07-2
07-2
September 6, 2007
Re: __________ –
Impound Account Services for California De Novo Banks
Dear __________:
This follows your letter of August 28, 2007, and confirms our earlier telephone conversation.
As we discussed, I am in agreement with the arguments set forth in your letter regarding the ability of an out-of-state bankers’ bank to establish an impound account to accept subscription application funds for a de novo California bank attempting to complete its organizational requirements. I have reached that conclusion despite the fact that the regulation cited within your letter appears to restrict the acceptance of such funds to impound accounts established by banks headquartered or formed in the state of California.
It must be remembered that the regulations in question were adopted before the California Interstate Banking and Branching Act of 1995 (Assembly Bill No. 1482; Chapter 480 of the Statutes of 1995) (the “Interstate Act”) became law. Those regulations have not been updated to reflect the changes in the statutes brought about by the Interstate Act. As you have persuasively argued, the Interstate Act intended to place out-of-state banks operating within the state of California on an equal footing with California based financial institutions. The continued restriction on out-of-state banks accepting subscription funds would validate the spirit of the Interstate Act.
The reason the current regulation focuses on in state banks is that the Commissioner must have the ability to control the access to, and distribution of, the funds held in an impound account. When banks were forbidden to conduct interstate business, that restriction made sense. To ensure that the Commissioner had jurisdictional control of the funds, the funds had to remain in a California bank. While the reasoning regarding control remains intact, the formative nature of the bank has become irrelevant. Thus, if the funds remain within the state and under the Commissioner’s control, the jurisdictional issue is satisfied.
There is no logic in the argument that out-of-state banks should not be able to accept California based deposits because the Commissioner of Financial Institutions (“Commissioner”) does not have the same regulatory authority over those banks that he or she has over institutions licensed or chartered by the Commissioner. Under the current regulations, an impound account for a de novo bank may be opened in a national bank headquartered in California. It may be argued that the Commissioner has
even less regulatory authority over a national bank and less influence over the Office of the Comptroller of the Currency than the Commissioner has with regard to a foreign (other state) state bank and his or her counterpart state bank supervisor. Accordingly, if a national bank headquartered in this state may take such deposits, it follows that an out-of-state bank authorized to operate in California should also be able to take such deposits.
In sum, provided that the impound account contract specifically states that the Commissioner has exclusive power over the funds held in that account, and if the funds remain within the borders of California so as to reinforce the jurisdiction of the Commissioner over such funds, it is of little legal significance where the insured financial institution is headquartered. For the reasons stated above, I am in agreement with the proposal set forth in your letter, subject to the caveats set forth above.
If you have any questions or comments regarding this matter, please feel free to contact me at (916) 322-1570.
Very truly yours,
KENNETH SAYRE-PETERSON
Acting General Counsel
KSP95:pjp
August 28, 2007
Kenneth Sayre-Peterson, Esq.
Acting General Counsel
California Department of Financial institutions
1810 13th Street
Sacramento, CA 95811-7118
Re: __________
Deposit Account Services for California De Novo Banks
Dear Ken:
This firm represents __________ of Dallas, Texas (“__________”). This letter will confirm our telephone conversations on Thursday, August 23, 2007, in which I described to you the current status of __________ and its intention to offer deposit account services to organizing groups that are forming California de novo banks. These deposit account services will include (i) pre-opening funds accounts as required by Title 10 of the California Code of Regulations (“CCR”), Sections 10.3405 and 10.3480, and (ii) services in connection with the impound of subscription funds received from prospective de novo bank investors. The purpose of this letter is to provide you our analysis of __________’s eligibility to maintain such accounts and to confirm __________’s willingness to conform its practices to the requirements of the CCR related to such accounts, as well as any other requirements of the California Department of Financial Institutions (“Department”).
Background of TIB
__________ was chartered by the State of Texas on January 21, 1982 as an independent bankers bank. Its deposits are insured by the Federal Deposit Insurance Corporation and it is a member of the Federal Reserve. __________ is owned by over 450 independent community banks and serves more than 1300 customer banks located in 46 states from offices in Texas, California, Arizona, Washington, New Mexico, Oklahoma, Louisiana, Kansas and Georgia. For CRA purposes, __________ is a limited purpose bankers bank in that it meets the criteria set forth in the CRA regulations as to its ownership and the customers it serves. __________ had approximately $1.7 billion in total assets, total loans of approximately $700 million and total deposits or approximately $467 million as of June 30, 2007.
In June 2002, __________accepted its first California bank as a __________ shareholder. Commencing in May 2003, __________ opened and maintained a California loan production office in Huntington Beach. By December 2006, __________ had 20 California banks as shareholders. At that point, __________ believed that it could best serve its shareholders and growing California customer base by offering services through a full service branch.
On March 23, 2007, __________ executed a definitive agreement to acquire by merger __________, a national banking association headquartered in the state of California that was more than five years old, from __________. That transaction was consummated on June 18, 2007 at which time __________ was merged with and into __________ with __________ as the surviving bank. Following the merger, the Texas Department of Banking and the Federal Reserve Bank of Dallas authorized __________ to maintain a branch in Huntington Beach, California. Since that time__________ has operated its former loan production office in Huntington Beach as a full service branch.
