FIRST LINCOLNWOOD CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, 546 F.2d 718

HASTINGS, Senior Circuit Judge. Petitioner First Lincolnwood Corporation, Lincolnwood, Illinois (First Lincolnwood), is a non-operating corporation organized under the laws of Illinois, for the purpose of becoming a bank holding company through the acquisition of the First National Bank of Lincolnwood, Lincolnwood, Illinois (Bank). Petitioner seeks review of an order of respondent Board of Governors of the Federal Reserve System (Board or Federal Reserve Board), issued January 9, 1976, denying, on financial grounds, the application of First Lincolnwood to acquire the Bank.

The application was filed with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, 12 U.S.C. §§ 1841-1848, as amended (the Act), which makes it unlawful for a company to acquire control of a bank without first obtaining prior approval of the Board.

Section 1842(

c) of the Act prescribes that in determining whether to approve an application, the Board is required to consider “the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served,” as well as the competitive effects of the proposed transaction.

Section 1842(

b) of the Act prescribes the following time limitation for Board consideration of an application to acquire control of a bank: In the event of the failure of the Board to act on any application for approval under this

section within the ninety-one day period which begins on the date of submission to the Board of the complete record on that application, the application shall be deemed to have been granted.

Section 1848 of the Act provides that “[a]ny party aggrieved by an order of the Board” may petition for review in a United States Court of Appeals, and that “[t]he findings of the Board as to the facts, if supported by substantial evidence, shall be conclusive.” THE ISSUES ON PETITION FOR REVIEW 1. Whether substantial evidence supports denial of petitioner’s application to form a one-bank holding company on grounds of inadequate capitalization. 2.

Whether the order of the Federal Reserve Board was issued within ninety-one days from the date of submission to the Board of the complete record on the application of the petitioner. 3. Whether the Federal Reserve Board complied with its own regulations governing applications for approval of the formation of a one-bank holding company. BASIC FACTS We first consider a statement of the basic facts and procedures underlying this petition for review.

On June 3, 1975, the Federal Reserve Bank of Chicago (Chicago Reserve Bank) accepted an application of First Lincoln-wood to become a bank holding company through the acquisition of eighty per cent or more of the voting shares of the Bank. A voting trust controls the Bank through August 1, 1982. A copy of the application was sent to the Comptroller of the Currency for his views and recommendations and to the Attorney General. The Attorney General did not respond. Notice of the application was also given to the several required federal and state agencies and was published in the Federal Register.

The Chicago Reserve Bank declined to exercise its delegated authority to act on the application, but forwarded the application to the board for its consideration and action because of the current capital position of the bank and its unsatisfactory debt structure. The Comptroller of the Currency first ruled adversely on the application but later reconsidered and voted favorably on it.

First Lincolnwood holding company is essentially a restructuring of the Bank’s ownership whereby the ownership of the Bank will be shifted from individuals now owning somewhat over eighty per cent of the 144,-375 shares of common stock authorized and outstanding, to a corporation owned by the same individuals, with no real change in control or management.

The holding company intended to acquire the bank stock now held by the voting trust (eighty per cent would be required for tax purposes), and the holding company would also acquire by purchase $1,500,000 in additional bank stock within one year of completion of the transaction to further capitalize the Bank. The real purpose of the acquisition is that the holding company would assume a debt of $3,700,000 owed by the Bank’s principals to Central National Bank, secured by the Bank’s stock, with an annual interest charge of $260,000.

This would permit the filing of a consolidated tax return which, in turn, would allow this interest deduction to be taken against the earned income of the Bank, with an ultimate increase in funds available to the Bank, as increased after tax earnings, of about $130,000. The Bank had some early “adverse history” following the indictment of its then chairman and its former president in a case involving the manipulation of the stock on the American Stock Exchange. All parties now agree that the Bank’s present management, headed by its chief executive officer, Mr.

Harold Cohn, is outstanding and has converted the Bank to its now favorable condition. Upon final consideration of the facts of record, the Federal Reserve Board denied the application. A copy of the Board’s order is attached hereto as an Appendix to this opinion. I On the basis of our consideration of the record as a whole, together with the findings of the Board as set out in the attached Appendix, we have no difficulty in finding that there is substantial evidence to support the denial of petitioner’s application.

