Professional Documents
Culture Documents
0
198,301 155,000 150;000 300,000 545.547 582,475 593.334 658.329
115,762 54.010 3,981 3.961 1,882 1.882 1.862 1,682
_H!1.74E1 ___ 191,746 191.'1'46 _91.746 eo,QOO 9O,00Q __ 90.000
1;07l;,707 $89.17'_5_ 774.357 73.:<!_1(1 750,211
2.153,418 $ 1,775,B92 $ 1,518.542 $ 1,499.040 $ 1.4:<11,563 $ 1,33$.777 $ 1.300.201 $ 1,327.368
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r,. ---"Dr ;Oif' 1 '. ; ".,.! ,-,' - - U" I 'a'n' i .1. a, . . tl), ,- -1. a, ,r tl),1: '--
:,Jce'_':,Q_'_,LO, ",!_ji / i ------ ,_. _':_,, __ '_---'_Q_'_,,/QP, __ ' ___ Q,-1'Se,
{> Capital raise of $370 million
{> UWBK would payoff Chase line of credit
UWBK would seek to acquire MSCS in first quarter
2011
{> Generates substantial cash flow at UWBK
Ol
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Ol
UWB"" :' Kf 0" -, M;' oj IS" . b t, ,1
... ei 1/ ..!.',' ' Jpera.: , .. .. -- __..:U.: sian :la-:
C
' O!.t IR '!,
f "tl . ..!. _:.
Other Earning Assets
Loans
Loan Loss Reserve
BD and Clearing Organization Reoeivablea
PAttniSell and Equipment
Real Estate OWned
Llabllw..
Deposita
BD and Clearing Organization Payables
Other Borrowings
Other Liabillitlea
Total Liabilities
Equity
Total Equity and Trust Preferred
813012010 813012010 1213112010 313112011 813012011 813012011 1213112011
$ 40,203 III 45,378 $ 98,132 $ 187,075 $ 137,944 III 132,137 $95,927 III 95,285
68,803 63,643 58,870 54.454 923,757 805,237 951.910 1,049.353
80,381 76,526 72,496 68,485 65,387 62,308 59.230 56,151
W,412 270,508 15,090 14,318 13,585 12,889 12,230 11604
.,793 $ 347,034 III 87,586 $ 82,783 III 78,972 III 75.197 III 71,460 11167,755
$ 625,518 $ 314.671 $ 663,564 $ 858,720 $ 0 III 0 111145,165 $ 186.038
1,420.498 1,372.940 1.355.906 1,347.792 1,477,257 1,608.383 1,741,151 1,875,545
(41,814) (41,614) (40,251) (39,439) (42,657) (44.649) (46,065) (52,093)
0 0 157,080 179,417 201,462 223,013 245,351
702 25,845 25,570 28,179 27,904 27,604 27,304 27,004
17,162 31,188 30,999 29,545 24,126 17,412 17
$ 2,141.509 $ 1,781,448 $1,746,824 $1,698.075 $ 1,883,279 $ 2,028,794 $ 2,437.352 $2,648,013
0 0
143,877 157.277 188,280 209,924 245,461
282,854 282,500 285,000 297,570 533,988 374.261 413,994 413,994
20,488 40.559 40.547 57,635 77,947 77,964 91.880 92,003
$2,444,651 $2,104,507 1112,052,371 $ 2,195.157 $2,852.469 $2,667,289 III 3,153,150 $ 3,399,471
$ 165,139 $ 155,517 $423,857 $422,790 $423,682 $428,224 $435,277 $457.926
Total Li!i!bllitiesand Equity S 2,609,790 $ 2,269,024 $ 2,478 228 $ 2,617,947 $ 3,078,151 $ 3993,513 . -IT,58 421---$ 3,85T,397
0.39%
2.79%
2.73%
13.17%
0.23%
2.78'!Koo
2.48'!Koo
15,49%
0)
I-'
-.....J
I
Scenario 2 UWBK - De-Risk Transaction
{>- UWBK raises capital sufficient for material de-
risking transaction.
