The proposed rule adopted at the FDIC Board Meeting on September 29, 2009 amended the final rule adopted in May 2009 to restore losses to the Deposit Insurance Fund (DIF).
Assessments for 4th Quarter 2009 and all of 2010-2012 Due December 30, 2009
The proposed rule would require insured institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all 2010, 2011, and 2012. If the proposed rule is adopted, an institution’s assessment will be calculated by taking the institution’s actual September 30, 2009 assessment and adjusting it quarterly by an estimated 5 percent annual growth rate through the end of 2012. Further, the FDIC will incorporate the uniform 3 basis point increase effective January 1, 2011.
The FDIC will continue to provide quarterly statements showing the actual amount of assessment owed and reflecting a reduction of the amount of prepayment “credit” applied to the amount due. If the FDIC has underestimated the amount of the prepaid assessment when compared to the actual assessment due, or factors change that would increase the assessment during the period in which the prepayment is applied, the institution will be required to pay quarterly assessments as usual once the prepaid assessment is exhausted. If, however, the FDIC has overestimated the amount of assessment due, or factors change that would decrease the assessment due during the period in which the prepayment is applied, the institution will be entitled to a refund of any overpayment not exhausted by December 30, 2014.
On June 23, 2009, the FDIC issued Financial Institutions Letter FIL-33-2009, which contains final amendments to Part 363 of the FDIC’s regulations regarding annual independent audit and reporting requirements for insured institutions with $500 million or more in total assets. The amendments are intended to clarify what must be included in a Part 363 Annual Report. The reporting obligations differ between institutions with total assets, as of the beginning of the fiscal year, between $500 million and less than $1 billion, and of $1 billion or more. Unless otherwise noted the amendments became effective on August 6, 2009. We summarize the main elements of Part 363, as amended, below.
Audit Report Requirements
Part 363 requires the following to be included in the Part 363 Annual Report:
For institutions with total assets between $500 million and less than $1 billion
- Audited comparative financial statements;
- The independent public accountant’s report on the audited financials; and
- A management report containing (i) a statement of management’s responsibilities for preparing annual financial statements, establishing and maintaining adequate internal controls, and complying with safety and soundness laws and regulations pertaining to insider loans and dividend restrictions, and (ii) a management assessment of the institution’s ability to comply with laws and regulations relating to insider loans and dividend restrictions, stating management’s conclusion on compliance with the laws and regulations.
For institutions with total assets of $1 billion or more
In addition to the items required for institutions with total assets between $500 million and less than $1 billion, institutions with total assets of $1 billion or more must provide the following:
- The management report must also contain an assessment by management on the effectiveness of the institution’s internal controls over financial reporting that identifies the internal control framework, states that the assessment included controls to ensure financial statements were prepared in accordance with regulatory instructions, states management’s conclusion whether this internal control is effective, and discloses any material weaknesses in these internal controls; and
- The independent public accountant’s attestation report concerning the effectiveness of the institution’s internal controls over financial reporting.
We have recently become aware that the OCC is reviewing national bank TARP recipients for their compliance with TARP requirements as part of the formal examination process. As of part of the examination, the OCC is requesting to review certain documents, policies, and other information related to areas impacted by the TARP regulations. In particular, the OCC will review a TARP recipient’s Luxury Expenditure Policy, as well as other compensation-related information.
Since the FDIC published Financial Institution Letter (FIL) 50-2009 extending the de novo period for state nonmember institutions from three to seven years, we have heard that FDIC believes the new policy has been misinterpreted in certain respects. The FDIC has explained to the American Bankers Association that the policy is intended to apply as follows:
- for banks chartered after August 28, 2009, the entire policy applies, including the requirement to maintain a Tier 1 leverage ratio of 8% for seven years;
- for banks less than three years old on August 28, 2009, only the new exam schedule and the requirement to submit updated business plans for years four through seven apply; and
- for banks more than three years old, but less than seven years old, on August 28, 2009, only the new exam schedule applies.
We do not know if the FDIC intends to publicly issue updated guidance to clarify these points. The text of the Financial Institution Letter itself is relatively vague, although the FDIC’s summary of the Letter explicitly states that the new “procedures apply to existing newly insured institutions.”
