On August 28, 2009, the FDIC published Financial Institution Letter (FIL) 50-2009 announcing that the de novo period for state nonmember institutions is increasing from three years to seven years.  The new policy is in response to depository institutions insured fewer than seven years being overrepresented on the list of failed institutions in 2008 and 2009.

Bottom line

Pay attention to your business plans!  First, banks less than seven years old must keep a close eye on how their performance matches up with the projections in the bank’s approved business plan.  Second, such banks need to seek prior regulatory approval for an amended business plan if the bank expects to materially deviate from that plan.  Third, such banks should be particularly mindful to avoid loan concentrations and to avoid using brokered deposits or other wholesale funding at levels not contemplated in their approved business plan.

Applicability

The new policy applies to existing newly insured institutions (banks less than seven years old).  There is a general exception for de novo institutions that are subsidiaries of “eligible holding companies.”  Eligible holding companies are those with consolidated assets of at least $150 million, BOPEC ratings of at least 2 for bank holding companies and an above average or “A” rating for thrift holding companies, and at least 75% of their consolidated depository institution assets comprised of “eligible depository institutions.”  An “eligible depository institution” is one that received a 1 or 2 composite rating and compliance rating at its most recent exams, has a satisfactory or better CRA rating, is well-capitalized, and is not subject to any type of regulatory enforcement action.  Even for subsidiaries of “eligible holding companies,” the FDIC has retained discretion to extend the new policy to this set of eligible holding companies.

Heightened capital requirements

Newly insured banks are required to maintain a Tier 1 leverage ratio of 8% during the de novo period.  Under the new policy, all banks less than seven years old will be required to maintain this heightened ratio.

Exam schedule revised

Risk management exams:  Following the initial limited exam at six months post-opening and full exam at twelve months, a de novo institution will remain on a twelve-month exam cycle until the expiration of the seven-year de novo period, instead of shifting to an eighteen-month exam cycle.

Compliance exams and CRA evaluations:  Newly insured institutions will undergo compliance exams and CRA evaluations on the following schedule:

  • Within first 12 months: full compliance exam and CRA evaluation
  • Year 2: compliance and CRA visitation
  • Year 3: full compliance exam
  • Year 4: compliance and CRA visitation
  • Year 5: full compliance exam and CRA evaluation

After the five-year period, the institution may (but may not) be subject to the regular examination schedule.

Business plans

Prior to this change in policy, FDIC required written notice of proposed changes to business plans during the first three years of operation.  According to the FIL, FDIC will require de novo institutions to obtain prior approval from the FDIC for “any proposed material change or deviation” in the bank’s original business plan.  De novo institutions that change or deviate from their respective approved business plans without FDIC approval may be subject to civil money penalties or other enforcement action.

Regardless of whether institutions propose to make material changes in business plans, the new policy requires that all newly insured institutions provide the FDIC with updated financial statements and business plans for years four through seven before the bank is three years old.  New  institutions that have already reached the end of their third year of operations are not subject to this requirement.

Stock incentive plans

Although the FIL does not address this issue, de novo banks are often subject to restrictions on the types and vesting schedules of stock incentives that they may issue.  Generally, a de novo bank’s stock incentive plan may provide only for qualified and non-qualified stock options and not other types of awards like restricted stock awards.  In the past, some banks have put in place an “omnibus” stock incentive plan providing for a broader array of stock incentives after being open three years.  However, under this new policy, banks will need to determine whether the FDIC will permit them to grant the other types of awards.