A Primer on Nondepository Trust Companies

New Hampshire has carved out a niche as the one of the best states in the country to organize a nondepository trust company (referred to herein as a “trust company”). A trust company is a bank without depository or lending powers. In practical effect, a trust company provides only fiduciary services.

Over the years, New Hampshire has streamlined the application and regulatory process and has amended its laws governing trusts so that they are among the most sophisticated in the country. Many companies have taken advantage of the state’s experienced regulatory environment. Recently, as federal regulators have tightened client protections under securities laws governing investment advisors, a number of firms have formed trust companies in New Hampshire to serve as qualified custodians to complement their advisory functions. A list of trust companies is maintained on the website of the New Hampshire Banking Department.

Organization and Operation of Nondepository Trust Companies in New Hampshire

The New Hampshire Bank Commissioner is responsible for the regulation of trust companies under NH RSA Chapter 392 and other state banking statutes. Charters are obtained through application to the New Hampshire Banking Department.

Typically, the process begins with a pre-filing meeting with representatives of the Department to discuss the plans for a new trust company. Three persons may petition for the charter; however, more commonly trust companies are formed as part of a holding company and only the immediate parent company is required to be the applicant. The advantage of this latter approach is that for an out-of-state company, a majority of the members its managing board do not have to be New Hampshire residents, whereas that would be required in a non-holding company structure. The application fee is $5,000. The principal features of the application are the identification of the management team, the business plan and three years of pro forma financial projections. A trust company may be organized in corporate or limited liability company form. There must be a managing board of at least five persons. There is a standard background check on the prospective managing members and officers, consistent with other banking applications.

The minimum capital for a trust company is $500,000. The Bank Commissioner reserves the right to increase this amount based on the risks of the enterprise. The former commissioner set the minimum at $1,000,000; however, the new commissioner has indicated that he will regard each application individually and is not bound by precedent. The minimum capital must be invested in approved investments, such as treasuries or high grade corporate bonds and securities. Working capital must be provided in addition to this minimum amount – the minimum capital may never be less than the required amount. There is also a requirement that an amount of up to $1,000,000 be pledged to the Department in the form of approved investments or a surety bond to be available in the event of a failure of the trust company to cover the costs of dissolution. While the former commissioner set the amount at $1,000,000, the new commissioner has also indicated flexibility on this requirement as well.

A trust company is not required to have an office in New Hampshire – but some companies elect to maintain a nominal office in state for business or legal purposes.

Once the application is filed and accepted as complete, a notice is published in a newspaper of state-wide circulation seeking comment. The staff of the Department will review the application, seek clarifications if necessary and conduct interviews with the members of the management team. If the staff is satisfied with the application, then it will pass the application on to the Bank Commissioner for action. The Bank Commissioner may hold a public hearing.

If the application is approved by the Bank Commissioner, then the organization of the trust company may be completed. The charter must be filed with the Secretary of State. When all of the pieces are in place, the Department will give a final review and, if satisfied, the Bank Commissioner will issue a certificate of authority to engage in business. If an application is rejected, the applicant can re-file, but must pay an additional re-filing fee equal to the original fee paid.

If an applicant is well organized, the process can be completed in as little as four months.

Once up and running, the trust company can expect an examination within the first year of operation and then every 18 months thereafter. The Department basically follows the examination standards of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The actual costs of examination are paid by the trust company. There is also an annual assessment based on the amount of its assets (including trust assets for which it is acting in a fiduciary capacity) to cover, along with other banking institutions, the general overhead expenses of the Department relating to its regulation of banking institutions (including trust companies). The costs are proportionately allocated among the banking institutions based on the size of their assets. With respect to trust companies and banks holding fiduciary assets, only 25% of the first $5 billion is counted, then there is a 5% decrease for each additional $5 billion up to $25 billion, at which amount the percentage is reduced to 2.5% for fiduciary assets up to $50 billion and 1% above that. Thus, the balance sheet assets and appropriate percentage of fiduciary assets are added together to arrive at the adjusted assets for each institution. Its share of the general overhead expenses is then calculated as a percent of the adjusted assets for all institutions. For example, in recent years, a trust company having $125 million in adjusted assets (i.e., approximately $500 million of total assets including balance sheet assets and fiduciary assets) would have paid $3,125; and $1 billion in adjusted assets (i.e., approximately $4 billion of total assets), $25,000. These amounts vary from year to year based on the Department’s expenses and the assets of the institutions sharing the cost.

A trust company is required to file quarterly call reports with the department that are similar to those filed by other banking institutions with the FDIC.

If you wish to discuss the features of nondepository trust companies in more detail, please contact John Funk at 603 228-1181. Attorney Funk has extensive experience in the formation and operation of nondepository trust companies.

* John Funk is admitted in New Hampshire, Massachusetts and Vermont.