Estimated capital raise $130 million.
Capital raised over amount used to inject into Bank and
purchase DCS securities - $42 million.
Capital ratio target levels achieved.
UWBK and the Bank return to profitability.
UWBK retires Chase line of Credit.
en
1-1
00
MIIJ
UNITED
WESTERN
BANCORP
Scenario 2 UWBK - De Risk Transaction
Assets
Actual
1Q10
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Cash&due $ 665,720 $ 361,000 $ 131,000 $ 127,570 $ 161,977 $ 100,798 $ 101,046 $ 123,680
Agencies & Ginnie Maes
Investments
Loans
Reserve for credit loss
Broker dealer and clearing organization receivab
Premises & equipment
Real estate owned
Other assets
68,603 63,643
364,793 346.910
1,416,698 1,372,940
(41,614) (41.614)
23,701 25,645
21.757 17,162
64,030 64,001
329,063 311,218
1,339,906 1,324,841
(39,528) (38,474)
141,657
25,570 26,133
30,818 30,471
64,003 125,003 120,428 120,771
297,172 283,127 269,252 255,378
1,303,565 1,265,428 1,265,972 1,254,176
(39,159) (39,159) (39,159) (39,159)
153,089 158,651 159,251 170,737
27,858 27,558 27,256 26,998
26,071 19,281 12,660 11,915
113,360
Totalas&ets $ .... ..n .......... ' ..... '"' .. .c.. __ .t..llo;Il 'V ! ':;'.IVI,"w !
69,932
108,620
114,117 113,679 113,639
'""li 7non ... ........ 0,... A7n
$ 2,108,693 $ 2,074,566 $ 2,030,349 $ 2,037,856
Liabilities and Shareholder's Equity
Deposits
Customer, BID and clearing organization payablE
Other borrowings
Other liabilities
Total Liabilities
Trust Preferred Securities
Common equity (net of realized loss)
Liabilities and "hareholder's equity
Income Statement Data
$ 2,141,509 $ 1,762,104 $ 1,505,721 $ 1,486,164 $ 1,416,517 $ 1,325,565 $ 1,286,996 $ 1,312,445
99,854 113,253 120.244 121,676 135,402
282,654 300,508 302,966 294,164 355,408 406,412 395,436 359,495
20,486 42,143 34,630 49,461 48,076 47,350 47,338
2,444,651- 2,1"04,755 1,643,317 1,930,938 1,936.639 1,900,297 1,851,658 1,854,680
30,442 30,442 30,442 30,442 30,442 30,442 30,442 30,442
134.697 119,500 115,720 140,395 141,612 152,734
$ 2,609,790 $ 2,254,697 $ 1,989,479 $ 2,101,775 $ 2,108,693 $ 2,074,566 $ 2;037,856
($ In thousands) Actual
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
Income Statement
Tota' interest Income
Total Interest expense
Net interest income
PrOVision for loan loss
Total non-interest Income
Total non-interest expense
Pre-tax income
Income taxes
Net (Loss) .ncome
Key Capital Ratios:
Equity (incl. TARP) I Assets
Common Equity (inc!. Warrant) I Assets
Total Capital Ratio (Incl. TARP) (OTS)
$
22,456 22,751 22,056 22,703 22,975 22,973 22,915 22,793
6,651_ 5,905 6,009 S,361 J?,1_1;3 .. __
15,799 16,846 16,041 17,342- 11,266-- -- -16,860 16,677 -16,554
14,223 6,500 1,914 146 1,665 1,250 550 550
(3,117) (2,187) (167) (14,680) 7,560 7,753 9,307 9,771
23.,49:3 .. 22,216 u 21,PJi___ ___ 2Q..464
. - (20,993) 945-- 2.352 5,046
19 (309) (E!.15) <2,939) 189 470 1,.QP9 1,062
(15,197) $ (3,769) $ (18,054) _$ 7.56 $ n 1,862 4&3L$ 4,249
0'\
t-I
Scenario 3 UWBK - No Capital
UWBK is unable to raise capital.
