Must Know - 12.1 Applications

Question 1

Requirements to be eligible for expedited application processing

Answer 1

Eligible depository institutions are defined in the regulation as those which meet the following criteria:
• Received a composite rating of 1 or 2 under the Uniform Financial Institutions Rating System (UFIRS) as a result of its most recent federal or state examination.
• Received a satisfactory or better Community Reinvestment Act (CRA) rating from its primary federal regulator at its most recent examination, if subject to CRA
• Received a compliance rating of 1 or 2 from its primary federal regulator at its most recent examination
• Is well-capitalized as defined in the appropriate capital regulation and guidance of the institution’s primary federal regulator; and
• Is not subject to a cease and desist order, consent order, prompt corrective action directive, written agreement, memorandum of understanding, or other administrative agreement with its primary federal regulator or chartering authority.

Question 2

Applications for Deposit Insurance

Answer 2

Sections 5 and 6 of the Federal Deposit Insurance Act specifically deal with deposit insurance.

Question 3

The seven statutory factors that must be considered when reviewing an application for deposit insurance

Answer 3

1. Financial History and Condition
2. Adequacy of the Capital Structure
3. Future Earnings Prospects
4. General Character of the Management
5. Risk Presented to the Insurance Fund
6. Convenience and Needs of the Community to be Served
7. Miscellaneous - The existence of any conflicting applications to establish depository facilities in the immediate area should be indicated and receive appropriate comment in the examiner’s report of investigation. If operation of a trust department is contemplated…

Question 4

The minimum amount of Tier 1 capital (level and percentage) a new institution must maintain during the first three years of operations

Answer 4

Normally, the initial capital of a proposed depository institution should be sufficient to provide a Tier 1 capital to assets leverage ratio (as defined in the appropriate capital regulation of the institution’s primary federal regulator) of not less than 8.0% throughout the first three years of operation.

Question 5

Generally, financial projections submitted with application must be based on reasonable assumptions and show profitability within three years

Answer 5

TRUE

Question 6

Assessment of management is generally the most important factor; to be rated “favorable”, management team must be such that it would get a 2 rating

Answer 6

TRUE

Question 7

If blanket bond coverage is less than $1MM, bank should have excess employee dishonesty bond of at least $1MM

Answer 7

TRUE

Question 8

Applications to establish a branch or move a main office/branch - The eight items that must be included/discussed in the application

Answer 8

Filing Procedures for Branch Applications
In applying to establish a branch or to relocate an existing office, State nonmember insured banks must file an application in letter form with the FDIC. A complete letter application shall include:
(1) a statement of intent to establish a branch or to relocate the main office or a branch;
(2) the exact location of the proposed site including the street address; and
(3) details concerning any involvement in the proposal by an insider of the bank;
(4) a statement on the impact of the proposal on the human environment, including information on compliance with the provisions of the NEPA (National Environmental Protection Act);
(5) a statement as to whether or not the site is eligible for inclusion in the National Register of Historic Places for purposes of complying with the applicable portions of NHPA (National Historic Preservation Act);
(6) comments on any changes in services to be offered, the community to be served, or any other effect the proposal may have on the applicant’s compliance with the Community Reinvestment Act;
(7) a copy of each newspaper publication required; and
(8) when an application is submitted to relocate the main office of the applicant from one state to another, a statement of the applicant’s intent regarding retention of branches in the state where the main office exists prior to relocation.

Question 9

Applications for consent to exercise trust powers

Answer 9

The FDIC does NOT grant trust powers; rather, it gives consent to exercise such powers as granted by state authorities

Question 10

When analyzing application to exercise trust powers, consideration is given to same 7 factors considered in applications for deposit insurance, as well as a few others

Answer 10

True

Question 11

Change in bank control act

Answer 11

o Every person (broadly defined) seeking to acquire control (power to vote 25% or more of stock) of a bank is required to provide 60 days prior written notice to FDIC
o Burden of disapproval falls on FDIC; absence of any reason to disapprove equates to tacit approval
o The 6 factors in evaluating the notice
o 25% trigger is valid even if the person does not actually gain control; for example, person goes from 15% ownership to 25% ownership, but another person owns 50%; notice is still required
o Some transactions which result in acquiring 25% or more of stock are exempt from prior notice requirement, but after-the-fact notice is still required

Question 12

Application for retirement of capital

Answer 12

Refer to the current FDIC Statement of Policy on Capital in the Capital Section of this Manual. Section 303.241 of the FDIC Rules and Regulations contains the procedures to be followed when an institution seeks the FDIC’s prior approval to reduce the amount or retire any part of its common or preferred stock, or to retire any part of its capital notes or debentures.

