As reported in our previous Client Alerts, publicly held banks, thrifts and their holding companies that wished to participate in the TARP Capital Purchase Program (“CPP”) were required to apply by November 14, 2008. We also reported that while the Emergency Economic Stabilization Act included insurance companies in TARP, the actual Treasury guidelines did not include them in the CPP. Notwithstanding the actions with respect to AIG, we stated that the only practical approach for insurance companies to access the CPP was to acquire a qualified financial institution (“QFI”).
Private Bank Capital Purchase Program
Two days after the deadline for publicly held banks, thrifts and their holding companies had passed, Treasury announced creation of the Private Bank CPP under which privately held banks, thrifts and their holding companies (in the case of the Private Bank CPP, individually a QFI) would be eligible for CPP participation if they apply by December 8, 2008. Under the Private Bank CPP, Treasury may invest in preferred shares of a QFI in an amount equal to not less than 1 percent of the institution’s “risk-weighted assets” and not more than the lesser of (i) $25 billion and (ii) 3 percent of the assets of the consolidated holding company.
At the moment, the Private Bank CPP expressly excludes Subchapter S corporations, mutually owned thrifts, and mutual thrift holding companies.
Reliance of Insurers Upon Placeholder Provisions
Treasury has been encouraging insurers and insurance holding companies otherwise foreclosed from CPP participation to apply for approval to become a bank holding company (“BHC”) or savings and loan holding company (“SLHC”) through ownership of U.S. banks or U.S. savings associations that were in existence on or before December 8, 2008. Such applications would be permitted under the so-called “placeholder provision.”
In the Treasury Private Bank Program Q&A, Treasury stated that insurance companies are permitted to conditionally apply by December 8, 2008 for participation in the Private Bank CPP on the basis of a pending application to acquire a qualified institution through the target institution's appropriate federal banking regulator. Final approval of the holding company application must be granted by the appropriate regulator by January 15, 2009. Depending on whether the acquired depository institution subsidiary is a bank or thrift, an insurance company would be subject to supervision by the Federal Reserve Board (“FRB”), for BHCs, or the Office of Thrift Supervision (“OTS”), for SLHCs. To date, it has been publicly reported that five insurers or insurance holding companies (namely Genworth Financial Inc., Lincoln National Corp., The Phoenix Cos. Inc., The Hartford Financial Services Group Inc. and Transamerica Corp.) have applied for SLHC status and one insurer (namely Protective Life Corp.) has applied for BHC status.
In a related development, the Federal Deposit Insurance Corporation (“FDIC”) today announced that it likewise established a modified bidder qualification process for failing depository institutions by those who would need to establish or acquire a bank or thrift holding company. Click here to view the announcement. The FDIC will consider abbreviated information submissions and applications and may issue conditional approvals for this purpose.
Factors Influencing Choice of Acquisition Target
The decision as to whether to acquire a bank or savings association may be influenced by the capital adequacy analysis applied to BHCs and SLHCs. Under applicable federal rules governing BHCs with consolidated assets over $500 million, the financials of all members of a BHC affiliated group must be consolidated for purposes of calculating compliance with minimum capital requirements. As a consequence, any highly leveraged insurance holding company (such as financial guaranty insurers and to a lesser degree life insurers) that becomes a BHC in order to participate in the Private Bank CPP would encounter capital compliance issues which would have to be resolved prior to obtaining approval.
Under Section 5(c) of the Bank Holding Company Act of 1956 (12 U.S.C. 1844(c)) as amended by the Gramm-Leach-Bliley Act, the FRB is not permitted to supplant the capital regulatory compliance requirements of state insurance regulatory authorities. Presumably, an insurance holding company's capital requirement would have to be modified by the FRB to comply with this section. However, a reconciliation of the assets and liabilities for regulatory compliance may not yield any relief if the leverage is in a non-regulated entity.
The OTS, however, does not impose either consolidated or unconsolidated regulatory capital requirements on SLHCs. Instead, an SLHC is required to maintain a prudential level of capital to support its risk profile. Accordingly, the equivalent of the BHC “risk-weighted assets” standard would be a prudential level of capital calculated in light of the nature of the overall risk and asset quality of the entire SLHC and its subsidiaries which also would take into consideration the results of state regulatory review of subsidiary insurance operations. Consequently, as a general matter, an SLHC is more likely than a BHC to accommodate insurance operations favorably.
An insurance company that seeks to avoid BHC regulation but for various reasons prefers to acquire a commercial bank can do so provided it converts the bank to a thrift. In that case, the insurance company must assure the OTS that the bank's investments and operations conform to OTS rules which are somewhat more limiting particularly with respect to banks with heavy concentrations of non-real estate related loans.
TARP Access Might Be Possible After Private Bank CPP Application Deadline
The Private Bank CPP currently excludes Subchapter S corporations, mutually owned thrifts, and mutual thrift holding companies. Treasury reportedly is developing a program for these institutions. An insurer or insurance holding company that misses the December 8th deadline to apply for participation in the Private Bank CPP might still access TARP funds if Treasury later expands the CPP to cover Subchapter S corporations and mutual thrifts and mutual thrift holding companies. The tax consequences of acquiring a large Subchapter S corporation will be highly problematical. However, it may be feasible for a large insurance company acquirer to gross up any adverse tax consequences in the case of a small bank. This could be done at relatively small cost given the advantages of securing TARP capital in an amount based on the consolidated entity's assets.
Because OTS prohibits the acquisition of mutual banks by stock companies except in the case of a failing mutual, there are few mutual bank targets that would be desirable to a stock acquirer. Although a mutual insurance company acquirer may seek OTS approval to form a mutual holding company to absorb a profitable mutual bank, the precedents are few and OTS would be unlikely to expedite consideration of such a novel transaction in time for approval of TARP funds.