Execute a smaller balance sheet de-risking strategy
involving direct credit substitute securities.
.. Through reduction of Equity Trust deposits and
elimination ofDCS securities UWBK becomes profitable,
capital grows through retained earnings.
UWBK works closely with regulatory agencies to obtain
approval for the Bank's acquisition of Legent Clearing.
As necessary, UWBK would assist the Bank in the
execution ofa plan to gradually eliminate institutional
deposits deemed to be brokered
0\
I\)
o
Scenario 3 UWBK - No Capital
($ In thousands)
Assets
Cash &due
Agencies & Ginnie Maes
Investments
Loans
ReselVe for credit lOlls
Broker dealer and clearing organlzatlonreceivab
Premisell & equipment
Real estate owned
Intangibles
Mortgage servicing rights
Accrued Interellt & other
Total assets
Llabllltl.s and Sh .... hold ..... Equity
Actual f*}Wi.\!i,iipr
1010 2010 3Q10 4Q10 1011 2011 3011 4Q11
$ 665,720 $ 3.61,000 $ 123,000 $ 118,570 $ 127,977 $ 100,798 $ 101,048 $ 122,680
68,803 63,643 64,030 64.001 64,003 91,003 88,978 89,130
384,793 346,910 329,063 311,218 297.172 283,127 269.252 255,378
1,416.698 1.372.940 1,352,906 1,337,792 1,316,274 1,297,898 1,278,208 1,266,183
(41,614) (41.614) (40,146) (39,089) (39,159) (39,159) (39,15S) (39,159)
141,657 153.089 158,651 159,251 170,737
23.701 25,845 25,570 26,133 27,858 27.558 27,258 28,998
21.757 17,162 31,117 30,769 26.325 19,468 12,782 12,029
643 643 5,387 5,217 5.046 4.875 4,705
6,770 6.421 6,072 5.724 5,441 5,159 4,876 4,594
83,162 101,455 101,613 103,246
1,99S.1J68 $2,105,408
103,460
$2,087.656
103.675 103,889 104,082
$;!,053.224 $2L()17,338
Deposits $2.141.509 $1,762,104 $1.505,721 $1,486,164 $1,418,517 $1,325.565 $1.288.996 $1,312,501
Customer. BID and clearing organization payablE 99,854 113,253 120.244 121,878 135.402
other borrowings 282.654 296.190 303.850 318.725 354,783 405,557 397,009 359.753
Other liabilities 20,488 41,850 34,338 50,756 49,461 48,076 47.351 47.338
Total Liabilities 2.444,651 2.100,144 1,843,909 1,955,499 1,936,015 1,899,443 1,853,232 1,854.994
Trust Preferred Securities 30.442 30.442 30,442 30.442 30,442 30,442 30.442 30,442
Common equity (net of realized loss) 134,697 123,819 119,517 119,467 121,199 123,339 127.584 131.901
LIabilities and ahareholder'1I equity $ 3609.790 $ 2,254.405 $ 1.993.868 $ 2, 1 05,408 $2.087.656 $ 2,053.224 $2.011.259 $ 2.017.338
Income Statement Data
'$ In thousands)
InGome Statem.nt
Total Interest Income
Total interest expense
Net Interest Income
ProVision for loan loss
Total non-interest Income
Total non-Interest expense
Pre-tax income
Income taxes
Net (LOSS) Income
Key Capital Ratios:
Equity (Incl. TARP) I Assets
Common Equity (Incl. Warrant)
Total Capital Ratio
Jt.Ctii
1010 2010 3Cl10 4tH 0 1Q11 2011 3011 4011
6,500
(3.117) (45) (167) 5.120 7,580 7.753 9,307 9.771
23.366 22,272 _20,44,!L _20.521
(25;-034--Y- (12,649) (5,002) (906) 1,588--a;a5S- .. --.r,825---5-,iOO
19 (1.771) (700) (127) 318 452 1.020
$ (25,053) $ (10,878) $ (4.302) $ m9) $ 1.270 $ 'I-;aoeS- 3,880--,--4;080
. . . . . .. , . . .
