The
OCC, Federal Reserve Board, FDIC and OTS have collectively approved a final
rule that permits banking organizations to reduce the goodwill deduction to
tier 1 capital by the amount of any associated deferred tax liability. Banks,
savings associations and bank holding companies are allowed to adopt this rule
for the reporting period ending December 31, 2008.
Prior
to the adoption of this rule, the tier 1 capital calculation required banking
organizations to deduct the full carrying amount of goodwill and other
intangible assets resulting from a taxable business combination. This full
deduction, however, was inconsistent with other aspects of the tier 1 capital
computation. Other intangible assets acquired in nontaxable transactions, for
example, could be deducted from tier 1 capital net of any associated deferred
tax liability.
In
a taxable business combination, the deferred tax liability arises from differences
between tax treatment and book treatment of the asset. And, that deferred tax
liability is not routinely settled for financial reporting purposes; it remains
until the goodwill is written down, written off or otherwise derecognized. If
the entire amount of the goodwill is impaired, the banking organization would
also derecognize the associated deferred tax liability for financial reporting
purposes. Therefore, the banking organization’s maximum exposure to loss with
respect to the goodwill asset would be the full carrying value of that goodwill
less the deferred tax liability. The spirit of this rule change is to improve
the tier 1 capital computation by reflecting the banking organization’s actual
exposure to loss with respect to goodwill arising from taxable business
combinations. Also,
the banking organization that deducts goodwill net of the associated deferred
tax liability from tier 1 capital may not net that deferred tax liability
against deferred tax assets for the computation of regulatory capital
limitations on deferred tax assets.
Comments largely
positive
On
September 30, 2008, the regulatory agencies published a notice of proposed
rulemaking requesting comments on this change. Of the thirteen comments
received, only two opposed the change. Five comments suggested that the rule be
adopted and available to banking organizations for the reporting period ending
on December 31, 2008. The agencies have agreed with this request.
Some
of the comments also requested that the change be applied to other intangible
assets as well, but did not provide sufficient data or analysis to support that
request.
Other miscellaneous
changes
The
OCC is also adopting other miscellaneous changes as noted in the proposed rule,
including:
·
Clarification
of the current treatment of intangible assets acquired due to a nontaxable
purchase business combination
·
Replacement
of the term “purchased mortgage servicing rights” with “servicing assets”
·
Clarification
of OCC’s interpretation of existing regulatory text
·
Amendment
of the goodwill definition to conform to GAAP
To
review the full text of the final rule, please click here (http://www.fdic.gov/news/board/08DEC15rule4.pdf).
From Hunton and Williams, LLP
The Treasury Department and the IRS have issued favorable guidance under Internal Revenue Code Section 382 for banks engaging in merger and acquisition activities, as well as certain capital raising efforts. Given the current state of the economy, banks engaging in such transactions are likely to hold financial assets that have decreased in value. Traditionally, bank investors’ and acquirers’ use of these unrealized losses after an acquisition would be significantly limited. Under the new guidance, no such limitation would be imposed. This shift is no doubt part of a larger policy initiative to encourage the capitalization and acquisition of troubled banks in the wake of the current financial crisis.
Code Section 382 generally imposes limitations on the use of existing unrealized losses and net operating loss carryforwards against income earned after a corporation has had a change in ownership of 50 percent or more. The policy behind this rule is to prevent the development of a market where taxpayers could buy and sell tax losses. This loss limitation rule effectively prevents one corporation from buying another corporation with significant losses for the primary purpose of using those losses to offset the acquiring corporation’s future taxable income.
Generally, unrealized losses and net operating loss carryforwards can be used after an ownership change only up to the amount of the “Section 382 limitation.” The Section 382 limitation is equal to the fair market value of the corporation on the date of the ownership change multiplied by the long-term tax-exempt rate, which is published each month by the IRS. (4.65 percent in October 2008.) Notice 2008-83, however, provides that for a bank, losses on loans or bad debts that are recognized after an ownership change will not be treated as built-in losses or deductions that are attributable to periods before the change date. Practically speaking, the impact of this new rule is that acquiring banks may be able to fully utilize any unrealized losses held by target banks if the acquisitions are otherwise properly structured.
