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Starting a New Bank

December 5, 2016

Authors

Jonathan Hightower

Starting a New Bank

December 5, 2016

by: Jonathan Hightower

piggybankOn November 29, 2016, the FDIC, as part of its Community Banking Initiative, held an outreach meeting in Atlanta.  While the FDIC has indicated that it will publish a handbook regarding applications for deposit insurance in the coming weeks (which we’ll also summarize), we thought it made sense to provide a few highlights from that meeting:

Mechanics.  The mechanics of the chartering process are the same as before.

Business Plans.  As expected, there will be greater scrutiny on business plans, making sure that banks stick to their business plans post-opening, and (not expressly stated but as translated by me) ensuring that the results of the bank’s business plan do not deviate greatly from the original projections (i.e., providing for limited ability to take advantage of natural growth in the new bank’s markets or lines

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FDIC Advisory Letter on Loan Participations

December 9, 2015

Authors

Bill Custer and Julia Fenwick Ost

FDIC Advisory Letter on Loan Participations

December 9, 2015

by: Bill Custer and Julia Fenwick Ost

On November 6th, the FDIC issued an advisory letter discussing risk management practices that FDIC-supervised banks should implement with regards to purchased loans and loan participations. While the FDIC acknowledges the benefits accruing from the purchase of these loans and loan participations, such as achieving growth goals, diversifying credit risk, and deploying excess liquidity, the FDIC also recognizes that purchasing banks have oftentimes relied too heavily on lead institutions when administering these types of loans. In such a case, over-reliance on the lead banks has resulted in significant credit losses and failures of the purchasing institutions. Thus, while the FDIC reiterates its support for these types of investments, the FDIC also reminds banks to exercise sound judgment in administering purchased loans and participations.

A summary of the key takeaways from the FDIC’s advisory letter follows below:

  • Banks should create and utilize detailed loan policies for purchased loans and
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Fourth Circuit Upholds FDIC’s Ordinary Negligence Claims

October 6, 2015

Authors

Michael Carey

Fourth Circuit Upholds FDIC’s Ordinary Negligence Claims

October 6, 2015

by: Michael Carey

The United States Court of Appeals for the Fourth Circuit, which governs North and South Carolina as well as Virginia, West Virginia and Maryland, has issued an important ruling in FDIC v. Rippy, a lawsuit  brought by the FDIC against former directors and officers of Cooperative Bank in Wilmington, North Carolina.  As it has done in dozens of cases throughout the country, the FDIC alleged that Cooperative’s former directors and officers were negligent, grossly negligent, and breached their fiduciary duties in approving various loans that caused the bank to suffer heavy losses.  The evidence showed the FDIC had consistently given favorable CAMELS ratings to the bank in the years before the loans at issue were made.  The trial court entered summary judgment in favor of all defendants, criticizing the FDIC’s prosecution of the suit as an exercise in hindsight.  The Fourth Circuit, however, vacated the ruling as it applied to

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How the New FDIC Assessment Proposal Will Impact Your Bank

September 9, 2015

Authors

Jonathan Hightower and Michael Shumaker

How the New FDIC Assessment Proposal Will Impact Your Bank

September 9, 2015

by: Jonathan Hightower and Michael Shumaker

In June, the Federal Deposit Insurance Corp. (FDIC) issued a rulemaking that proposes to revise how it calculates deposit insurance assessments for banks with $10 billion in assets or less. Scheduled to become effective upon the FDIC’s reserve ratio for the deposit insurance fund (DIF) reaching a targeted level of 1.15 percent, these proposed rules provide an interesting perspective on the underwriting practices and risk forecasting of the FDIC.

The new rules broadly reflect the lessons of the recent community bank crisis and, in response, attempt to more finely tune deposit insurance assessments to reflect a bank’s risk of future failure. Unlike the current assessment rules, which reflect only the bank’s CAMELS ratings and certain simple financial ratios, the proposed assessment rates reflect the bank’s net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year asset growth, and a loan mix index. The new assessment rates are subject to

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The New Deposit Insurance Proposal

June 18, 2015

Authors

Jonathan Hightower

The New Deposit Insurance Proposal

June 18, 2015

by: Jonathan Hightower

A Quick Overview and a Note on Construction Lending

On June 16, 2015, the FDIC issued a notice of proposed rulemaking to revise its calculations for deposit insurance assessments for banks with under $10 billion in assets (excluding de novo banks and foreign branches).  The rules would go into effect the quarter after they are finalized but by their terms would not be applicable until after the designated reserve ratio of the Deposit Insurance Fund reaches 1.15%.

At almost 150 pages, there are many facets to the proposed rule that must be carefully analyzed.  At the outset, we give credit to the FDIC for attempting to fine tune deposit insurance assessments beyond the blunt instrument that they have always been.  We have long held the position that the FDIC should adopt more careful underwriting procedures, similar to private insurers, in order to better

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Is The Time Right for De Novo Banks?

