12 CFR 362.4 – Subsidiaries of insured State banks
(a) Prohibition. A subsidiary of an insured State bank may not engage as principal in any activity that is not of a type permissible for a subsidiary of a national bank, unless it meets one of the exceptions in paragraph (b) of this section.
(b) Exceptions—(1) Consent obtained through application. A subsidiary of an insured State bank may conduct otherwise prohibited activities if the bank obtains the FDIC’s prior written consent and the insured State bank meets and continues to meet the applicable capital standards set by the appropriate Federal banking agency. Consent will be given only if the FDIC determines that the activity poses no significant risk to the Deposit Insurance Fund. Applications for consent should be filed in accordance with § 303.121 of this chapter and will be processed under § 303.122(b) of this chapter. Approvals granted under § 303.122(b) of this chapter may be made subject to any conditions or restrictions found by the FDIC to be necessary to protect the Deposit Insurance Fund from risk, to prevent unsafe or unsound banking practices, and/or to ensure that the activity is consistent with the purposes of Federal deposit insurance and other applicable law.
(2) Grandfathered insurance underwriting subsidiaries. A subsidiary of an insured State bank may:
(i) Engage in grandfathered insurance underwriting if the insured State bank or its subsidiary on November 21, 1991, was lawfully providing insurance as principal. The subsidiary may continue to provide the same types of insurance as principal to the residents of the State or states in which the bank or subsidiary did so on such date provided that:
(A)(1) The bank meets the capital requirements of paragraph (e) of this section; and
(2) The subsidiary is an “eligible subsidiary” as described in paragraph (c)(2) of this section; or
(B) The bank submits an application in compliance with § 303.121 of this chapter and the FDIC grants its consent under the procedures in § 303.122(b) of this chapter.
(ii) Continue to provide as principal title insurance, provided the bank was required before June 1, 1991, to provide title insurance as a condition of the bank’s initial chartering under State law and neither the bank nor its parent holding company undergoes a change in control.
(iii) May continue to provide as principal insurance which is reinsured in whole or in part by the Federal Crop Insurance Corporation if the subsidiary was engaged in the activity on or before September 30, 1991.
(3) Majority-owned subsidiaries’ ownership of equity investments that represent a control interest in a company. The FDIC has determined that investment in the following by a majority-owned subsidiary of an insured State bank does not represent a significant risk to the Deposit Insurance Fund:
(i) Equity investment in a company engaged in real estate or securities activities authorized in paragraph (b)(5) of this section if the bank complies with the following restrictions and files a notice in compliance with § 303.121 of this chapter and the FDIC processes the notice without objection under § 303.122(a) of this chapter. The FDIC is not precluded from taking any appropriate action or imposing additional requirements with respect to the activity if the facts and circumstances warrant such action. If changes to the management or business plan of the company at any time result in material changes to the nature of the company’s business or the manner in which its business is conducted, the insured State bank shall advise the appropriate regional director (DSC) in writing within 10 business days after such change. Investment under this paragraph is authorized if:
(A) The majority-owned subsidiary controls the company;
(B) The bank meets the core eligibility criteria of paragraph (c)(1) of this section;
(C) The majority-owned subsidiary meets the core eligibility criteria of paragraph (c)(2) of this section (including any modifications thereof applicable under paragraph (b)(5)(i) of this section), or the company is a corporation meeting such criteria;
(D) The bank’s transactions with the majority-owned subsidiary, and the bank’s transactions with the company, comply with the investment and transaction limits of paragraph (d) of this section;
(E) The bank complies with the capital requirements of paragraph (e) of this section with respect to the majority-owned subsidiary and the company; and
(F) To the extent the company is engaged in securities activities authorized by paragraph (b)(5)(ii) of this section, the bank and the company comply with the additional requirements therein as if the company were a majority-owned subsidiary.