In addition, the Treasury Department and the IRS have relaxed the presumption of a tax avoidance motive for contributions made within two years of an ownership change. These “anti-stuffing” provisions attempt to disallow the arbitrary inflation of a corporation’s value when capital contributions are made in anticipation of a change in ownership, as increases in value would result in a higher limitation amount under Section 382. Currently, any contribution made within two years of a change in ownership is presumed to be part of a plan for the avoidance of tax
and is subtracted from the value of the corporation for purposes of calculating the Section 382 limitation, thus reducing the amount of losses that can be utilized after the change date. Notice 2008-78 removes this presumption altogether and provides four safe harbors under which contributions will not be deemed to be part of a plan for the avoidance of tax. This notice also makes it clear that failure to fall within one of the safe harbors is not evidence of a plan for tax avoidance. This change in the antistuffing rules is not limited to banks.
CIRCULAR 230 DISCLOSURE
TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT THIS ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING UNITED STATES FEDERAL TAX PENALTIES.
© 2008
Sanderson
State Bank, Sanderson, Texas, was closed today by the Texas Department of
Banking, and the Federal Deposit Insurance Corporation (FDIC) was named
receiver. To protect the depositors, the FDIC entered into a purchase and assumption
agreement with The Pecos County State Bank, Fort Stockton, Texas, to assume all
of Sanderson State Bank's deposits, including those that exceeded the deposit
insurance limit.
Sanderson
State Bank's sole office will reopen on Monday as a branch of The Pecos County
State Bank. All depositors of the failed bank will automatically become
depositors of The Pecos County State Bank. Deposits will continue to be insured
by the FDIC, so there is no need for customers to change their existing banking
relationship to retain their deposit insurance coverage. Customers of the
failed bank should continue to use the same banking location until they receive
further information from The Pecos County State Bank.
Over the
weekend, depositors of Sanderson State Bank will have access to all of their
money by writing checks or using ATMs or debit cards. Checks drawn on the bank
will continue to be processed. Loan customers should continue to make their
payments as usual.
As of
December 3, 2008, Sanderson State Bank had total assets of $37 million and
total deposits of $27.9 million. The Pecos County State Bank agreed to assume
all of the deposits for a .55 percent premium. In addition to assuming all of
the failed bank's deposits, The Pecos County State Bank will purchase approximately
$3.8 million of assets, and have the option to purchase owned premises and
equipment. The FDIC will retain the remaining assets for later disposition.
Customers who
have questions about today's transaction can call the FDIC toll-free at
1-866-782-1766. This phone number will be operational this evening until 9:00
p.m., CST; on Saturday from 9:00 a.m. to 6:00 p.m., CST; on Sunday from noon
until 6:00 p.m., CST; and thereafter from 8 a.m. to 8 p.m., Central. Interested
parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/sanderson.html.
The FDIC
estimates that the cost to the Deposit Insurance Fund will be $12.5 million.
The Pecos County State Bank's acquisition of all the deposits was the least
costly resolution for the FDIC's Deposit Insurance Fund compared to
alternatives. Sanderson State Bank is the 25th bank to fail in the nation this
year, and the second in Texas. The last bank to be closed in the state was
Franklin Bank, SSB, Houston, TX, on November 7, 2008.
Haven Trust
Bank, Duluth, Georgia, was closed today by the Georgia Department of Banking and
Finance, and the Federal Deposit Insurance Corporation (FDIC) was named
receiver. To protect the depositors, the FDIC entered into a purchase and
assumption agreement with Branch Banking & Trust (BB&T), Winston-Salem,
NC, to assume all of Haven Trust's deposits, including those that exceeded the
insurance limit.
The four
branches of Haven Trust will reopen on Monday as branches of BB&T. All the
depositors of Haven Trust will automatically become depositors of BB&T.
Deposits will continue to be insured by the FDIC, so there is no need for
customers to change their existing banking relationship to retain their deposit
insurance coverage. Customers of the failed bank should continue to use their
existing branches until they receive further information from BB&T.