January 28, 2015

Authors

Michael Shumaker

Is The Time Right for De Novo Banks?

January 28, 2015

by: Michael Shumaker

Ten years ago, business was booming for community banks—profitability driven by a hot real estate market, a wave of de novo banks receiving charters, and significant premiums paid to sellers in merger transactions. Once the community bank crisis took root in 2008, however, the same construction loans that once drove earnings caused significant losses, merger activity slowed to a trickle, and only one new bank charter has been granted since 2008. But as market conditions improve and with Federal Deposit Insurance Corporation’s (FDIC) release of a new FAQ that clarifies its guidance on charter applications, there are some indications that an increase in de novo bank activity may not be far away.

To understand the absence of new bank charters in the last six years, one must look to the wave of bank failures that took place between 2009 and 2011, which involved many de novo banks. Many of these

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Latest FDIC Statements on Brokered Deposits Require Careful Review

January 16, 2015

Authors

Bryan Cave

Latest FDIC Statements on Brokered Deposits Require Careful Review

January 16, 2015

by: Bryan Cave

On December 24, 2014, the FDIC released its latest statements on what they consider to be “brokered deposits.”  In Guidance on Identifying, Accepting, and Reporting Brokered Deposits Frequently Asked Questions (the “FAQs”), the FDIC outlined their current views on what they will deem to be brokered deposits, formally stating positions that have been developing over the last few years but which had not previously been stated in writing.  For many FDIC-insured depository institutions (collectively, “banks”), the FAQs might have little or no impact.  For others, the impact could be significant.

Banks that have a large portfolio of brokered deposits know that they do, but these FAQs could expand the number of brokered deposits held by such banks.  It therefore is important to review the FAQs carefully to ensure that your call reports are accurate.  As discussed below, your volume of brokered deposits could even impact your FDIC insurance

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Georgia Supreme Court Confirms Business Judgment Rule

July 12, 2014

Authors

Michael Carey

Georgia Supreme Court Confirms Business Judgment Rule

July 12, 2014

by: Michael Carey

The Georgia Supreme Court issued its long-awaited decision in FDIC v. Loudermilk  on Friday, addressing whether the FDIC’s ordinary negligence claims against former directors and officers of failed banks are precluded by the business judgment rule.  There is a lot to digest in the Court’s 34-page opinion, but here are our initial thoughts.

The upshot for bank directors and officers in Georgia is that the business judgment rule is very much alive, and applies to banks to the same extent as other corporations.  That itself is big news—the Georgia Supreme Court had never addressed whether the business judgment rule exists in any context, and the FDIC had argued that if the rule existed at all, it did not apply to banks because the Banking Code imposes an ordinary negligence standard of care.  Much of the Court’s opinion is devoted to explaining how the business judgment rule developed as

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Major Loan Participation Decision Affecting FDIC Successor Rights

April 13, 2014

Authors

Jerry Blanchard

Major Loan Participation Decision Affecting FDIC Successor Rights

April 13, 2014

by: Jerry Blanchard

One of the very powerful rights that the FDIC possesses in any receivership is a provision added by FIRREA which states that the FDIC may enforce any contract entered into by the depository institution notwithstanding any provision of the contract providing for termination, default, acceleration, or exercise of rights upon, or solely by reason of, insolvency or the appointment of or the exercise of rights or powers by a conservator or receiver (i.e., “ipso-facto” clauses). Many typical vendor contracts will oftentimes contain just such a clause providing that one party to the contract can terminate the contract at will if the other party files for relief under the Bankruptcy Code or is taken over by the government. The logic is pretty compelling, a party wants to be able to decide if it is comfortable dealing with an entity that is insolvent or attempting to reorganize.

​A recent Georgia Court of

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A Significant Change in the Regulatory Oversight of Third-Party Relationships

April 7, 2014

Authors

Bryan Cave

A Significant Change in the Regulatory Oversight of Third-Party Relationships

April 7, 2014

by: Bryan Cave

Both Banks and Their Vendors Must Pay Attention

Introduction

First there was the bulletin about third-party vendors issued by the Consumer Financial Protection Bureau (CFPB) in April 2012. Then it was the FFIEC’s guidance on IT service providers in October 2012.  Next came the FDIC’s September 2013 Financial Institution Letter about payment-processing relationships with high-risk merchants.  Then there was the news on October 30, 2013 about the OCC’s guidance on third-party relationships, followed shortly by the Federal Reserve Board’s guidance on managing outsourcing risks in December 2013.

Let’s face it. There has always been guidance and concern about banks and their relationships with third-party service providers. But in recent years it has become quite obvious that the bar has been raised on how banks relate to their third-party processors, program managers, and other service providers. These

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