On May 1, 2017, the FDIC released its "Applying for Deposit Insurance - A Handbook for Organizers of De Novo Institutions" (the "Handbook") to assist potential organizers of new or "de novo" institutions with the deposit insurance application process and the path to obtaining deposit insurance for newly chartered banks. The Handbook highlights three (3) primary activities: (1) Pre-Filing Activities, (2) the Application Process, and (3) Pre-Operating Activities. Over the next few weeks, our Banking & Financial Services Newsletters will explore each of these activities. This week’s newsletter explores Part I - Pre-Filing Activities.
Management. In the pre-filing stage, the FDIC reminds organizers considering applying for a new charter that the selection of the proposed institution’s board of directors and management team "is the single most important contributor to the success of any institution." The organizers’ selection of a board of directors and management team must center around the specific products and services offered, as well as the markets that the proposed institution will serve.
Board of Directors. A minimum of five (5) directors is required, a majority of whom must be independent (nonemployees), and should include individuals with previous banking experience. Of note, the FDIC reminded organizers that they should consider recent agency guidance on creating and strengthening diversity and inclusion. Recognizing the need to attract qualified candidates, the FDIC acknowledged that it will not bring civil suits against directors of failed institutions who fulfill their duties of loyalty and care (including the business judgment rule, where applicable), and who make reasonable business decisions.
Executive Management. The management team’s most important consideration should be the proposed CEO, who should "have a demonstrated record of performance at the executive level with an institution of comparable size." Further, the FDIC intends to review compensation arrangements such as stock benefit plans, severance packages, and employment agreements. Previous experience in executive management at a failed or troubled financial institution or nonbanking institutions that have a history of bankruptcy filings may disqualify a candidate.
Charter, Ownership Structure, and Tax Election. The Handbook outlines the various charter options that a proposed institution may choose—such as a state charter or national charter—as well as ownership considerations. Any individual or related group that will own more than 10 percent of the proposed institution will have to submit a separate application. Groups may elect a C corporation, S corporation, or limited liability company form of incorporation.
Business Plan and Capital. Finally, the Handbook takes considerable length outlining the contents of a successful business plan, which will guide the first three (3) years of an institution’s operation, and addresses the compliance function, cybersecurity threats, and financial management considerations. Although the FDIC does not prescribe a minimum amount of initial capital, it expects a minimum leverage ratio of 8 percent and no additional capital raises (which may prohibit any dividends) during the first three years of operation.