, espouse theories of implied branching powers that have been rejected by reviewing courts.

The first group of cases involves retention of branches under 12 U.S.C. Section 36(b)(2)(A) or (B) by a national bank which survives a merger with another bank. The present case does not involve a merger between banks. Therefore, 12 U.S.C. Section 36(b)(2)(A) and (B) are inapplicable.

The second group of cases involves the right of a national bank under 12 U.S.C. Section 30 to relocate its main office a distance of not more than 30 miles, which includes the right to relocate to a different state (the “30-mile rule”). The OCC has taken the position that the 30-mile rule implies the right of a national bank which has relocated its main office across state lines to retain its branches in the state where the head office was formerly located. On two recent occasions, federal courts have rejected that position and have held that a national bank may not both relocate its main office across state lines and retain branches in the state where its main office was formerly located. See, Burke v. Ludwig, U.S. District Court for the District of Connecticut, Civil No. 3: 96 CVO 579 (AVC), slip opinion, August 23, 1996 (the “Connecticut Decision”), and Ghiglieri v. Ludwin, U.S. District Court of the Northern District of Texas, Dallas Division, Civil No. 3: 95-CV-2001-H, slip opinion, May 22, 1996. The Oakar Amendment no more implies interstate branching powers than does the 30-mile rule.

Riegle-Neal set up a comprehensive framework for authorization of interstate banking which provides the exclusive means for national and state banks to enter new states with interstate branches. With respect to mergers of national banks, Riegle-Neal added 12 U.S.C. Section 36(e)(1), which specifically provides that, effective June 1, 1997, a national bank may not acquire, establish or operate a branch in a state other than its home state unless the acquisition, establishment or operation thereof is authorized under Sections 36, 1823(f), 1823(k) or 1831 u of Title 12. The proposal of to acquire and operate the LA Branch qualifies under none of the provisions of federal law specified in Section 36(e)(1). It is not a merger between banks under 12 U.S.C. Section 1831u; it is not an assisted emergency interstate acquisition of a bank under 12 U.S.C. Section 1823(f); and it is not an emergency acquisition of a bank or savings association under Section 1823(k). Nor, as indicated above, does the Oakar Amendment imply that any other provision of 12 U.S.C. Section 36 authorizes a national bank to branch interstate through the acquisition of a savings association.

Riegle-Neal expressly permits interstate branching by a national bank through the acquisition of a savings association only in the event that the acquisition is approved pursuant to the emergency acquisition provisions of 12 U.S.C. Section 1 823(k). If the power of a national bank to branch interstate were implied from the more general authority to approve the merger of a national bank and a savings association under the Oakar Amendment, the specific authority for interstate branching in the event of an emergency acquisition of a savings association under 12 U.S.C, Section 1823(k) would become superfluous, and the carefully crafted limitations on interstate branching in Riegle-Neal could be circumvented to such an extent as to effectively render them a nullity. The theory of implied powers advanced by Applicant therefore offends the well-settled rule of statutory construction that all parts of statute are to be given effect. See, e.g., Weinberaer v. Hynson. West Cott & Dunnina. Incoroorated, 412 U.S. 609, 633 (1973).

Applicant argues that even assuming the limitations on interstate branching imposed by 12 U.S.C. Section 36(e)(1 ) prohibit its retention of the LA Branch, those limitations do not become effective, by their terms, until June 1, 1997. Applicant contends that prior to that time, authority for it to branch interstate through retention of the LA Branch is implied from its authority to merge with a savings association that has interstate branches. However, as indicated above, such implied powers existed prior to the enactment or the effective date of Riegle-Neal. Indeed, the Supreme Court has commented that in the form it took prior to Riegle-Neal, the McFadden Act entirely prohibited interstate branching by national banks. See, Northeast Bancorc v. Board of Governors, 472 U.S. 159,169 (1985). Moreover, the interstate branching limitations in Riegle-Neal are currently effective. See, Connecticut Decision, p.12.

In summary, Applicant has failed to cite clear authority in support of the contention that it may retain the LA Branch in connection with the Proposal. The authority cited is factually inapplicable to the proposed transaction, and it is based on theories of implied branching powers which have not found favor with the courts. In our view, retention of the LA Branch by Applicant would be contrary to law. We, therefore, urge the OCC to deny the Application to the extent that it requests approval for to retain the LA Branch.

Very truly yours,

CONRAD W. HEWITT
Superintendent of Banks

By

THOMAS M. LOUGHRAN
Senior Counsel

TML:lca