621
TabC
Exhibit 21 B
622
UNITED WESTERN BANK
LIQUIDITY POLICY and CONTINGENCY FUNDING
PLAN
Approved byResolution of the Board of Directors dated
UNITED WESTERN BANK
Uquidity Policy
Max 7. 2010
May 7,2010
623
1
I. SUMMARY
The purpose of this Liquidity Policy (,'Policy") is to establish and document
Board-approved guidelines for the management of United Western Bank's (the
"Bank") liquidity considerations. The Board of Directors has ultimate
responsibility for the liquidity risk assumed by the Bank. This Policy is developed
and implemented as a meaningful tool and reference for the Board Investment
Committee ("IC") to carry out its oversight responsibilities and for the
AssetILiability Committee ("ALCO") and Bank management to use in its ongoing
liquidity risk measurement and management efforts, decision-making processes,
and managing the trade-offs between liquidity risk and short-term profits.
A strong liquidity risk management process is a critical element of maintaining
Bank operations in a safe and sound manner.
Effective liquidity risk management requires systems and processes that are
commensurate with the Bank's complexity, risk proftle, and scope of operations.
Thus, it will evolve as business conditions and the Bank's risk profile changes.
Liquidity risk management is intertwined with internal and external forces
including credit, market, operation, legal, and reputation risk. These forces can
shape the Bank's liquidity risk profile and need to be considered in the assessment
of liquidity and assetlliability management.
ll. AUTHORITY
Board of Directors
Has ultimate responsibility for the liquidity risk assumed by the Bank.
Appoint qualified members to serve on the Board Investment Committee.
Review and approve revisions and improvements to the Liquidity Policy
and Contingency Funding Plan (CFP) on at least an annual basis.
Monitor Bank performance and overall liquidity risk profile, ensuring that
the level of liquidity risk is maintained at prudent levels and is supported
by adequate capital.
Ensure that the Bank implements sound fundamental policies and
principles that facilitate the identification, measurement, monitoring, and
control of liquidity risk.
Ensure that adequate resources (personnel, budgetary and other) are
devoted to liquidity risk management. Effective risk management requires
both technical and human resources.
Board Investment Committee
Monitors compliance with Board-approved limits and polices.
Reviews and understands significant balance sheet and liquidity
management activity including, but not limited to: loan and deposit
activity, investment activity, wholesale funding, off-balance-sheet
transactions, including concentrations in any of the foregoing, and other
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
624
2
activities that impact liquidity risk at the Bank and significant subsidiaries
and affiliates as appropriate.
Reviews applicable deviations from the approved policies, and provides
feedback to ALCO.
Ensures the ALCO process reflects the Board's objectives; provides
appropriate feedback to the Board.
Ensures that adequate resources are devoted to the liquidity management
process.
It is the intent of the Bank Board of Directors to delegate day-to-day operational
authority for the matters set forth in this Policy to senior executive officers of the
Bank. The Board directs the authority granted and requirements of this Policy to
be administered by the ALCO 'With periodic reports to the Investment Committee.
Bank ALCO Committee (at least monthly)
Oversees the capital markets activities of the Bank.
Reviews deviations in policies and guidelines. Recommends prospective
action plans to Board Investment Committee. .
Approves AssetILiability Strategies.
Reviews Contingency Funding Plan Triggers at least monthly to assess
Bank's liquidity risk status.
Reviews effectiveness of Contingency Funding Plan and makes
modifications as necessary depending on Bank's risk profile and market
conditions.