The basic guidelines for consideration of this precise question are to be found in two thoroughly considered opinions authored by Judge Swygert of our court, First Wisconsin Bankshares Corp. v. Board of Governors of Federal Reserve System, 7 Cir., 325 F.2d 946 (1963), and Marine Corp. v. Board of Governors of Federal Reserve System, 7 Cir., 325 F.2d 960 (1963). We find these two cases to be dispositive of the first issue on this petition for review. II We find Judge Pell’s opinion in Tri-State Bancorp, Inc. v.

Board of Governors of Federal Reserve System, 7 Cir., 524 F.2d 562 (1975), to be instructive on the date the ninety-one day period begins to run in order to determine whether the application for approval of a bank holding company shall be deemed to have been granted. We have earlier herein set out the provisions of 12 U.S.C. § 1842(b). In Tri-State, the court regarded the principal issue as being the proper construction of the statutory phrase “complete record.” After reviewing the legislative history of the Act and various tangential decisions, the court held “that the 91-day period of § 1842(

b) begins to run when the final material needed for the Fed’s decision is received from the various interested sources outside the Fed, which ordinarily would be the applicant and governmental agencies other than the Fed. * * * [I]t is our view that the Congressional intent here was to define ‘complete record’ as meaning the facts upon which the agency would pass, not the internal documents relating to the process of that passing.” 524 F.2d at 566.

Further, the court in Tri-State said: “The holding we have reached in this case, of course, does not mean that the submission of the complete record has occurred when the decisional process develops the need for further information which is thereupon requested. The completion of the record status is not reached until all factual data from external sources necessary for the decision has been actually submitted to the Fed.” 524 F.2d at 567.

We are in accord with the holding in Tri-State that the ninety-one day period does not start to run until the final material needed for the Board’s decision is received from various interested sources outside the Board. In the instant case the Board’s action on January 9, 1976, was well within ninety-one days of the last submission to it by First Lincolnwood on November 8, 1975, of the third quarter financial statements of the Bank. This was completely relevant and necessary as the basis for calculation of the Bank’s invested asset ratios which support the Board’s denial.

First Lincolnwood acquiesced completely in furnishing the third quarter figures. First Lincolnwood argues that the ninety-one day period ran from the date of acceptance of its application by the Reserve Bank of Chicago. This is unrealistic and in conflict with Tri-State. Likewise, we find no merit in First Lincolnwood’s attempt to extend the holding in Tri-State by contending that a submission, in order to be deemed necessary to a Board decision, must be noted in the Board’s order in order for the submission to mark the start of the ninety-one day period.

We have considered other contentions of First Lincolnwood on the ninety-one day time limitation period and are not persuaded by them. We hold, therefore, that under the facts of this case, the Board acted within ninety-one days of the submission of the complete record on the First Lincolnwood application. Ill Finally, First Lincolnwood contends that the Federal Reserve Board failed to comply with its own regulations for the approval of the formation of a one-bank holding corporation.

Under the Board’s appropriate regulation concerning this issue, it is provided that: Any application for the Board’s approval of the formation of a company that controls only one bank shall be deemed to be approved forty-five days after the company has been informed by its Reserve Bank that said application has been accepted, unless the company is notified to the contrary within that time or is granted approval at an earlier date. (Emphasis added.) 12 C.F.R. 225.3(b) (1976).

The record on review establishes that petitioner was notified on June 3,1975 (seventeen days after the filing of its application), that the forty-five day period would not apply, and that its application would be forwarded to the Board for action, in lieu of action by the Chicago Reserve Bank under delegated authority. By letter dated June 3, 1975, the Reserve Bank informed Mr. Harold Cohn, President of First Lincolnwood, that First Lincoln-wood’s application was accepted as of that date. The letter informed Mr.

Cohn that the application would require action by the Federal Reserve Board because of the capital position of the Bank and, accordingly, that “[i]n view of the factors involved in this transaction, the 45-day period as provided in

Section 225.3(

b) of the Board of Governors’ Regulation Y is hereby suspended.” This letter received by Mr. Cohn appears to be dispositive of this issue on review. The Board fully complied with its own regulation. In sum, based on the foregoing, together with the order of the Board, as set out in the Appendix hereto, which we fully approve, the order of the Federal Reserve Board denying the application of First Lincolnwood is in all respects approved and affirmed. AFFIRMED — REVIEW DENIED. APPENDIX FEDERAL RESERVE SYSTEM FIRST LINCOLNWOOD CORP.

