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Monthly Archives: August 2009

FDIC Extends “De Novo Period” from Three to Seven Years

By Lauren Brown - Monday, August 31, 2009

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.

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Acceptable Performance Ratios Under TARP CPP Standards

By Rob Klingler - Sunday, August 30, 2009

On August 27, 2009, the Treasury’s Inspector General released its audit report on the approval of City National Corp.’s receipt of $400 million in TARP Capital Purchase Program funds.  The report concludes that City National met the required criteria to receive funding, and that the OCC and Treasury followed the policies and procedures in place at that time for approving City National.

Unlike prior reports, the Appendix to the Treasury’s Inspector General report explicitly provides that acceptable performance ratios for TARP CPP recipients:

  • Classified Assets/Net Tier 1 Capital plus Allowance for Loan and Lease Losses (ALLL) ratio of less than 100 percent;
  • Non-Performing Loans plus Other Real Estate Owned/Net Tier 1 Capital plus ALLL ratio of less than 40 percent; and
  • Construction and Development Loans/Total Risk-Based Capital ratio less than 300 percent.
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Impressive Returns for Treasury in TARP CPP Program

By Rob Klingler - Friday, August 28, 2009

Emphasizing the fact that the TARP Capital Purchase Program represents investments in financial institutions rather than any form of bailout, a recent SNL Interactive blog post (subscription required), illustrates that the Treasury Department earned a 12.74% annualized return on the CPP investments in the 21 banks that have returned all TARP funds.

The largest total returns to the Treasury have come from some of the largest recipients of TARP funds, namely Goldman Sachs Group Inc., Morgan Stanley and American Express Co., whose dividends on the government’s preferred shares and the redemption of warrants tied to the program yielded returns to Uncle Sam of 14.18%, 12.68% and 12.23%, respectively, according to SNL data.

Banks can redeem the warrants shortly after paying back TARP funds.  Banks send a valuation of the warrants, with the aid of a national investment bank, to the Treasury, which then decides whether or not to accept the price, negotiate it or contract a third-party for another valuation.  The aforementioned redemptions that generated outsized returns to the Treasury came in late July and early August after financial stocks have risen considerably from the levels seen in late May and early June when many of the first few warrant redemptions occurred.  Backlash in the media and from the Congressional Oversight Committee over the value of early warrant redemptions also caused the later transactions to be more favorable to the Treasury.

As explored in SNL’s post, the return to the Treasury (and cost to the TARP recipient) for public companies is largely tied to the value of the warrants received by Treasury, and therefore the price of the TARP recipient’s common stock.  Accordingly, for public TARP recipients, the total cost of the TARP investment remains variable and unknown.  Undertaking a capital raise (which may weigh on the common stock price) can, in turn, cause the institution to be able to strike a better price with the Treasury on the redemption of the warrants.

For TARP recipients that participated under the private company or Sub S term sheets, these fluctuations are irrelevant, as the Treasury exercises the warrant issued in connection with the Capital Purchase Program at closing in exchange for additional shares of preferred stock (or subordinated debentures for Sub S entities).  Accordingly, the total redemption cost for private and Sub S participates is fixed at the par value of those investments.

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News Roundup — August 17, 2009 to August 21, 2009

By Stan Santos - Tuesday, August 25, 2009

Heartland Payments Systems

The Department of Justice indicted three individuals on Monday, August 17, 2009, in what it has called the largest case of cybercrime and identity theft ever prosecuted. The three suspects, one American and two unnamed Russian co-conspirators, are allegedly responsible for the data security breach suffered by Heartland Payments Systems in January 2009. The DOJ’s press release is here, the indictment is here and an article from August 2008 (with reference to a similar data breach suffered by the parent company of T.J. Maxx) can be viewed here.

U.S. Supreme Court

The Court has released its calendar of cases for November 2009. Of note is Bilski v. Doll (08-964), a case that could have a broad impact on the prepaid card industry.

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Reminder Regarding Inclusion of Trust Preferred Securities in Tier 1 Capital

By Lauren Brown - Friday, August 21, 2009

Although the trust preferred securities (“TPS”) market has been quiet (or non-existent) for the past few years, many bank holding companies have issued TPS in the past to take advantage of the hybrid capital treatment afforded to TPS by the Federal Reserve.  In 2005, the Federal Reserve revised its rules permitting the inclusion of a limited amount of TPS in the Tier 1 capital to provide stricter quantitative limits. Under the 2005 rule, which became effective on March 31, 2009, bank holding companies may include TPS in Tier 1 capital in an amount up to 25% of all core capital elements less goodwill and any associated deferred tax liability. Core capital elements include common shareholders’ equity, noncumulative perpetual preferred stock (including preferred stock issued pursuant to the Troubled Asset Relief Program (TARP)), and minority interests directly issued by a consolidated U.S. depository institution or foreign bank subsidiary. Any TPS issued in excess of this limit may be included in Tier 2 capital.

Prior to March 31, 2009, bank holding companies were permitted to calculate the limit for TPS without deducting goodwill and associated deferred tax liability from Tier 1 capital. The regulators are now taking note that some bank holding companies with outstanding TPS have not revised their Tier 1 calculations to comply with the newly-effective rule. If your bank has a holding company with outstanding TPS, be sure that you are limiting the TPS component of Tier 1 capital to 25% of core capital elements less goodwill and any associated deferred tax liability.