Reviews and understands significant balance sheet and liquidity
management activity including, but not limited to loan and deposit
activity, investment activity, wholesale funding, off-balance-sheet
transactions, and other .activities that impact liquidity risk.
Recommends liquidity risk parameters and limits for the risk positions of
the Bank.
Ensures an appropriate mix of existing and potential future :funding
sources.
Ensures adequate levels of highly liquid, unencumbered marketable
securities, securities pledged to FHLB with appropriate collateral value, or
cash that can be used to meet liquidity needs in stressful situations.
Monitors compliance 'With all regulatory limits and benchmarks regarding
capital, brokered deposits, outstanding loans and loan commitments or
other limitations on growth that may arise from time to time, including
those that may arise from the Bank becoming less than well-capitalized
pursuant to Prompt Corrective Action (PCA) provisions under Federal
Deposit Insurance Corporation Improvement Act (FDICIA). This would
include monitoring compliance 'With and developing funding
contingencies if restrictions are placed on rates paid for deposits,
participating in any approvals requested from FDIC to accept brokered
UNITED WESTERN BANK
Liquidity Policy
3
May 7, 2010
625
deposits, and partnering with Operations should the Bank be unable to
accept brokered deposits.
Management Responsibilities and Oversight
Chairman of ALCO as appointed by Board
Recommends to the President and/or Chief Executive Officer (CEO), or
the Bank Executive Committee for interim exceptions to specific policies
and limits. These exceptions must be presented at the next ALCO.
Chairs ALCO
Responsible for overall liquidity risk management and executing the
Contingency Funding Plan
In cases where the Chairman is absent the Chief Operating Officer (COO),
Chief Investment Officer and/or Chief Accounting Officer (CAO) or Chief
Financial Officer (CFO) can obtain approval from the President and/or
CEO, or the Bank Executive Committee.
Partners with COO or appropriate designee on a daily review of balance
sheet and liquidity risk issues when the Bank is in a Stage 2 or higher
liquidity risk status.
Balance Sheet Strategy Group (weekly if needed)
Reviews the following as needed:
Balance Sheet Growth and Trends - compare to Plan, and compared to any
documentation received from a regulatory agency that may impact balance
sheet growth.
Product Pricing/Profitability versus Plan.
Economic Developments that impact Earnings and customer behavior.
Investment Portfolio Activity and Strategy
Emerging Credit Trends
FundingILiquidity Issues
Reviews Contingency Funding Plan Triggers at least monthly to assess the
Bank's liquidity risk status
Reviews effectiveness of Contingency Funding Plan and makes
modifications as necessary
Coordinates Deposit Gathering and Pricing Strategy with Pricing
Committee
Analyzes Net Interest Income versus Plan; versus Forecast; versus prior
periods
Provides Feedback and Analysis for ALCO
Monitors Compliance with all Regulatory limits and benchmarks regarding
capital, brokered deposits, outstanding loans and loan commitments or
other limitations on growth that may arise from time to time, including
those that may arise from the Bank becoming less than well-capitalized
pursuant to PCA provisions under FDICIA. This would include monitoring
UNITED WESTERN BANK 4
Liquidity Policy
May 7, 2010
626
compliance with and developing funding contingencies if restrictions are
placed on rates paid for deposits, if restrictions are placed on the types of
deposits received (e.g. certain institutional deposits), participating in any
approvals requested from FDIC to accept brokered deposits or accept a
waiver of deposit restrictions on certain deposit types (e.g., institutional
deposits), and partnering with Operations should the Bank be unable to
accept brokered deposits.
Reviews periodically any material changes or proposed material changes to
the Bank's liquidity risk proftle.
Develops and recommends strategies to ALCO.
Business Development Officers and others with customer contact
Keep CEO, CFO, CAO, and other ALCO members abreast of news,
rumors, concerns,etc. regarding the Bank in the market place.
Units Engaged in Contingency Funding Plan Activitx
There are several groups authorized to execute some form. ofCFP activity.