Over the
weekend, depositors of Haven Trust can access all their money by writing checks
or using ATMs or debit cards. Checks drawn on the bank will continue to be
processed. Loan customers should continue to make their payments as usual.
As of December
8, 2008, Haven Trust had total assets of $572 million and total deposits of
$515 million. BB&T agreed to assume all of the deposits for $112,000. In
addition to assuming all of the failed bank's deposits, BB&T will purchase
approximately $55 million of the failed bank's assets. The FDIC will retain the
remaining assets for later disposition.
Customers who
have questions about today's transaction can call the FDIC toll-free at
1-866-782-1402. This phone number will be operational this evening until 9
p.m., EST; on Saturday from 9 a.m. to 6 p.m., EST; on Sunday from noon to 6
p.m., EST; and thereafter from 8 a.m. to 8 p.m., EST. Interested parties can
also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/haventrust.html.
It is
important to note that neither the FDIC as receiver nor BB&T as the
acquiring institution will e-mail customers of Haven Trust asking them to
validate their deposits or to request personal, confidential information, such
as account numbers, social security numbers or driver's license numbers.
Customers will not be asked to revalidate passwords, deposit accounts or
deposit insurance. If customers receive e-mails asking for such personal
information, they should consider the e-mails fraudulent and should not
respond.
The FDIC
estimates that the cost to the Deposit Insurance Fund will be $200 million. The
BB&T's acquisition of all deposits was the "least costly"
resolution for the FDIC's Deposit Insurance Fund compared to alternatives.
Haven Trust is the 24th bank to fail in the nation this year, and the fifth in
Georgia. The last bank to be closed in the state was First Georgia Community
Bank, Jackson, GA, on December 5, 2008.
First Georgia Community Bank, Jackson, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with United Bank, Zebulon, Georgia, to assume all of the deposits of First Georgia Community Bank.
The four branches of First Georgia Community Bank located in Jackson, Covington, Griffin and Locust Grove will reopen on Saturday as branches of United Bank. Depositors of the failed bank will automatically become depositors of United Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of the failed bank should continue to use their existing branches until further information is received from United Bank.
Over the weekend, depositors of First Georgia Community Bank access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of November 7, 2008, First Georgia Community Bank had total assets of $237.5 million and total deposits of $197.4 million. United Bank agreed to assume all the deposits for a .811 percent premium. In addition to assuming all of the failed bank's deposits, United Bank will purchase approximately $60.6 million of assets. The FDIC will retain the remaining assets for later disposition.
Customers who have questions about today's transaction can call the FDIC toll-free at 1-800-930-5172. This phone number will be operational this evening until 9 p.m., Eastern; on Saturday from 9 a.m. to 6 p.m., Eastern; and on Sunday 12 p.m. to 6 p.m., Eastern; and thereafter from 8 a.m. to 8 p.m. Interested parties can also visit the FDIC's Web site at http://wwwdev/bank/individual/failed/firstga.html.
The FDIC estimates that the cost to the Deposit Insurance Fund will be $72.2 million. United Bank's acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to alternatives. First Georgia Community Bank is the 23rd bank to fail in the nation this year, and the fourth in Georgia. First Georgia Community Bank, the failed bank, is not affiliated with First Georgia Banking Company. The last bank to be closed in the state was The Community Bank, Loganville, GA, on November 21, 2008.
FDIC
Reports Continued Deterioration in Earnings Performance, Asset Quality
The
FDIC’s third quarter, 2008 Quarterly Banking Profile was released on November
25, 2008. The industry snapshot shows a continuation of negative trends, including
depressed earnings and deteriorating asset quality. The report also provides
detail on the proposed changes to the FDIC’s assessment system.
Earnings continue
to slide
Greater
than 58 percent of member institutions reported year-over-year declines in
quarterly net income, while 64 percent generated a reduced quarterly return on
assets (ROA). Profitability issues appear to be magnified at the larger banks;
institutions with assets greater than $1 billion experienced a 47-basis point,
year-over-year ROA decline. Community banks fared somewhat better with a
25-basis point decline. Nearly one-quarter of member banks failed to earn a
profit in the quarter; this is the highest level for this metric since the
fourth quarter of 1990.
