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Category Archives: Troubled Institutions

Fraudulent E-Mails Claiming to Be From the FDIC

By Rob Klingler - Thursday, October 29, 2009

We are aware of several fraudulent emails circulating purporting to be from the FDIC.  Subject lines include: “FDIC has officially named your bank a failed bank” and “FDIC Alert: you need to check your Bank Deposit Insurance Coverage.”

These e-mails and the associated Web site are fraudulent. Recipients should consider the intent of these e-mails as an attempt to collect personal or confidential information, some of which may be used to gain unauthorized access to on-line banking services or to conduct identity theft.

The FDIC does not issue unsolicited e-mails to consumers. Financial institutions and consumers should NOT follow the link in the fraudulent e-mail.

The FDIC has released a special alert confirming that these announcements are not from the FDIC.

The official FDIC website does contain useful information if you have questions about FDIC insurance; alternatively, we encourage you to contact your bank if you have questions about whether your deposited funds are insured.

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FDIC Issues Final Statement of Policy on Investor Qualifications for Failed Bank Acquisitions

By BT Atkinson - Wednesday, September 23, 2009

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.

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Bank Eligibility to Bid for Loss Sharing Arrangements

By Rob Klingler - Friday, September 4, 2009

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

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Pictorial Perspective of Atlanta Real Estate Market

By Rob Klingler - Thursday, April 16, 2009

SunTrust Robinson Humphrey has created a depressing slideshow of Atlanta’s residential and CRE properties in development (or in lack of development).  From the SunTrust Robinson Humphrey report:

While the city’s residential real estate lot inventory woes are well known to the investment community, we believe the extent of inventory in CRE property types like office and retail centers is not fully appreciated.  We took some photos of residential and CRE properties around Atlanta, which is admittedly a small sample.  Based on our observations and the statistics, we believe there are significant and growing vacancies around the city, particularly in the outer suburban areas like Alpharetta and Cumming (North of Atlanta).  We witnessed particularly high vacancy rates in numerous outer suburb strip and neighborhood retail centers.  Atlanta’s retail vacancy rate was 9.9% at the end of 1Q09, compared to the national average rate of 7.2% and Atlanta’s 4Q08 level of 9.0%.  This is the sixth highest level of retail vacancy among the 63 major U.S. retail markets.  Moreover, Atlanta led all major U.S. markets in aggregate retail space delivered during 1Q09, with 1.7 million square feet hitting the market.

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The Lottery is Not an Acceptable Funding Source

By Rob Klingler - Friday, March 27, 2009

On March 3, 2009, the FDIC published Financial Institution Letter FIL-13-2009 on the use of volatile or special funding sources by financial institutions that are in a weakened condition.  The guidance generally suggests that banks should be run safely and soundly.

Directors and officers of institutions that are in a weakened financial condition are expected to oversee the operations of these institutions in a way that stabilizes the risk profile and strengthens the financial condition. Actions taken by a weak financial institution to increase its risk profile are inconsistent with this expectation.

While the guidance is overly broad, we believe the FDIC guidance may be focused on two practices:

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60 Minutes on Banking

By Rob Klingler - Friday, March 20, 2009

Over the last two weekends, 60 Minutes has aired two interviews that are directly relevant to community bankers.

On Sunday, March 15, 2009, Federal Reserve Chairman Ben Bernanke sat down with 60 Minutes for a rare interview.  Chairman Bernanke discusses the current financial condition of the country as well as the actions taken by the Federal Reserve to address those conditions. (Video: Part I, Part II)

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A New Capital Injection Program?

By Rob Klingler - Friday, February 6, 2009

On February 6, 2009, the Wall Street Journal ran a story indicating that the Treasury Department is shifting away from a “bad bank” concept and towards a second round of capital injections.  This second round of capital injections, according to the Wall Street Journal, would carry stricter terms than the current TARP Capital Purchase program and would be targeted towards weaker banks.

Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years.

To get money, banks would likely have to pay a higher dividend to the government than the 5% rate the government charged in the first round of infusions and agree to a host of new restrictions, such as lending above a baseline level, reporting frequently on their use of the money and curbing executive salaries. While Treasury wouldn’t preclude healthy banks from participating, the stricter terms would likely attract primarily weaker banks in need of capital.

