Banking Interpretations

NYSBL Sec. 142-a and 222 and 223 and 223-a

February 15, 2002 [ ]

Dear [ ]:

In your June 9, 2002 correspondence to Deputy Superintendent and Counsel Sara Kelsey, you seek the Department's confirmation that a proposed interstate branching transaction by your client, [ ] ("Buyer") will not violate the New York Interstate Branching Act (the "NYIBA") or New York Banking Law generally. For the reasons discussed below, we believe that your client's proposed transaction would be consistent with New York Banking Law.

Buyer, a national bank headquartered in [ ] Pennsylvania, seeks to purchase certain assets and assume certain deposits and other liabilities from the Branch of [ ] Community Bank, a federally-chartered savings bank headquartered in [ ] New York ("Seller"). Deposits of approximately six million dollars would be assumed by Buyer. In addition, the remainder of a 5-year premises lease, which expires December 31, 2002, that was entered into by Seller's predecessor, would be assumed by Buyer.

As we understand it, in order to structure the transaction so as to be permissible under federal banking law, Buyer's parent holding company will form an interim national bank, headquartered at Seller's Branch address, which will acquire the assets and liabilities from the Branch, and immediately thereafter the interim national bank will be merged with and into Buyer, leaving Buyer with the [ ] New York branch location. Apparently, this is necessary because the federal Bank Merger Act does not contemplate or accommodate acquisition transactions between a national bank and a federal savings association directly. The Bank Merger Act does contemplate the formation of interim banks, or shell banks, to facilitate interstate transactions, however. If a shell bank is utilized, the Bank Merger Act provides that such bank is deemed to have been in existence for the same period of time as the bank or branch to be acquired. (12 U.S.C. 1831u(a)(6)). This attribution rule apparently exists to ensure that a shell bank structure is not used to circumvent any relevant state age limit rules on interstate branching transactions.

Turning to whether the proposed transaction would be consistent with the NYIBA, we note initially that, like the federal Riegle-Neal Interstate Branching Act, the NYIBA did not in specific terms deal with federal savings associations when it was enacted. Generally, the NYIBA provides that an out-of-state bank that does not operate a branch in New York may maintain one or more branches located in New York acquired by means of an acquisition transaction. (N.Y. Banking Law § 223).

Buyer clearly meets the definition of "out-of-state bank" that would be permitted to branch into New York under the NYIBA. "Out-of-state bank" includes both an "out- of-state state bank" and an "out-of-state national bank". (N.Y. Banking Law § 222). Buyer is an out-of-state national bank. An "acquisition transaction" is defined in the NYIBA to mean any merger, consolidation, or purchase of assets and assumption of liabilities of all or part of a banking institution. (N.Y. Banking Law § 222(7)). Although the term "banking institution" is not defined for purposes of the NYIBA, it could be interpreted to include a federal savings association. The NYIBA was enacted to facilitate interstate transactions among insured institutions, and it would seem incongruous to disallow federal savings associations from being selling institutions in such transactions, particularly since federal savings associations are permitted to branch into New York without restriction. The fact that Buyer proposes to acquire a single branch of Seller in the transaction is also consistent with the terms of the NYIBA, as the legislative history of the NYIBA clearly indicates that a single branch or branches of an institution would constitute a sufficient "part of a banking institution" to be acquired in an acquisition transaction.

As noted above, the Bank Merger Act attributes to the interim bank the age of the bank or branch to be acquired. In this case, Seller's Branch is approximately 4 years and 2 months old; accordingly, this would be the age of the interim national bank. This will only be relevant, however, if the transaction involves a step in which a state age limitation provision will be relevant. In this case, the Buyer's transaction involves merging the interim national bank out of existence.

The NYIBA does contain an age limitation provision designed to prevent transactions structured so as to circumvent New York's prohibition on de novo interstate branching as a means of entry into New York. However, the provision is limited in its applicability. Specifically, Banking Law § 223-a provides, in relevant part:

"An acquisition transaction in which the resulting or consolidated corporation is an out-of-state bank is hereby prohibited if the effect thereof is to terminate the separate existence of a New York bank that has been chartered less than five years, unless the Superintendent finds that the New York bank to be acquired was not chartered directly or indirectly by the out-of-state bank, its officers, directors or principal stockholders, or any other person in a position to exercise control over such out-of-state bank; provided, however [ the prohibition in this section does not apply if the New York bank to be acquired is troubled or if the acquiring bank already has a branch in New York]."

Likewise, when the NYIBA was enacted, New York's Bank Holding Company Act (N.Y. Banking Law §§ 141 et. seq.) was amended to include a similar provision. Section 142- a(2) provides, in relevant part:

"No out-of-state bank holding company which has acquired control of a banking institution that has been chartered for less than five years may cause it to be merged into, or to have all or a substantial part of its assets acquired by, an out-of-state bank [as defined in the NYIBA], unless the Superintendent finds that the banking institution being acquired was not chartered directly or indirectly by the bank holding company, its officers, directors or stockholders...."

Section 223-a is not directly applicable in this transaction because the effect of Buyer's transaction is not to terminate the separate existence of a New York bank (which is defined in Banking Law Section 222 to mean a New York-chartered institution). Section 142-a(2) is implicated because the interim national bank constitutes a "banking institution" established by an out-of-state bank holding company. ("Banking institution" is defined in Banking Law Section 141 to include a national bank for purposes of New York's Bank Holding Company Act). However, the fact that the interim national bank is attributed an age of less than five years is not relevant for purposes of analysis under the NYIBA.

Although the Bank Merger Act attribution rule is designed to assign an age to a shell bank so that state age rules will not be violated, the age limitation provision in Section 223-a of the NYIBA would not be violated if one were to analyze the substance of the underlying transaction. Buyer is purchasing Seller's Branch, which Branch is less than five years old. New York's age limitation statute is only designed to prohibit a transaction the effect of which is to terminate a bank charter which is less than five years old. In other words, the age limitation provision is not implicated if an out-of-state bank acquires a branch, even if the branch is less than five years old (assuming that the branch has been in existence as a legitimately operating branch). Thus, since the NYIBA would not prohibit Buyer's acquisition of Seller's less than five year old Branch if acquired directly, we would not view Section 223-a or Section 142-a(2) as being applicable in this case, even though the Bank Merger Act would deem the interim national bank to be less than five years old.

Accordingly, the Department would interpose no objection to the proposed transaction under the NYIBA.

We trust that this is helpful.


Rosanne Notaro 
Assistant Counsel

Cc: Deputy Kursky - Community Financial Services Division

Madonna Starr, Esq. 
Office of the Comptroller of the Currency - NY Office