In addition, in the current economic environment, many bank holding companies are experiencing deterioration in capital. When the core capital elements of Tier 1 capital decline, the amount of TPS that may be included in Tier 1 capital also declines, thereby further reducing a bank holding company’s leverage ratio. When calculating capital ratios, bank holding companies must remember to re-evaluate the inclusion of TPS in Tier 1 capital as capital declines.

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COMPLIANCE REMINDER – Red Flag Rules Delayed to November 1

By Roy Hadley and Toby Butler - Thursday, August 20, 2009

The FTC has delayed the compliance date for the Red Flag Rules, the federal bank regulatory agencies and the National Credit Union Administration, to November 1, 2009 to give companies greater time to prepare their systems and protocols.  The Rules have not changed.  Companies should still take proper steps to ensure compliance by the November deadline.  Click here for help on steps your company can take.

Although the FTC intends to publish sample Plans for “low-risk” and “high-risk” companies (terms that are still somewhat hazy at this point), it has not done so as of yet (although it has published a helpful FAQs website).  Therefore, many companies are seeking outside business and legal counsel to better understand the Red Flag Rules and to ensure their plan addresses the requirements of these new regulations.

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News Roundup — August 6, 2009 to August 14, 2009

By Stan Santos - Friday, August 14, 2009

Recent Litigation

The August 2009 issue of Selling Prepaid E-Magazine is now online. Particularly noteworthy is a news capsule that mentions Bryan Cave LLP‘s successful representation of Green Dot Corp. in the matter of Every Penny Counts, Inc. v. American Express Company, et. al. (2008-1434).

Resolution was recently reached in an appeal for the U.S. Court of Appeals for the 8th Circuit in the matter of Deanthony Thomas et. al. v. U.S. Bank, National Association ND et. al. The court held that the Depository Institutions Deregulation and Monetary Control Act (DIDA), 12 USC @ Section 1831d does not preempt state law usury claims against a federally-insured state-chartered bank. Congress very clearly intended the preemptive scope of the DIDA to be limited to particular circumstances. The court reversed trial court and ordered the case to be remanded to state court for consideration under Missouri usury law.

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Bryan Cave Submits Comment Letter on TARP Interim Final Rules

By Rob Klingler - Friday, August 14, 2009

On August 14, 2009, Bryan Cave LLP submitted a comment letter on the Treasury Department’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance.

In addition to several technical revisions, we have recommended that Treasury:

  • permit TARP recipients to implement new commission compensation programs;
  • treat single-trigger change in control payments as retention awards as opposed to golden parachute payments;
  • add a $100,000 floor for consideration of an employee as a “most highly compensated employee;”
  • permit smaller reporting companies to use the SEC’s smaller reporting company rules for determining their senior executive officers;
  • modify its restrictions on tax gross-up payments;
  • clarify that the say on pay provisions do not apply to private companies; and
  • either clarify or eliminate the 162(m)(5) requirement.

The comment letter is currently being processed by the Treasury Department before being added to the public docket for the regulation, but you can read the complete comment letter here.

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Additional Clarity on TARP Approval Process & Standards

By Rob Klingler - Thursday, August 13, 2009

On August 6, 2009, the Office of the Special Inspector General for TARP (SIGTARP) published its report on whether external parties (i.e. politicians) unduly influenced TARP Capital Purchase Program decisions.  We will write more about that subject shortly, but the Report also provided the most detailed summary that we’ve seen of the factors considered by Treasury and the federal banking regulators in determining whether to approve a TARP application.

First, composite CAMELS ratings clearly played a significant role in determining the likelihood of success for any given institution.

  • 1-rated institutions were generally sent directly to Treasury for approval, and seemingly regularly approved for Capital Purchase Program funds.
  • 2-rated institutions with “acceptable performance ratios” were also sent directly to Treasury for approval, and again appear to have been regularly approved for funds.  2-rated institutions with “unacceptable performance ratios” were subject to further review by the interagency council, where at least three of the four federal banking regulators had to approve the application.  The Report states that the interagency council then analyzed “the viability of the institution based on the quantitative and qualitative  factors of the case” in determining whether to recommend approval to Treasury.
  • 3-rated institutions were originally treated like 2-rated institutions, but “relatively early in the CPP application review process,” Treasury decided that all 3-rated institutions needed to be reviewed by the interagency council.
  • 4- or 5-rated institutions were generally asked to withdraw, without the application being forwarded to the interagency council.

The Treasury would then make an independent evaluation of each application before making recommendations to the three-member Treasury Investment Committee.  The Treasury Investment Committee would then make a recommendation for final approval to the Assistant Secretary.  While only the Assistant Secretary can actually approve a TARP CPP application (all other actions are merely recommendations to approve), according to the Report, the Assistant Secretary had not rejected any recommendation forwarded by the Investment Committee for approval.

Performance Ratios

The Report also includes, as an Appendix, a copy of a “Case Decision Memo Template” that appears to have been the form used by the region/district level office of each federal banking regulator that reviewed TARP CPP applications.  The Memo provides further guidance on the specific performance ratios considered by the agencies.  In addition to CAMELS and CRA ratings, the  Memo called for an evaluation of the following performance ratios, both before and after a TARP infusion and both for the holding company and the largest bank subsidiary:

  • Tier 1 Risk-Based Capital
  • Total Risk-Based Capital
  • Tier 1 Leverage Ratio
  • Classified Assets/(Net Tier 1 Capital + ALLL)
  • (NPLs + OREO)/(Net Tier 1 Capital + ALLL)
  • Construction & Development Loans/Total Risk-Based Capital

While the first three performance ratios are consistent with the three historical measures of bank capitalization, the last three performance factors highlight the focus of the banking regulators on these ratios.

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