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Appeal of Denial of de Novo Charter - (Second Quarter 1999)


An organizing group appealed the decision of the Of­fice of the Comptroller of the Currency's (OCC's) li­censing division, Bank Organization Structure (BOS), to deny their application to establish a de novo char­tered bank.

The organizing group expressed concern and disagree­ment with several reasons provided in the denial letter as the basis for denying the charter application.  The group's appeal primarily focused on:

  1. 1)     Inconsistencies in what they were told during the field investigation and what the denial letter stated;
  2. 2)     Concerns expressed in the denial letter with the organizing group's lack of banking experience;
  3. 3)     OCC concerns with the proposed bank's operat­ing plan;
  4. 4)     OCC comments about the proposed president/ chief operating officer (CEO); and
  5. 5)     Comments in the denial letter that indicate the group had not provided information on their plans to mar­ket the proposed bank's stock.


While all concerns in the appeal were investigated and discussed with the appropriate parties, the ombudsman decided that opining on the propriety of the comments presented in the denial letter would not lead to a deci­sion on whether a charter should be granted.  The om­budsman determined the best approach to resolve this appeal would be to independently assess the informa­tion in the BOS application file and make a determina­tion on the merits of the information as to whether the charter should be granted.

After reviewing the information, the ombudsman applied the criteria outlined in the regulation established for the purpose of providing guidance on granting bank char­ters to organizers of a proposed bank.  12 CFR 5.20, "Organizing a bank," is explicit in outlining the impor­tance of the operating plan on the OCC's decision to grant a national charter.  Specifically:

12 CFR 5.20(h) Operating plan-

(1) General.  (I) Organizers of a proposed national bank shall submit an operating plan that adequately addresses the statutory and policy considerations set forth in paragraphs (e) and (f)(2) of this section.  The plan must reflect sound banking principles and demonstrate realistic as­sessment of risk in light of economic and competi­tive conditions in the market to be served.  (ii) The OCC may offset deficiencies in one factor by strengths in one or more other factors.  How­ever, deficiencies in some factors, such as unreal­istic earnings prospects, may have a negative in­fluence on the evaluation of other factors, such as capital adequacy, or may be serious enough by themselves to result in denial.  The OCC considers inadequacies in an operating plan to reflect nega­tively on the organizing group's ability to operate a successful bank.

The group's operating plan contained inconsistencies and assumptions that were not adequately explained.  As an example, it was difficult to understand how the proposed institution would achieve deposit growth of 4 percent per year when the entire market had only experienced average growth of 1 percent in the four years presented in their deposit analysis.  Addition­ally, a market penetration strategy that assumed the bank could pay less than market rate on deposits, when other banking professionals interviewed indi­cated deposits in that area were rate sensitive, did not appear realistic.


While the group was convinced that there was a need for a locally owned bank, they did not submit an operat­ing plan that demonstrated the proposed bank could reasonably be expected to achieve and maintain profit­ability.  The other issues discussed in the denial letter by themselves were not insurmountable had the operat­ing plan been sound.  While those issues did not form the basis for the ombudsman's decision, they offered no support to warrant granting a charter to the organiz­ing group.  In considering whether any factors were present to mitigate the weaknesses in the operating plan, the ombudsman determined there were no other factors to offset weaknesses of the plan.  Therefore, the om­budsman upheld the denial of the charter, based on the poor operating plan.