Alert September 01, 2009

FDIC Issues Letter Extending Supervisory Procedures for De Novo FDIC - Supervised Depository Institutions

The FDIC issued a financial institution letter (FIL-50-2009, the “Letter”) in which it advised the banking industry that it was extending its special supervisory period for de novo state member depository institutions (“DIs”) from three to seven years.  Throughout the de novo period, newly FDIC-insured DIs will be subject to higher capital requirements, more frequent examinations, and other requirements.  The 8% Tier 1 leverage capital ratio requirement will now apply to de novo DIs for seven years rather than for three years. Furthermore, de novo DIs will now be required to obtain prior FDIC approval for material changes to their business plans for seven years from establishment rather than only during the three years.  The new business plan requirements will not apply to DIs that are currently more than three years old.  The FDIC said in the Letter that experience during the current economic downturn had demonstrated that “de novo DIs pose an elevated risk to the FDIC’s Deposit Insurance Fund,” and that many of the failures of the de novo DIs in 2008 and 2009 occurred during the fourth through seventh years of the de novo DI’s operation.

With respect to examinations, the Letter said that the FDIC is revising its risk management compliance and Community Reinvestment Act (“CRA”) examination schedules for de novo DIs.  De novo DIs will undergo a limited scope risk management examination within the first six months of operation and a full-scope risk management examination within the first twelve months.  In subsequent years through year seven de novo DIs will be on a twelve month risk management examination schedule.  For compliance and CRA examinations, de novo DIs will have full-scope examinations during the first twelve months of operation, will have a visitation in the second year, a compliance examination (but not a CRA examination) in the third year, a visitation in the fourth year and both a compliance and CRA examination in the fifth year.  Thereafter de novo DIs may be placed on a regular compliance and CRA examination schedule (with longer intervals between examinations).

The Letter further states that before the end of its third year of operation, a de novo  DI must submit updated financial statements, pro forma financial projections and business plans for years four through seven.  In this submission the de novo DIs will also be required to provide a strategic plan that highlights capital maintenance plans, dividend payment plans, proposed product offerings and other strategies that may alter the de novo DI’s risk profile.

Finally, the FDIC states in the Letter that these expanded supervisory procedures will generally not apply to de novo DIs that are subsidiaries of existing “eligible” holding companies (in general, those that are highly rated and not subject to supervisory orders or agreements).