In addition, FinCriAdvisor has reported that the OCC, OTS and Federal Reserve have confirmed that they will not be following suit and that their existing de novo periods will remain unchanged.
Background
On July 2, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) issued for public comment a proposed Statement of Policy that sets forth the qualifications for private equity investors in failed bank acquisitions (the “Proposed Policy”). The FDIC established a 30-day comment period and sought public comment on nine topics:
- definition of private equity investor and scope of the policy;
- permissibility of “silo” structures;
- capital requirements;
- applicability of the source of strength doctrine;
- imposition of cross-guarantee liability;
- restrictions on bidders from bank secrecy jurisdictions;
- post-investment holding period;
- possible limitations on 10% investors in failed institutions; and
- length of restriction period.
On August 26, 2009, the FDIC issued its Final Statement of Policy on Qualifications for Failed Bank Acquisitions (the “Final Policy”). The FDIC notes that the policy statement is just that—a statement of policy and not a statutory provision imposing civil or criminal penalties and that the requirements it imposes on investors only apply to investors that agree to its terms.
In response to 61 comment letters from a broad variety of interests, in the Final Policy the FDIC reduced the proposed capital requirements, removed the proposed “source of strength” requirement, and increased the ownership threshold for cross-guarantee liability. These changes are intended to make the failed bank acquisition opportunity more attractive for private equity investors, while retaining many of the other elements of the Proposed Policy that address the FDIC’s apparent concerns about such investors.
The Final Policy is relevant only to bidders for failed financial institutions. Investors seeking to acquire control of banks that have not failed should refer to the Bank Holding Company Act and the relevant regulations and policy statements issued by the Federal Reserve Board including, but not limited to, the policy statement issued by the Federal Reserve Board on September 22, 2008 that eased certain limitations on private equity investments in banks and bank holding companies. This policy statement is summarized in our prior client alert on private equity investments generally. Investors seeking to acquire control of federal savings institutions that have not failed should refer to the Home Owners’ Loan Act and relevant regulations issued by the Office of Thrift Supervision. These existing holding company statutes and regulations are not replaced or substituted by the Final Policy. The Final Policy merely adds additional limitations and requirements in the context of acquiring failed financial institutions.
Short-Term Planning for Recovery and Survival
(This post was authored by Walt Moeling and Dustin Hall. A version of this post originally appeared in the August 2009 issue of the ABA’s Community Banker magazine.)
The grim economic prognoses we continue to hear about have an immediate impact in the bank board room. Boards must think about short-term planning for recovery and survival because virtually no bank is wholly immune from the current recession. Although the problems may have started with residential real estate in the Sunbelt, they have gone much beyond that now, impacting banks throughout the country.
As a director you must plan for both long-term and short-term. Long-term planning is tremendously important, and we hope to make it to the “long-term,” but short-term planning is critical today.
Short-term planning in this context deals with the reality of today’s marketplace. The focus is not on earnings or even stock value, two traditional focal points for planning. Instead, the focus is on capital management, liquidity, and asset quality.
Capital Management
Your short-term capital planning in the face of mounting losses cannot focus on today or yesterday; it must focus on tomorrow. You must ask: Where are we going? What will happen if housing prices drop for another two and a half years, as predicted by some? Can our borrowers sustain a more prolonged recession? If not, where will our capital be three, six, and nine months from now? In essence, you must stress test your bank to see how far it can go.
A real problem for directors is assuming that capital today is as readily available as it has been for the past 15 years, or that they can sell the bank if there is a real problem. Unfortunately, there is no public market, and virtually no private equity, for bank stock. Those sources are presently closed, shall we say, for repair. Instead, short-term capital is likely to be found only within the boardroom and from family and friends.
On August 19, 2009, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) published its latest Audit Report, titled “Despite Evolving Rules on Executive Compensation, SIGTARP Survey Provides Insights on Compliance.” The Report summarizes the results of SIGTARP’s survey of the first 364 TARP CPP recipients, focusing on their executive compensation responses. (SIGTARP previously published its Audit Report on the responses related to the use of TARP funds.)