(ii) Equity securities of a company engaged in the following activities, if the majority-owned subsidiary controls the company or the company is controlled by insured depository institutions, and the bank meets and continues to meet the applicable capital standards as prescribed by the appropriate Federal banking agency. The FDIC consents that a majority-owned subsidiary may conduct such activity without first obtaining the FDIC’s consent. The fact that prior consent is not required by this subpart does not preclude the FDIC from taking any appropriate action with respect to the activity if the facts and circumstances warrant such action:
(A) Any activity that is permissible for a national bank, including such permissible activities that may require the company to register as a securities broker;
(B) Acting as an insurance agency;
(C) Engaging in any activity permissible for an insured State bank under § 362.3(b)(2)(iii) to the same extent permissible for the insured bank thereunder, so long as instruments held under this paragraph (b)(3)(ii)(C), paragraph (b)(7) of this section, and § 362.3(b)(2)(iii) in the aggregate do not exceed the limit set by § 362.3(b)(2)(iii);
(D) Engaging in any activity permissible for a majority-owned subsidiary of an insured State bank under paragraph (b)(6) of this section to the same extent and manner permissible for the majority-owned subsidiary thereunder; and
(4) Majority-owned subsidiary’s ownership of certain securities that do not represent a control interest—(i) Grandfathered investments in common or preferred stock and shares of investment companies. Any insured State bank that has received approval to invest in common or preferred stock or shares of an investment company pursuant to § 362.3(a)(2)(iii) may conduct the approved investment activities through a majority-owned subsidiary of the bank without any additional approval from the FDIC provided that any conditions or restrictions imposed with regard to the approval granted under § 362.3(a)(2)(iii) are met.
(ii) Bank stock. An insured State bank may indirectly through a majority-owned subsidiary organized for such purpose invest in up to ten percent of the outstanding stock of another insured bank.
(5) Majority-owned subsidiaries conducting real estate investment activities and securities underwriting. The FDIC has determined that the following activities do not represent a significant risk to the Deposit Insurance Fund, provided that the activities are conducted by a majority-owned subsidiary of an insured State bank in compliance with the core eligibility requirements listed in paragraph (c) of this section; any additional requirements listed in paragraph (b)(5)(i) or (ii) of this section; the bank complies with the investment and transaction limitations of paragraph (d) of this section; and the bank meets the capital requirements of paragraph (e) of this section. The FDIC consents that these listed activities may be conducted by a majority-owned subsidiary of an insured State bank if the bank files a notice in compliance with § 303.121 of this chapter and the FDIC processes the notice without objection under § 303.122(a) of this chapter. The FDIC is not precluded from taking any appropriate action or imposing additional requirements with respect to the activities if the facts and circumstances warrant such action. If changes to the management or business plan of the majority-owned subsidiary at any time result in material changes to the nature of the majority-owned subsidiary’s business or the manner in which its business is conducted, the insured State bank shall advise the appropriate regional director (DSC) in writing within 10 business days after such change. Such a majority-owned subsidiary may:
(i) Real estate investment activities. Engage in real estate investment activities. However, the requirements of paragraph (c)(2)(ii), (v), (vi), and (xi) of this section need not be met if the bank’s investment in the equity securities of the subsidiary does not exceed 2 percent of the bank’s tier one capital; the bank has only one subsidiary engaging in real estate investment activities; and the bank’s total investment in the subsidiary does not include any extensions of credit from the bank to the subsidiary, any debt instruments issued by the subsidiary, or any other transaction originated by the bank that is used to benefit the subsidiary.
(ii) Securities activities. Engage in the public sale, distribution or underwriting of securities that are not permissible for a national bank under section 16 of the Banking Act of 1933 (12 U.S.C. § 24 Seventh), provided that the insured state nonmember bank lawfully controlled or acquired the subsidiary and had an approved notice or order from the FDIC prior to November 12, 1999 and provided that the following additional conditions are, and continue to be, met:
(A) The state-chartered depository institution adopts policies and procedures, including appropriate limits on exposure, to govern the institution’s participation in financing transactions underwritten or arranged by an underwriting majority-owned subsidiary;
(B) The state-chartered depository institution may not express an opinion on the value or the advisability of the purchase or sale of securities underwritten or dealt in by a majority-owned subsidiary unless the state-chartered depository institution notifies the customer that the majority-owned subsidiary is underwriting or distributing the security;
(C) The majority-owned subsidiary is registered with the Securities and Exchange Commission, is a member in good standing with the appropriate self-regulatory organization, and promptly informs the appropriate regional director (DSC) in writing of any material actions taken against the majority-owned subsidiary or any of its employees by the State, the appropriate self-regulatory organizations or the Securities and Exchange Commission; and
(D) The state-chartered depository institution does not knowingly purchase as principal or fiduciary during the existence of any underwriting or selling syndicate any securities underwritten by the majority-owned subsidiary unless the purchase is approved by the state-chartered depository institution’s board of directors before the securities are initially offered for sale to the public.
