On August 26, 2009, the Federal Deposit Insurance Corporation ("FDIC") issued a Final Statement of Policy on Qualifications for Failed Bank Acquisitions ("Final Statement"). The Final Statement is intended as a guide to private capital investors with respect to investments in or acquisitions of failed banks and thrifts insured by the FDIC. The Final Statement does not apply to investors that entered into partnerships with bank holding companies where the holding company has a strong majority interest in an institution and has an established record for successful operation or to investors holding less than 5 percent of total voting power of a bank or thrift or its holding company provided there is no evidence of concerted action between investors. Nor does the Final Statement apply to investors in institutions which have maintained a Camels 1 or 2 rating continuously for seven years. A Camels rating is a regulatory rating of a bank's overall condition with a "1" being the best.
The Final Statement imposes several requirements on applicable investors. It requires the investors to maintain sufficient capital so that the ratio of Tier 1 common equity to total assets of the acquired institution will be at least 10 percent throughout the first three years after the acquisition. If such capital drops below 10 percent, the institution will be "undercapitalized" and, therefore, subject to FDIC disciplinary actions. Investors also must maintain ownership for at least three years.
The Final Statement requires a cross guaranty when two or more depository institutions are at least 80 percent owned by common investors. The FDIC may waive cross guaranty obligations if enforcing such obligations would not reduce the cost of an institution's failure to the FDIC.
All transactions with affiliates (not just those transactions prohibited by Section 23A and 23B of the Federal Reserve Act and the Federal Reserve Board's rules) are prohibited under the Final Statement. An "affiliate" means any company in which the investors own directly or indirectly at least 10 percent of the equity of such company and in which they have maintained ownership for at least 30 days. Existing extensions of credit are exempt. Investors should provide regular reports to the institution identifying all their affiliates.
The FDIC will not approve "complex and opaque" ownership structures (so-called "silo structures") that make it difficult to ascertain who the decision-making parties are. For example, a structure in which a private equity firm with multiple investment vehicles funded and apparently controlled by the private equity firm seeking to acquire ownership of an insured depository institution would not be approved.
Finally, private capital investors are restricted from having entities located in a "bank secrecy jurisdiction" in the ownership structure. "Bank secrecy jurisdiction" is defined as a country that applies a bank secrecy law that limits U.S. bank regulators from determining compliance with U.S. laws or prevents them from obtaining information on the competence, experience, and financial condition of applicants and related parties; lacks authorization for the exchange of information with U.S. regulatory authorities; or does not provide for a minimum standard of transparency for financial activities.
Members of the Firm have discussed the Final Statement with representatives of the FDIC. We have been told that investors must obtain a shelf charter. It is likely investors will seek a national charter so acquisitions can be made in various states. To obtain such a charter, investors must, among other things, have sufficient capital and have banking experience and pass rigorous background checks for organizers and proposed officers and directors. A detailed business model, acceptable to the FDIC, must be prepared. Moreover, the investment entity must obtain FDIC insurance. Assuming the investors have adequate capital and banking experience, the process may take as little as 6 to 8 weeks. If an investor wishes to proceed, the first step should be a meeting between the investor and its counsel, on the one hand, and the FDIC and OCC (the regulator of national banks) on the other.
The full text of the Final Statement is available at http://www.fdic.gov/news/board/Aug26no2.pdf.