Account Services for California De Novo Organizing Groups
__________ intends to establish both pre-opening funds accounts and accounts for the impound of subscription funds for groups that are involved in the organization of de novo California banks. Pre-opening funds accounts are governed by CCR § 10.3405 for accounts established prior to incorporation and by § 10.3480 for accounts established after incorporation. In each instance the applicable regulation requires that funds must be deposited “in a deposit account with a California commercial bank.” CCR § 10.115(a) limits the term “a California commercial bank” to banks formed under the laws of the state of California Impound accounts for deposit of funds received from subscribers for shares in a bank’s initial stock offering are established pursuant to requirements set forth in a letter the Department sends to de novo bank organizers to inform the organizers of the conditions of approval of their application to organize the bank. These letters typically include provisions related to the establishment of impound accounts, as follows:
II. Impound Account
All funds received from the sale of the Bank’s stock will be place in an impound account with a bank authorized to do business in California. [emphasis added] The Depositary Agreement between the Bank and the depositary must specifically provide that the funds in the impound account are subject to the order of the Commissioner.
Two observations concerning the Department’s language are appropriate here. The first is that the language related to the establishment of an impound account for subscription funds does not require that the bank of deposit be organized under California law or that it be a national bank headquartered in California. Second, by the terms of the impound account agreement that will govern the impound of funds received from subscribers for shares, the Commissioner will have authority over the release of funds from the account. An example of language as approved by the Department that has been used in numerous agreements establishing the impound account is as follows:
All funds received from the issuance of shares of Bank’s stock will be placed in an impound account with Impound Agent, to be held by Impound Agent subject to the order of the Regulatory Agency, and shall not become the property of or be released to Bank unless and until otherwise released to Bank by order of the Regulatory Agency. [Note: “Regulatory Agency” is used in the agreement as the defined term for the California Department of Financial Institutions.]
Clearly this language or any similar language that may be approved by the Department establishes the right of the Department to oversee the distribution of the funds from an impound account.
Legal Analysis
We are of the view that __________ is legally enabled to maintain both pre-opening funds accounts and impound accounts established for deposit of investor funds. Our conclusions are based on provisions of the California Financial Code and federal law.
As stated above, any group organizing a proposed California state-chartered bank is required to open and administer a deposit account into which pre-opening funds are deposited as provided in CCR §§ 10.3405 and 10.3480. Prior to incorporation of the bank records of those funds must be maintained by the organizing group in accordance with CCR § 10.3406, and reports must be presented to the Department as required by § 10.3407. The disposition of funds deposited in that account is governed by § 10.3408. Once the organizing group is given permission to go into organization, the deposit account must be established and managed in accordance with CCR §§ 10.3480 through 10.3483. The administrative requirements for the pre- and post-incorporation accounts are very similar. As is noted above, both § 10.3405 and § 10.3480 contain language that obligates the organizers to place the deposits “with a California commercial bank.”
C.C.R. § 10.1115 may be viewed as creating some confusion as to the ability of an out-of-state bank which maintains a branch in California to be the depositary of pre-opening funds. The language of § 10.1115 states:
(a) “California” when used with respect to a bank means, in the case of a state bank, a bank which is organized under the laws of the State of California and, in the case of a national bank, a national bank which maintains its head office in the State of California.
While the history and timing of the quoted section is not clear from the information included in Barclays California Code of Regulations, we submit that the language of § 10.115 is subject to subsequent changes in both California law and federal law. Specifically, California Financial Code § 3827 expressly permits branches of foreign (other state) banks maintaining a branch office in California to conduct its business in California “as if the bank were a California state commercial bank.” The statute lists several provisions of the Financial Code pursuant to which an out of state bank with a branch in California is to be treated as if it is a California commercial bank. Included in this list, among other relevant provisions, is Chapter 7 of the Financial Code, which governs the acceptance of deposits. Because pre-opening fund accounts are deposit accounts, it is clearly the express intention of § 3827 that an out of state bank which maintains a branch in California consistent with the other provisions of Financial Code Chapter 22 must be viewed by the Department as if the bank were a California state commercial bank.
We believe that this view of § 3827 is consistent with the requirements of the Riegel Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegel Neal”). Riegel Neal prohibits a state from creating or enforcing a law that in application “would have discriminatory effect” on the out of state banking branch (12 USC § 36(f)(A)(ii) as applied to out of state banks by 12 USC § 1831a(j)(2)). The express language of § 1831a(j)(2) states:
An insured State bank that establishes a branch in a host State may conduct any activity at such branch that is permissible under the laws of the home State of such bank, the extent such activity is permissible either for a bank chartered by the host State (subject to the restrictions in this section) or for a branch in the host State of an out-of-State national bank.
As such California law must be applied in the same manner to a California branch of an out of state bank as it would be to a California state-chartered institution.
While California has a direct interest in assuring that pre-opening funds are properly administered, we submit that the CCR sections applicable to organizing groups provide this protection. The requirements of the CCR provisions cited above apply to the manager of the pre-opening funds account and not directly to the depositary bank. As such, no justifiable distinction can be made between a branch of a foreign (other state) bank and a California chartered commercial bank in maintaining such an account.
With respect to the deposit of funds into an impound account, we submit that there are no provisions in CCR or the Financial Code restricting the depository to a California commercial bank. In fact, the Department’s standard communication requires solely that the funds be deposited in “an impound account with a bank authorized to do business in California.” Clearly, under both state and federal law, an out of state bank maintaining a branch in California as permitted under Chapter 22 of the Financial Code is “authorized to do business in California.” Moreover, the authority of the Department to both govern the terms of the impound agreement and the requirement that the impound agreement provide for direct oversight of the account and authority to direct disbursements by the Department is sufficient for the Department to assure itself that the stock subscription funds will be solely used in furtherance of the objectives of the Department and the expectations of subscribers for de novo bank shares.
Finally, as you requested during our telephone conversation, __________ undertakes that it will hold all deposits for pre-opening funds and for impound accounts in its branch located in Huntington Beach, California. Additionally, as you further requested, __________ will only disburse funds from any impound account in accordance with the restrictions set forth in an impound agreement in form acceptable to the Department and as ordered by the Department.
Please let me know if you have any further questions or comments concerning the foregoing.
Sincerely yours,