(6) Real estate leasing. A majority-owned subsidiary of an insured State bank acting as lessor under a real property lease which is the equivalent of a financing transaction, meeting the lease criteria of paragraph (b)(6)(i) of this section and the underlying real estate requirements of paragraph (b)(6)(ii) of this section, does not represent a significant risk to the Deposit Insurance Fund. A majority-owned subsidiary may conduct this activity without first obtaining the FDIC’s consent, provided that the bank meets and continues to meet the applicable capital standards as prescribed by the appropriate Federal banking agency. The fact that prior consent is not required by this subpart does not preclude the FDIC from taking any appropriate action with respect to the activity if the facts and circumstances warrant such action.
(i) Lease criteria—(A) Capital lease. The lease must qualify as a capital lease as to the lessor under generally accepted accounting principles.
(B) Nonoperating basis. The bank and the majority-owned subsidiary shall not, directly or indirectly, provide or be obligated to provide servicing, repair, or maintenance to the property, except that the lease may include provisions permitting the subsidiary to protect the value of the leased property in the event of a change in circumstances that increases the subsidiary’s exposure to loss, or the subsidiary may take reasonable and appropriate action to salvage or protect the value of the leased property in such circumstances.
(ii) Underlying real property requirements—(A) Acquisition. The majority-owned subsidiary may acquire specific real estate to be leased only after the subsidiary has entered into:
(1) A lease meeting the requirements of paragraph (b)(6)(i) of this section;
(2) A legally binding written commitment to enter into such a lease; or
(3) A legally binding written agreement that indemnifies the subsidiary against loss in connection with its acquisition of the property.
(B) Improvements. Any expenditures by the majority-owned subsidiary to make reasonable repairs, renovations, and improvements necessary to render the property suitable to the lessee shall not exceed 25 percent of the majority-owned subsidiary’s full investment in the real estate.
(C) Divestiture. At the expiration of the initial lease (including any renewals or extensions thereof), the majority-owned subsidiary shall, as soon as practicable but in any event no less than two years, either:
(1) Re-lease the property under a lease meeting the requirement of paragraph (b)(6)(i)(B) of this section; or
(2) Divest itself of all interest in the property.
(7) Acquiring and retaining adjustable rate and money market preferred stock and similar instruments. The FDIC has determined it does not present a significant risk to the Deposit Insurance Fund for a majority-owned subsidiary of an insured State bank to engage in any activity permissible for an insured State bank under § 362.3(b)(2)(iii), so long as instruments held under this paragraph, paragraph (b)(3)(ii)(C) of this section, and § 362.3(b)(2)(iii) in the aggregate do not exceed the limit set by § 362.3(b)(2)(iii). A majority-owned subsidiary may conduct this activity without first obtaining the FDIC’s consent, provided that the bank meets and continues to meet the applicable capital standards as prescribed by the appropriate Federal banking agency. The fact that prior consent is not required by this subpart does not preclude the FDIC from taking any appropriate action with respect to the activity if the facts and circumstances warrant such action.
(c) Core eligibility requirements. If specifically required by this part or by FDIC order, any state-chartered depository institution that wishes to be eligible and continue to be eligible to conduct as principal activities through a subsidiary that are not permissible for a subsidiary of a national bank must be an “eligible depository institution” and the subsidiary must be an “eligible subsidiary”.