In the aggregate, the responses are not particularly insightful. As noted in the Report’s conclusion:
Since EESA was enacted on October 3, 2008, the legislation and implementing guidance on executive compensation for TARP recipients have been in flux. Nevertheless, most CPP recipients report that they have made a concerted effort to comply with executive compensation limitations. Moreover, many institutions reported that they intend to comply with the additional restrictions on executive compensation enacted under ARRA. Nonetheless, some recipients voiced concerns about the new restrictions; in particular, they noted a need for further Treasury guidance or regulations to implement ARRA executive compensation limits.”
However, in addition to the Audit Report itself, SIGTARP has published redacted copies of all of the SIGTARP survey responses. Responses are listed both alphabetically, and by state.
During the month of August, the Treasury completed rounds thirty-eight, thirty-nine, forty, and forty-one of TARP Capital infusions. In these four rounds, which closed on August 7, August 14, August 21, and August 28, respectively, the Treasury purchased a total of approximately $130 million in securities from 9 financial institutions. Through August 2009, the Treasury had invested in 673 institutions, totaling approximately $204.5 billion.
In these four rounds, U.S. Century Bank, Miami, Florida, received the largest infusion, $50 million, and Bank Financial Services, Inc., received the smallest infusion, $1 million.
During August, three financial institutions re-paid their TARP capital investments: CVB Financial Corporation ($97.5 million (75% of the initial investment)), Bancorp Rhode Island, Inc. ($30 million), and State Bankshares, Inc. ($12.5 million (25% of the initial investment)). As of the end of August, 2009, 37 financial institutions had re-paid all, or some portion, of their TARP Capital investment, bringing the total amount re-paid to approximately $70.3 billion. At the end of August 2009, Treasury’s outstanding investment equaled approximately $134.2 billion.
We have advised a number of banks on the feasibility of bidding to acquire the assets of failed institutions. The loss sharing arrangements currently being offered by the FDIC can be an attractive means to increase market presence or to expand into new markets.
The specific criteria used by the FDIC will vary from project to project based on the characteristics of the troubled institution, the time available for marketing, and other factors. However, the FDIC has indicated the following base criteria:
Supervisory Criteria:
- Total Risk Based Capital ratio of 10% or higher
- Tier 1 Risk Based Capital ratio of 6% or higher
- Tier 1 Leverage Capital ratio of 4% or higher
- CAMELS composite rating of 1 or 2
- CAMELS Management component rating of 1 or 2
- Compliance rating of 1 or 2
- RFI/C rating of 1 or 2
- CRA rating of at least Satisfactory
- Satisfactory AML Record
As we’ve previously discussed, the Georgia Department of Banking and Finance had proposed to modify the way in which loans to related entities are treated, among other changes. No material changes to the proposed rules have been made, and the new final rules are effective on September 7, 2009. The new final rules are available from the DBF’s website or directly here.
The new rules, effectively consolidating many related party loans, may cause the consolidated relationships to become in technical violation of Georgia’s loans to one borrower rule upon renewal. However, the DBF, in recognition of the current economic environment, has allowed for a transitional phase for loans that were previously made and separately remain in compliance with the DBF’s prior rule on an unconsolidated basis. Those loans should be reworked to comply with the new regulations if feasible, but will otherwise be treated as grandfathered under the prior rules. So long as such loans are modified or renewed by the bank without any additional extension of credit, the loans will not be cited for a violation of the Georgia legal lending limit.
The DBF has NOT provided any relief from loan to one borrower issuers in the context of declining legal lending limits due to reduced capital. Under the Georgia regulations, where the bank’s statutory capital base is reduced for any reason, existing debt which was in conforming with the legal limitations at the time it originated are not construed to be non-conforming with new legal limitations resulting from the reduced statutory capital base. However, extensions, renewals and rollovers are generally considered to be a new loan, and must conform to the new, lower lending limitations.
In the current economic environment this places banks in an untenable situation because borrowers are unable to pay off the loans due to a lack of liquidity and no other financial institutions are willing to take over the credits. There are few options left for a bank in such a situation; e.g., enter into some sort of forbearance agreement with the borrower. The result of that, however, is that after 90 days the loan will need to be downgraded to substandard, regardless of whether the borrower is able to keep interest payments current. We have had extensive discussions with the Georgia DBF on this issue, focused on the OCC rules, which permit extensions or renewals in this situation. However, the Georgia DBF has stated that it will not modify its position at this time.