Income a mixed bag
Member
banks reported declines in several categories of noninterest income, including
securitization income and gains on sales of assets other than loans. Losses on
sales of bank-owned real estate increased almost six-fold to $518 million. Loan
sales, however, showed a marked improvement with net gains of $166 million.
This compares to net losses of $1.2 billion in the third quarter of last year.
Net
interest income also improved by 4.9 percent versus a year ago. The average net
interest margin (NIM) remained flat with last quarter, but rose 2 basis points
relative to the year-ago quarter. This trend was more pronounced among larger
institutions.
Credit losses still
piling up
As
expected, expenses related to credit losses drove much of the earnings decline.
Industry-wide, credit loss-related expenses topped $50 billion, eating up about
one-third of the industry’s net operating revenue. Aggregate loan-loss
provisions tripled from the year-ago level, reaching $50.5 billion in the
quarter. Net charge-offs increased by 156.4 percent to $27.9 billion, with
two-thirds of the increase related to loans secured by real estate. Charge-offs
related to closed-end first and second lien mortgages, real estate construction
and development loans, and loans to commercial and industrial borrowers all
showed increases well in excess of 100 percent. The quarterly net charge-off
rate jumped 10 basis points sequentially to 1.42 percent; this is the highest quarterly
net charge-off rate since 1991.
Past-due loans
still rising
Noncurrent
loans and leases, defined as being 90 days or more past due or in nonaccrual
status, increased by $21.4 billion sequentially to $184.3 billion. Nearly half
of this growth came from closed-end first and second lien mortgages. The percentage
of loans and leases that are noncurrent rose to 2.31 percent, which is the
highest percentage recorded since 1993.
Loan-loss
reserves ticked up by 8.1 percent, bringing the ratio of reserves to total
loans and leases to 1.95 percent. Reserves to noncurrent loans fell to $0.85, which
is the lowest level recorded since the first quarter of 1993.
Watch list grows 46
percent, number of new charters shrinks
Nine
banks collapsed during the third quarter, and another seventy-three were merged
into other institutions. While the number of failures marks a high point since the third quarter of 1993,
the growth of the FDIC’s list of problem banks indicates that there are still
rough times ahead; an additional fifty-four banks were added to the watch list,
bringing the total number of problem banks to 171.
Twenty-one
new institutions were chartered during the quarter. This marks a decline from
the twenty-four new charters that were added last quarter.
Noninterest-bearing
deposits rise, DIF reserve ratio declines
The
total assets of all FDIC-insured member institutions rose 2.1 percent to $273.2
billion during the quarter. Most of the increase, some 57 percent, came from
noninterest-bearing deposits. Interest-bearing deposits on the other hand
showed a slight decrease of 0.3 percent.
Insured
deposits continued an upward trend, rising 1.8 percent on top of a second
quarter increase of 0.6 percent. Fifty-eight percent of member institutions
reported an increase in insured deposits, 42 percent reported a decrease and
the remainder reported no change.
The
Deposit Insurance Fund decreased by $10.6 billion, primarily due to an $11.9
billion increase in loss provisions for bank failures. As of September 30,
2008, the reserve ratio was 0.76 percent, down 25 basis points from three months
prior. Nine insured institutions failed during the quarter, bringing
year-to-date failures to thirteen; those thirteen failed institutions had
combined assets of $348 billion and are estimated to have cost the DIF $11
billion.
Restoration plan
involves increases, changes to risk-based assessments
The
FDIC adopted a restoration plan on October 7 to increase the DIF’s reserve loss
ratio to 1.15 percent within five years, as required by Federal Deposit
Insurance Reform Act of 2005. In accordance with the plan, the FDIC Board
approved the publication of a notice of proposed rule making to increase the
assessment and shift a larger proportion of that increase to riskier
institutions. For the first quarter of 2009, the FDIC seeks to increase
assessment rates by 7 basis points across the board.
The
proposed assessment system, to be effective April 1, 2009, establishes base
assessment rates ranging from 10 to 45 basis points for Risk Categories I
through IV. Those base rates would then be adjusted for unsecured debt, secured
liabilities and brokered deposits. The adjusted assessment rates would range
from 8 to 77.5 basis points.