Finance and Operations
Manages interest rate risk, liquidity, hedging, wholesale funding,
derivatives, and investing activity.
Adheres to the directives and policies.
Prepares material for Balance Sheet Strategy Group and ALCO.
Must adhere to any payments policies.
Pledges collateral and prices deposits in concert with Pricing Committee
andALCO.
Keeps CPO, COO, CAO and ALCO abreast of deposit gathering efforts
and challenges.
Monitors and manages intraday liquidity and capital.
Chief Credit Officer
Adheres to policies
Coordinates lending activity in advance with ALCC when under Stage 2
or Stage 3 liquidity risk.
Policy Compliance Monitoring
Many compliance rules are detailed in the policies themselves. The following list sets
forth responsibilities for monitoring adherence to the policies.
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
5
627
Liquidity Risk
Contingency Funding Plan Targets
Measurement of Liquidity Risk Metrics
Trade Confinnation/EntrylReconciliation
Credit Risk
Overal1 Policy Compliance and Adequacy
Determination of Brokered Deposit Designation
IlL OBJECTIVES
ALCO
Controller and A VP-Treasury
Modeling
Controller
Chief Credit Officer (CCO)
ALCO subject to Audit and
Compliance testing of such.
General Counsel and ALCO
The objective of liquidity management is to reduce the risk to bank. earnings and
capital arising from the inability to meet obligations in a timely manner and cover
both expected and unexpected deviations from normal operations. without
incurring unacceptable losses. This entails ensuring sufficient funds are available
at a reasonable cost to meet potential demands from both fund providers and
borrowers. To achieve this objective, it is essential to be able to indentify,
measure, monitor, and control liquidity risk in a timely and comprehensive
manner. Liquidity risk management needs to be fully integrated into the Bank's
risk management process. The objective of this Policy is to outline the procedures
to accomplish these tasks.
The Board of Directors should establish the association's tolerance for liquidity
risk, set liquidity limits and thresholds, and approve policies related to . liquidity
management. The Board should also ensure senior management takes the
necessary steps to monitor and control liquidity risk; The Board should
understand the nature and level of the association's liquidity risk, and
management should inform the Board regularly of the liquidity position of the
association.
This Policy, along with related policies, will assist the IC, ALCO and
management in administering the Bank's liquidity as well as the overall asset and
liability portfolios. This Policy overlaps in some respects with the Bank's Interest
Rate Risk Policy; however, this Policy is specific to liquidity. This Policy sets
forth tolerance for liquidity risk, establishes liquidity limits and thresholds,
establishes liquidity management monitoring activities, and requires preparation
of appropriate contingency funding plans.
UNITED VllESTERN BANK
Uqulcllty Policy
May 7, 2010
6
628
IV. RISK MANAGEMENT
In addressing liquidity management issues, the Board of Directors and executive
management must be aware of the potential risks that arise related to differing
types of liquidity risk exposures faced by the Bank. In establishing a Liquidity
Policy, the Board has evaluated various risks; these risks, and their related
management techniques, which include:
Credit risk Impacting earnings or capital due to an obligor's failure to meet the
terms of a loan or an investment, or otherwise failing to perform as agreed. Credit
risk occurs any time an institution relies on another party, issuer, or borrower
performance.
Interest rate risk Addressing the potential adverse impact to the organization's
capital or earnings arising from movement in interest rates. Interest rate risk
evaluation must take into consideration the impact of complex hedging strategies
or products which become illiquid; potential impact on loans or investments due
to earnings reduction of the actual investments per changes in interest rates; or
ability to sell assets in the portfolio due to significant changes in interest rates.
Liquidity risk This is the risk that the Bank's financial condition or overall safety
and soundness is adversely affected by an inability (or perceived inability) to meet
its obligations. An institution's obligations and the funding sources used to meet
them, depend significantly on its business mix, balance sheet structure, and the
cash flow profiles of its on- and off-balance sheet obligations. In managing the
Bank's cash flows, various situations can give rise to increased liquidity risk.