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Interest Rate and Brokered Deposit Restrictions

By Rob Klingler - Wednesday, January 28, 2009

On January 27, 2009, the FDIC proposed to amend its regulation relating to interest rate restrictions on institutions that are less than well capitalized.  The proposed regulation would tie the interest rate caps to published national interest rates and eliminate the concept of local deposit market areas.

Section 29 of the Federal Deposit Insurance Act places statutory limitations on the ability of any insured depository institution that is not well capitalized to accept funds obtained by or through any deposit broker.  Because of the statutory definition of a deposit broker, these limitations also limit the interest rates which may be paid by insured depository institutions that are less than well-capitalized. In order to be considered well-capitalized, an institution may not be subject to any written agreement or order issued by its primary federal regulatory which requires the institution to meet and maintain a specific capital level for any capital measure.

Under the existing regulations, any institution that is not well capitalized (including any institution subject to a regulatory enforcement action with capital requirements) may generally not pay interest in excess of 75 basis points over the average interest paid for comparable deposits in the institution’s “normal market area.”

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WSJ Articles on Political Interference and Nationalization

By Rob Klingler - Thursday, January 22, 2009

On January 22, 2009, the Wall Street Journal published two stories of importance to community bankers:

The “Political Interference” article focuses on the potential role of politics in determining which institutions receive TARP  Capital.

Bankers, regulators and politicians complain of a secretive and opaque process for deciding which banks get cash and which don’t. The goal of aiding only banks healthy enough to lend — laid out by the Treasury when the program began — clearly seems to have shifted, but in a way that’s hard to pin down and that the Treasury has declined to explain. Part of the problem is that some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states.

The article focuses on OneUnited Bank in Boston, Massachusetts, which received $12 million in TARP Capital in December.  Nominally, OneUnited Bank was certainly a poor candidate for receiving TARP Capital; according to its September 30, 2008 Call Report, One United Bank was critically undercapitalized, with a leverage ratio of 1.7%, a Tier 1 risk-based capital ratio of 2.92%, and total risk-based ratio of 3.67%.  In addition, it was subject to a Consent Order to Cease & Desist with the FDIC.

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FDIC and Open Bank Assistance

By Rob Klingler - Monday, January 12, 2009

On January 2, 2009, the Wall Street Journal ran a story on the possibility of the FDIC agreeing to assume future losses on the troubled assets of a failed institutions.  The FDIC has used versions of the loss-sharing model several times last year, but with the exception of the initial attempt to rescue Wachovia, only as part of the receivership of a failed institution.

“It is something that we plan on doing in the future where it’s appropriate,” says Herb Held, assistant director in the FDIC’s division of resolutions and receiverships. “I think it’s a good deal for everybody: the FDIC, the acquiring bank and the borrowers. It keeps the assets where they were.”

This leaves open the question of whether the FDIC will begin using a loss-sharing approach to facilitate open bank transactions.  Some advisers believes that the FDIC will use this approach to effectively entice sound financial institutions to purchase struggling banks, or those which may be in imminent danger of failing.  While there is no existing precedent during this period of economic turmoil, open bank assistance was a well regarded and oft used solution in earlier troubled times.  Where FDIC does provide stop loss or other support, it comes ahead of shareholders in the troubled institution, so it does not help shareholders in most instances; however, it does prevent the extra disruption of a failure.  Traditionally, FDIC officials informally estimated the additional loss upon a failure was at least 15% higher than the loss where the troubled bank is acquired by a healthy bank in an open bank transaction.  As a result, properly structured stop loss or other assistance programs should save the deposit insurance fund real dollars.

For now, the FDIC appears tied to the position that it can only offer loss-sharing following receivership and a full auction of the troubled or failing institution in order to comply with its legal obligation to provide the least-costly solution.  If a tangible proposal for a loss sharing were presented to a regional FDIC office, such a proposal would be have to be structured to assure “least costly” status and would be forwarded to DC for review.

Accordingly, we recommend that neither acquiring banks, nor troubled institutions looking to be acquired, put too many eggs in the basket hoping for FDIC loss-sharing assistance.

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