(1) A state-chartered depository institution is an “eligible depository institution” if it:
(i) Has been chartered and operating for three or more years, unless the appropriate regional director (DSC) finds that the state-chartered depository institution is owned by an established, well-capitalized, well-managed holding company or is managed by seasoned management;
(ii) Has an FDIC-assigned composite rating of 1 or 2 assigned under the Uniform Financial Institutions Rating System (UFIRS) (or such other comparable rating system as may be adopted in the future) as a result of its most recent Federal or State examination for which the FDIC assigned a rating;
(iii) Received a rating of 1 or 2 under the “management” component of the UFIRS as assigned by the institution’s appropriate Federal banking agency;
(iv) Has a satisfactory or better Community Reinvestment Act rating at its most recent examination conducted by the institution’s appropriate Federal banking agency;
(v) Has a compliance rating of 1 or 2 at its most recent examination conducted by the institution’s appropriate Federal banking agency; and
(vi) Is not subject to a cease and desist order, consent order, prompt corrective action directive, formal or informal written agreement, or other administrative agreement with its appropriate Federal banking agency or chartering authority.
(2) A subsidiary of a state-chartered depository institution is an “eligible subsidiary” if it:
(i) Meets applicable statutory or regulatory capital requirements and has sufficient operating capital in light of the normal obligations that are reasonably foreseeable for a business of its size and character within the industry;
(ii) Is physically separate and distinct in its operations from the operations of the state-chartered depository institution, provided that this requirement shall not be construed to prohibit the state-chartered depository institution and its subsidiary from sharing the same facility if the area where the subsidiary conducts business with the public is clearly distinct from the area where customers of the state-chartered depository institution conduct business with the institution. The extent of the separation will vary according to the type and frequency of customer contact;
(iii) Maintains separate accounting and other business records;
(iv) Observes separate business entity formalities such as separate board of directors’ meetings;
(v) Has a chief executive officer of the subsidiary who is not an employee of the institution;
(vi) Has a majority of its board of directors who are neither directors nor executive officers of the state-chartered depository institution;
(vii) Conducts business pursuant to independent policies and procedures designed to inform customers and prospective customers of the subsidiary that the subsidiary is a separate organization from the state-chartered depository institution and that the state-chartered depository institution is not responsible for and does not guarantee the obligations of the subsidiary;
(viii) Has only one business purpose within the types described in paragraphs (b)(2) and (b)(5) of this section;
(ix) Has a current written business plan that is appropriate to the type and scope of business conducted by the subsidiary;
(x) Has qualified management and employees for the type of activity contemplated, including all required licenses and memberships, and complies with industry standards; and
(xi) Establishes policies and procedures to ensure adequate computer, audit and accounting systems, internal risk management controls, and has necessary operational and managerial infrastructure to implement the business plan.
(d) Investment and transaction limits—(1) General. If specifically required by this part or FDIC order, the following conditions and restrictions apply to an insured State bank and its subsidiaries that engage in and wish to continue to engage in activities which are not permissible for a national bank subsidiary.
(2) Investment limits—(i) Aggregate investment in subsidiaries. An insured state bank’s aggregate investment in all subsidiaries conducting activities subject to this paragraph (d) shall not exceed 20 percent of the insured State bank’s tier one capital.
(ii) Definition of investment. (A) For purposes of this paragraph (d), the term “investment” means:
(1) Any extension of credit to the subsidiary by the insured State bank;
(2) Any debt securities, as such term is defined in part 344 of this chapter, issued by the subsidiary held by the insured State bank;
(3) The acceptance by the insured State bank of securities issued by the subsidiary as collateral for an extension of credit to any person or company; and
(4) Any extensions of credit by the insured State bank to any third party for the purpose of making a direct investment in the subsidiary, making any investment in which the subsidiary has an interest, or which is used for the benefit of, or transferred to, the subsidiary.
(B) For the purposes of this paragraph (d), the term “investment” does not include:
(1) Extensions of credit by the insured State bank to finance sales of assets by the subsidiary which do not involve more than the normal degree of risk of repayment and are extended on terms that are substantially similar to those prevailing at the time for comparable transactions with or involving unaffiliated persons or companies;
(2) An extension of credit by the insured State bank to the subsidiary that is fully collateralized by government securities, as such term is defined in § 344.3 of this chapter; or
(3) An extension of credit by the insured State bank to the subsidiary that is fully collateralized by a segregated deposit in the insured State bank.
