By Clifford Weber, Esq.
Recent financial market turbulence, aggressive regulation and proposed legislation have consumed the attention of community bankers. When this crisis passes, community banks can emerge with renewed focus on customer service and franchise value. As bankers redial into a more orderly environment, they will face the challenges posed by lending, deposit taking, operations and other core functions, as well as strategic planning. Here, we look at branching law developments that can significantly affect New York banks’ growth plans.
Interstate Branching-Home Office Protection
New York-chartered commercial banks and savings banks may branch freely within the state, subject to the territorial limitation discussed below. New York-domiciled national banks enjoy the same intrastate branching rights, subject to the same limitation, under the National Bank Act and the Office of the Comptroller of the Currency’s regulations. Federal savings associations are not subject to New York branching laws and may branch without restriction within New York under the Home Owners Loan Act and the Office of Thrift Supervision’s regulations.
The New York Banking Law prohibits New York-chartered commercial banks and savings banks from establishing a branch in a city or village with a population of 50,000 or less in which is located the principal office of a New York-chartered commercial bank or a national bank, unless that bank is a bank holding company as defined in the banking law. This “home office protection” (HOP) statute effectively insulates from competition banks headquartered in small communities.
The banking law authorizes New York chartered commercial banks and savings banks to branch into other states. Likewise, as a result of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, national banks with their principal offices in New York may establish de novo branches in other states having laws that expressly permit de novo branching by out-of-state banks. As with intrastate branching, under preemption principles, federal thrifts may branch across state lines without regard to state laws.
Following Riegle-Neal’s enactment, a number of states passed laws permitting de novo interstate branching by out of state banks on a reciprocal basis. These laws permit an out-of-state bank to establish branches within their borders if the laws of the out-of-state bank’s home state provide reciprocal interstate branching rights to banks chartered in the target state. In 2009, New York enacted this kind of statute, Section 223-b of the banking law. The New York Banking Department (NYBD) believed that this law would enhance the competitiveness of New York banks by enabling them to branch de novo into states with reciprocal statutes. Prior to enactment of this law, New York banks could only acquire interstate branches through acquisition transactions.
Unfortunately, HOP has thwarted the intent of New York’s interstate branching law. Because HOP imposes restrictions on branching in New York that do not exist in other states, several states with reciprocity statutes, including Connecticut, Pennsylvania and Virginia, have concluded that New York law does not afford to their banks branching rights that are substantially equal to the rights that New York banks would enjoy in those states. These states’ financial regulators have found, with varying degrees of formality, that Banking Law Section 223-b is not reciprocal, and that New York banks therefore may not open de novo branches within their borders.
Policymakers have long debated HOP’s merits, but whether one agrees with its protective purpose or opposes it as anti-competitive, HOP clearly disadvantages New York banks and New York-based national banks seeking to reach beyond stagnant or declining markets through interstate branching. HOP does not, however, stop New York banks from acquiring out of state branches, including those located in Connecticut, Massachusetts and other states with reciprocity requirements for branch acquisitions. This result obtains because the NYBD has interpreted the HOP statutes to be inapplicable to branch acquisitions (as opposed to de novo branching) in protected communities. While branch purchases can be more costly and complex than de novo branching, they do enable New York institutions to establish a beachhead in other states without having to acquire a whole bank.
In March of this year, the NYBD issued a notable legal interpretation to a New York-based national bank regarding mobile, or messenger service, branching in New York. The OCC had approved as mobile branches vans operating within specified distances of the bank’s brick and mortar branches, from which the bank furnished deposit and lending services. The NYBD’s opinion was required because under the McFadden Act of 1927, as expressed in the National Bank Act, state law governs national banks’ branching powers. The opinion thoroughly reviews federal and state branching law and is based on three main points.
First, the National Bank Act authorizes a national bank to establish a branch at any point within its home state “…if such establishment and operation are at the time authorized to State banks by the statute law of the State in question by language specifically granting such authority affirmatively and not merely by implication or recognition.” Second, as interpreted by the federal courts, state law governs not only where and when a national bank branch may be established, but also the type and method of branching permitted. Third, these rules reflect the McFadden Act’s overriding policy of competitive equality between state and national banks.
Applying these principles, the NYBD explained that the New York branching statute does not mention mobile branching, which is why, in prior opinions, it has required separate branch licensure for each location served by a mobile facility. The NYBD then reasoned that the banking law’s silence on mobile branching does not satisfy the federal requirement for a specific, affirmative grant of authority for branching. It therefore concluded that the banking law does not permit New York-chartered banks to operate messenger service branches freely throughout a geographic area and consequently, that national banks may not so branch in New York. The OCC has not yet reacted to this opinion.
These branching developments attest that the dual banking system does not foster painless legal analysis. Two centuries of compromise and politics, not logic, have created the present legal framework. While the balancing of state and federal bank regulatory power and the idea of a level playing field ring true in theory, in practice they produce a complicated overlay of laws that can frustrate business planning and arrest growth. But experience has shown that with imaginative thinking, banks can successfully navigate this thicket and achieve their goals.
Clifford Weber is a partner in the White Plains office of Hinman, Howard & Kattell, LLP. His practice focuses on regulatory, corporate, securities, advisory and transactional work for financial institutions. His clients include commercial banks, thrift institutions and their holding companies, among others. He can be reached at (914) 694-4102 or via e-mail at email@example.com.