FDIC De Novo Guidance Provides Insight into FDIC Expectations
By: BEAU J. HURTIG
The Federal Deposit Insurance Corporation (FDIC) recently issued a Financial Institution Letter (FIL) entitled “Enhanced Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions.” This FIL applies to state nonmember institutions insured seven years or less. The title implies that banks formed in the future will be subject to enhanced supervision. This enhanced supervision is consistent with the FDIC’s trend toward approving fewer de novo banks, and the FIL itself states “recent experience demonstrates that newly insured institutions pose an elevated risk to the Deposit Insurance Fund.” How does the FIL apply to existing banks already in their first seven years of operation, and does the FIL provide any insight with respect to the FDIC’s examination priorities?
New De Novo Bank Requirements
The FIL institutes the following requirements with respect to state nonmember banks:
- The de novo period requiring higher capital levels and more frequent examinations is extended from three years to seven;
- Banks within the de novo period will be subject to risk management examinations every 12 months;
- Banks will undergo a full-scope compliance examination and CRA evaluation within the first 12 months, a visitation in the second year, a compliance-only examination in the third year, a visitation in the fourth year, a full-scope compliance examination and CRA evaluation in the fifth year, and regular examinations thereafter;
- Banks in years one through three of operation must submit financial projections and updated business plans for years four through seven; and
- Banks submitting business plans must receive prior FDIC approval to deviate materially from such plans.
All FDIC De Novo Bank Requirements Do Not Apply to All De Novo Banks
The requirements set forth in the FIL do not apply equally to all banks within the newly extended seven-year de novo period. Importantly, banks that had completed three years of operation as of August 28, 2009, will not be required to submit financial projections and updated business plans for years four through seven. However, those banks will remain subject to annual risk management examinations through year seven, a compliance visitation in the fourth year, and a full-scope compliance examination and CRA evaluation in the fifth year.
The FIL generally does not apply to subsidiaries of existing holding companies that have consolidated assets of at least $150 million, a BOPEC rating of at least 2, and at least 75% of consolidated depository institution assets comprised of “eligible depository institutions.” Eligible depository institutions have a CAMELS rating of 1 or 2, have satisfactory or better CRA ratings, have compliance ratings of 1 or 2, are well capitalized, and are not subject to any enforcement actions.
The Guidance Indicates Possible Examination Points of Emphasis
Although the FIL purports that the following factors are common to failed de novo institutions, all banks should view the following with caution as they are likely to be points the FDIC will emphasize in the future:
- rapid growth;
- over-reliance on volatile funding, including brokered deposits;
- concentrations without compensatory management controls;
- noncompliance with conditions in the deposit insurance orders;
- weak risk management practices;
- unseasoned loan portfolios which mask potential deterioration during an economic downturn;
- weak compliance management systems leading to significant consumer protection problems; and
- involvement in certain third-party relationships with little or no oversight.
Recently enacted FDIC guidance does not universally implement requirements for banks in years one through seven, so more analysis may be necessary for your bank. The guidance also provides insight as to FDIC examination points of emphasis.