(3) Transaction requirements—(i) Arm’s length transaction requirement. With the exception of giving the subsidiary immediate credit for uncollected items received in the ordinary course of business, an insured State bank may not carry out any of the following transactions with a subsidiary subject to this paragraph (d) unless the transaction is on terms and conditions that are substantially the same as those prevailing at the time for comparable transactions with unaffiliated parties:
(A) Make an investment in the subsidiary;
(B) Purchase from or sell to the subsidiary any assets (including securities);
(C) Enter into a contract, lease, or other type of agreement with the subsidiary;
(D) Pay compensation to a majority-owned subsidiary or any person or company who has an interest in the subsidiary; or
(E) Engage in any such transaction in which the proceeds thereof are used for the benefit of, or are transferred to, the subsidiary.
(ii) Prohibition on purchase of low quality assets. An insured State bank is prohibited from purchasing a low quality asset from a subsidiary subject to this paragraph (d). For purposes of this subsection, “low quality asset” means:
(A) An asset classified as “substandard”, “doubtful”, or “loss” or treated as “other assets especially mentioned” in the most recent report of examination of the bank;
(B) An asset in a nonaccrual status;
(C) An asset on which principal or interest payments are more than 30 days past due; or
(D) An asset whose terms have been renegotiated or compromised due to the deteriorating financial condition of the obligor.
(iii) Insider transaction restriction. Neither the insured State bank nor the subsidiary subject to this paragraph (d) may enter into any transaction (exclusive of those covered by § 337.3 of this chapter) with the bank’s executive officers, directors, principal shareholders or related interests of such persons which relate to the subsidiary’s activities unless:
(A) The transactions are on terms and conditions that are substantially the same as those prevailing at the time for comparable transactions with persons not affiliated with the insured State bank; or
(B) The transactions are pursuant to a benefit or compensation program that is widely available to employees of the bank, and that does not give preference to the bank’s executive officers, directors, principal shareholders or related interests of such persons over other bank employees.
(iv) Anti-tying restriction. Neither the insured State bank nor the majority-owned subsidiary may require a customer to either buy any product or use any service from the other as a condition of entering into a transaction.
(4) Collateralization requirements. (i) An insured State bank is prohibited from making an investment in a subsidiary subject to this paragraph (d) unless such transaction is fully-collateralized at the time the transaction is entered into. No insured State bank may accept a low quality asset as collateral. An extension of credit is fully collateralized if it is secured at the time of the transaction by collateral having a market value equal to at least:
(A) 100 percent of the amount of the transaction if the collateral is composed of:
(1) Obligations of the United States or its agencies;
(2) Obligations fully guaranteed by the United States or its agencies as to principal and interest;
(3) Notes, drafts, bills of exchange or bankers acceptances that are eligible for rediscount or purchase by the Federal Reserve Bank; or
(4) A segregated, earmarked deposit account with the insured State bank;
(B) 110 percent of the amount of the transaction if the collateral is composed of obligations of any State or political subdivision of any State;
(C) 120 percent of the amount of the transaction if the collateral is composed of other debt instruments, including receivables; or
(D) 130 percent of the amount of the transaction if the collateral is composed of stock, leases, or other real or personal property.
(ii) An insured State bank may not release collateral prior to proportional payment of the extension of credit; however, collateral may be substituted if there is no diminution of collateral coverage.
(5) Investment and transaction limits extended to insured State bank subsidiaries. For purposes of applying paragraphs (d)(2) through (d)(4) of this section, any reference to “insured State bank” means the insured State bank and any subsidiaries of the insured State bank which are not themselves subject under this part or FDIC order to the restrictions of this paragraph (d).
(e) Capital requirements. If specifically required by this part or by FDIC order, any insured State bank that wishes to conduct or continue to conduct as principal activities through a subsidiary that are not permissible for a subsidiary of a national bank must:
(1) Be well-capitalized after deducting from its tier one capital the investment in equity securities of the subsidiary as well as the bank’s pro rata share of any retained earnings of the subsidiary;
(2) Reflect this deduction on the appropriate schedule of the bank’s consolidated report of income and condition; and
(3) Use such regulatory capital amount for the purposes of the bank’s assessment risk classification under part 327 of this chapter and its categorization as a “well-capitalized”, an “adequately capitalized”, an “undercapitalized”, or a “significantly undercapitalized” institution as defined in § 324.403(b) of this chapter, provided that the capital deduction shall not be used for purposes of determining whether the bank is “critically undercapitalized” under part 324 of this chapter.