Order Denying Formation of Bank Holding Company First Lincolnwood Corp., Lincolnwood, Illinois, has applied for the Board’s approval under § 3(aXl) of the Bank Holding Company Act [12 U.S.C. § 1842(a)(1)] of formation of a bank holding company through acquisition of 80 per cent or more of the voting shares of The First National Bank of Lincolnwood, Lincolnwood, Illinois (“Bank”). Notice of the application, affording opportunity for interested persons to submit comments and views, has been given in accordance with § 3(

b) of the Act. The time for filing comments and views has expired, and the Board has considered the application and all comments received, including those submitted by the Comptroller of the Currency, in light of the factors set forth in § 3(

c) of the Act [12 U.S.C. § 1842(c)], Applicant is a non-operating corporation organized under the laws of Illinois for the purpose of becoming a bank holding company through the acquisition of Bank. With deposits of $65.7 million, Bank holds approximately two-tenths of one per cent of the total deposits held by commercial banks in the relevant banking market (approximated by the Chicago area) and is the 67th largest of the market’s 286 banks.

Inasmuch as this proposal represents essentially a transfer of Bank’s ownership from individuals to a corporation owned by the same individuals, and Applicant has no present banking subsidiaries, the acquisition of Bank by Applicant would not eliminate any significant existing competition nor foreclose potential competition, increase the concentration of banking resources, or have any adverse effect upon competition within the relevant banking market. Accordingly, the Board concludes that competitive considerations are consistent with approval of the application.

The Board has indicated on previous occasions that a bank holding company should provide a source of financial and managerial strength to its subsidiary bank(s), and that the Board will examine closely the condition of the applicant in each case with this consideration in mind. In connection with this proposal, Applicant will incur acquisition debt of approximately $3.7 million, which debt Applicant proposes to service over a twelve-year period primarily through earnings of Bank.

In the Board’s view, the projected earnings of Applicant over the debt-retirement period appear to be somewhat optimistic in view of Bank’s previous earnings record and, eveA if actually realized, would not provide Applicant with the financial flexibility necessary to meet its annual debt service requirements while maintaining adequate capital at Bank.

Furthermore, although Applicant has stated that Bank plans to augment its capital accounts through the sale of $1.1 million in equity capital and $1.0 million debt capital within three to six months of approval of this application, the Board is concerned that the financial requirements imposed upon Applicant as a result of the acquisition debt, and uncertainty as to the source of funds for Bank’s proposed capital injections, could prevent Applicant from resolving any unforeseen problems that may arise at Bank.

On the basis of the above banking factors, and other facts of record, the Board is of the view that it would not be in the public interest to approve the formation of a bank holding company with an initial debt structure that could result in the weakening of Bank’s overall financial condition. Accordingly, the Board concludes that the considerations relating to the banking factors weigh against approval of the application.

As indicated above, the proposed bank holding company formation is essentially a restructuring of the ownership interests of Bank without any significant changes in Bank’s operations or the services offered to customers of Bank. Consequently, considerations relating to the convenience and needs of the community to be served are consistent with, but do not lend weight toward, approval of the application.

On the basis of all of the circumstances concerning this application, the Board con-eludes that the banking considerations involved in the proposal present adverse factors bearing upon the financial conditions and future prospects of both Applicant and Bank. ' Such adverse factors are not outweighed by any procompetitive effects or by benefits to the convenience and needs of the relevant community. Accordingly, it is the Board’s judgment that approval of the application would not be in the public interest and that the application should be denied.

On the basis of the facts of record, the application is denied for the reasons summarized above. By order of the Board of Governors, effective January 9, 1976. (Signed) Theodore E. Allison Theodore E. Allison Secretary of the Board [SEAL] . All banking data are as of December 31, 1974, unless otherwise indicated. . Voting for this action: Vice Chairman Mitchell and Governors Bucher, Holland, Wallich, Coldwell, and Jackson. Absent and not voting: Chairman Burns. . Board action was taken while Governor Bucher was a Board member. . Board action was taken before Governor Par-tee became a Board member.