Banking Interpretations

NYBL 105(1) and 105(5)

Rosanne Notaro



Subject:Home office protection inquiry re federal thrift conversion 

Dear Gary and John,

You have explained that your firm represents a federal savings association that is contemplating a charter conversion to a national commercial bank charter. This institution, through past mergers with other institutions, has acquired branches in areas that may be deemed home office-protected ("HOP") under New York Banking Law ("NYBL") 105. You ask whether the converted federal savings association would be prohibited from continuing to hold and operate these branches, due to the limitations in NYBL 105 on commercial banks opening and occupying branches in home office protected areas, which branching limitations must also be observed by national banks due to federal law governing the branching rights of national banks.

NYBL 105.1(a) provides that a bank may not "open and occupy" one or more branches in any city or village with a population of fifty thousand or less in which is located the principal office of any bank, trust company or national bank which is not a subsidiary of a bank holding company. An exception to the restriction on a bank or trust company opening and occupying branches in an HOP area is contained in NYBL 105.1(a) for (i) branch offices occupied immediately prior to a conversion pursuant to the provisions of [NYBL]; and (ii) an acquisition by merger, sale or otherwise of the business and property of a bank, trust company or national bank.

In addition, NYBL 105.5(a) also addresses the right of a bank or trust company to maintain branch offices acquired in a merger or asset acquisition transaction, where the transaction agreement so provides. Specifically, NYBL 105.5(a) provides that "a bank or trust company may, if the merger or asset acquisition is permitted by law, and if the merger or asset acquisition agreement so provides, maintain as a branch office or branch offices the place or places of business of any bank, trust company, safe deposit company, national banking association, out-of -state state bank (as such term is defined in section 222 of this chapter), savings bank, or savings and loan association, federal savings bank or federal savings and loan association which it has received into itself by merger or by acquisition of assets thereof pursuant to the provisions of this chapter. .. " In other words, NYBL 105.5(a) reiterates, and expands upon, the exception in NYBL 105.1(a) for branches acquired through merger or acquisition transaction.

NYBL 105.5(a) also addresses conversions, providing that "a state bank or trust company resulting from the conversion of a national banking association may, if the conversion agreement so provides, maintain as a branch office or branch offices the place or places of business of the national banking association." (emphasis added)

Prior Legal Division opinions have made clear that the Banking Department interprets the "open and occupy" language in the prohibition in NYBL 105.1(a) to be a reference only to prohibiting the opening of de novo branches in an HOP area. (See Memorandum dated March 26, 1992 from Michael Schussler to Deputy Superintendent and Counsel Tibbals ("1992 Schussler Opinion"); Letter dated April 12, 1994 from Michael Schussler to A. Patrick Doyle of Arnold & Porter ("1994 Schussler Opinion"). Both Schussler Opinions also clearly recognize NYBL 105.5(a) as independent authority for a bank or trust company to maintain branches it acquires in a merger or acquisition, including branches which may be located in HOP areas.

The 1994 Schussler Opinion contained additional observations and conclusions that appear to be helpful for reaching a conclusion with respect to your client's situation. The substance of the 1994 transaction was that a New York State-chartered commercial bank was acquiring a federal thrift institution (which had some branches located in HOP areas), albeit in a 2-step transaction in which (1) the federal thrift first converted to a New York State-chartered savings and loan association and thereafter (2) the State-chartered savings and loan association merged into the state-chartered commercial bank. Schussler ultimately concluded that the acquisition would not "offend the statutory scheme set out in the Banking Law" inasmuch as the acquisition, in effect, of the federal thrift's HOP-area branches would not "result in the creation of new banking locations in home office protected communities." He also found that the retention of the HOP-area branches by the State-chartered savings and loan association (as a result of the first step conversion) did not violate the restriction in NYBL 396, which prohibits savings and loan associations from opening and occupying branches in HOP areas. He reasoned that a conversion involves the retention of branches, and, while nothing in the NYBL specifically addressed the permissibility of a State-chartered thrift retaining the branches of a converted federally-chartered thrift, the conclusion is implicitly the same as that in the case of analogous conversions (i.e. permitting a bank or trust company to maintain branches acquired as a result of a conversion).

Your client's situation involves a federal thrift converting to a national bank, with the national bank retaining the federal thrift's branches, including some that may be in HOP areas. Although this transaction would not technically be a conversion "pursuant to the provisions of this article" subject to the express exception in NYBL 105.1(a), it is nonetheless a conversion involving the retention of existing branches, as with the federal-to-state first step conversion addressed in the 1994 Schussler Opinion, and the same rationale should apply as to the ability of the national bank to retain such existing branches, since national banks should be subject only to the same HOP-related restrictions (and conversely, enjoy the same privileges) as New York State-chartered banks under NYBL 105. (I note that there should be no question as to the right, as a corporate matter, of the national bank to retain the branches of the federal thrift as result of the conversion transaction). The 1994 Schussler Opinion similarly found that the retention of branches of a federal thrift, although not specifically addressed by the statute (NYBL 105.5) at that time since the HOP provisions in the NYBL generally did not address branches of federal thrifts, was nonetheless also consistent with the purposes of the statute.

In sum, although the NYBL does not expressly cover your client's situation, the prohibition on opening and occupying branches in an HOP area would not be an impediment since your client's transaction involves a conversion and, in addition, the Banking Department has interpreted the HOP provisions to operate similarly with respect to transactions involving state and federally-chartered institutions.