Question 13

Application for retirement of capital - The eight items required to be included/discussed in the application

Answer 13

1. type and amount of the proposed change to the capital structure and
2. the reason for the change;
3. a schedule detailing the present and proposed capital structure;
4. the time period that the proposal will encompass;
5. if the proposal involves a series of transactions affecting Tier 1 capital components which will be consummated in twelve months or less, the application shall certify that the insured depository institution will maintain itself as a well-capitalized institution as defined in Part 325 of the FDIC Rules and Regulations, both before and after each of the proposed transactions;
6. if the proposal involves the repurchase of capital instruments, the amount of the repurchase price and the basis for establishing the fair market value of the repurchase price;
7. a statement that the proposal will be available to all holders of a particular class of outstanding capital instruments on an equal basis, and if not, the details of any restrictions;
8. and the date that the applicant’s board of directors approved the proposal.
   Expedited processing is available for eligible depository institutions as defined in Part 303.

Question 14

Application for retirement of capital - Adequacy of remaining capital is the chief factor considered and must also consider the 7 statutory factors from application for deposit insurance

Answer 14

True

Question 15

Merger applications considerations

Answer 15

o Competition after the merger is primary consideration; FDIC may not approve merger which would create a monopoly or substantially lessen competition
o FDIC also must consider projected condition of the resulting bank, and may deny if final entity will have inadequate capital, unsatisfactory management, or poor earnings prospects

Question 16

Brokered Deposit Waiver applications

Answer 16

Section 224 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 added Section 29 to the FDI Act, prohibiting the acceptance, renewal or rollover of brokered deposits by any undercapitalized insured depository institution (bank or savings association) except on specific application to and waiver of the prohibition by the FDIC.

Question 17

Brokered Deposit Waiver applications - The 8 items that must be included/discussed in the application

Answer 17

Applications should contain:

1. the time period for which the waiver is requested,
2. a statement of the policy governing the use of brokered deposits in the institution’s overall funding and liquidity management program;
3. the volume, rates and maturities of the brokered deposits held currently and anticipated during the waiver period sought, including any internal limits placed on the terms, solicitation and use of brokered deposits;
4. how brokered deposits are costed and compared to other funding alternatives and how they are used in the institution’s lending and investment activities, including a detailed discussion of asset growth plans;
5. procedures and practices used to solicit brokered deposits, including an identification of the principal sources of such deposits;
6. management systems overseeing the solicitation, acceptance and use of brokered deposits;
7. a recent consolidated financial statement with balance sheet and income statements;
8. and the reasons the institution believes its acceptance, renewal or rollover of brokered deposits would pose no undue risk.

Question 18

Brokered Deposit Waiver applications - If granted, waivers should be for a fixed period generally no longer than 2 years, and may be revoked at any time

Answer 18

True

Question 19

Definition of minority-owned institution

Answer 19

the term minority-owned institution means an FDIC-insured depository institution where more than 50% of the voting stock is owned or controlled by minority individuals or organizations, or in the case of a mutual depository institution, the majority of the Board of Directors, account holders and the community which it serves are members of a minority group. The term “minority” means any Black American, Native American, Hispanic American, or Asian American.

Question 20

Section 19 applications

Answer 20

o Application to and written consent from FDIC is required for person who has been convicted of any criminal offense involving dishonesty, money laundering, breach of trust, or who has entered into pre-trial diversion program for such offense, from:
 Becoming or continuing as an IAP
 Owning or controlling a bank
 Participating in conduct of affairs of bank, directly or indirectly

Question 21

Subpart F of Part 303 – Change of Director or Senior Executive Officer

Answer 21

Insured state nonmember banks are to give the FDIC written notice at least 30 days prior to adding or replacing any member of its board of directors, employing any person as a senior executive officer of the bank, or changing the responsibilities of any senior executive officer so that the person would assume a different senior executive officer position if:
(1) The bank is not in compliance with all minimum capital requirements applicable to the bank
(2) The bank is in troubled condition, or
(3) The FDIC determines, in connection with its review of a capital restoration plan that such notice is appropriate
o Waivers to the pre-filing requirement may be applied for and granted if delay would threaten the safety or soundness of the bank or not be in the public interest. In the case of the election of a new director not proposed by management at a meeting of the shareholders, the prior 30-day notice is automatically waived provided that a complete notice is filed with the appropriate regional director within two business days after the individual’s election.

Question 22

Golden Parachute and severance plan payments

Answer 22

– Pursuant to section 18(k) of the FDI Act and Part 359 of the FDIC Rules and Regulations, an insured depository institution or depository institution holding company may not make golden parachute payments or excess nondiscriminatory severance plan payments unless permission is obtained.