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.
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.