These include funding mismatches, market constraints on the ability to convert
assets to cash or accessing sources of funds (i.e., market liquidity), and contingent
liquidity events. Changes in economic conditions or exposure to credit, market,
operation, legal and reputation risks can also affect the Bank's liquidity risk
profile and should be considered in the assessment of liquidity and asset/liability
management.
Price risk. Measuring and supervising the risks inherent with market-making,
dealing, and position-taking activities in interest rates, foreign exchange, equity
and commodities markets. Price risk represents a risk to earnings or capital arising
from changes in the value of portfolios of financial instruments.
Compliance risk Maintaining legal compliance with various appropriate
regulations as well as compliance with the Bank's ALCO Policies.
Reputation risk Developing and retaining marketplace confidence in handling
customers' financial transactions in an appropriate manner as well as protecting
the safety and soundness of the Bank.
V. LIQUIDITY MANAGEMENT PROCESS
The Bank will be capable of meeting financial obligations in a timely manner at a
reasonable cost without incurring unacceptable losses if the Bank has a sufficient
liquidity Management Process. Accordingly, liquidity is measured by the Bank's
ability to have sufficient cash reserves on hand, at a reasonable cost andlor with
UNITED WESTERN BANK
Liquidity Policy
May7,2010
629
7
minimum losses, as well as to meet liquidity requirements under supervisory
agency regulations.
Management shall employ general risk management strategies to ensure that the
Bank's system is commensurate with the liquidity and funding risks undertaken.
Proper funds management policies and procedures shall be adopted and followed.
The Policy shall provide for forward planning, establish appropriate cost
structures, and set realistic limitations and business strategies.
Funds management decision-making responsibilities shall be clearly defined by
applicable Bank policies, with the acceptable level of risk tolerance set forth by
the board. Sufficient due diligence procedures will be performed prior to entering
into any business relationship with a wholesale or processing / trust deposit
source. Due diligence shall be employed in assessing the potential risk to earnings
and capital associated with various deposit relationships or other rate-sensitive
deposits and prudent strategies for their use. Management will avoid excessive
reliance on funds that may be only temporarily available, which may require
premiwn rates or pose excessive operational risks to retain.
Appropriate management processes will be utilized to monitor funding
concentrations. Specific attention shall be paid to brokered funds, and other rate-
sensitive or credit-sensitive deposits obtained through wholesale or processing
and trust sources.
Management will track at least monthly non-relationship and higher-cost funding
programs to measure performance, manage funding gaps, and monitor compliance
with concentration and other risk limits. Reports will include a listing of funds
obtained through each significant program, rates paid on each instrument and an
average per program, information on maturity of the instruments, and
concentration or other limit monitoring and reporting. Management will ensure
that brokered deposits are accurately reported in regulatory reports.
Contingency funding plans shall address the risk that deposits may not "roll over"
at expected rates and terms and provide a reasonable alternative funding, risk
management and communication strategy. The Bank's contingency funding plan
will consider the potential for changes in market acceptance based on a variety of
factors, which are discussed below.
Management shall also consider the potential for triggering legal limitations that
restrict the Bank's access to brokered deposits under PCA standards, or other
regulatory actions and the effect that this would have on the Bank's liability
structure.
Liquidity is often available from both asset and liability sources, however, the
timing and confidence in the availability vary with the nature of the source and
the condition of the bank. Therefore, the analysis of liquidity is measured by
assigning a tier level to the sources based on management's confidence level in
the timing and probability of availability. For identification and ongoing
measurement purposes, liquidity is segmented as follows:
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
8
630
INDENTIFICATION AND MEASUREMENT OF LIQUIDITY
Liquidity will be indentified as Primary (Tier 1 and Tier 2) sources and Secondary
sources depending upon the assurance of its availability and the timeframe
necessary to obtain.
Tier 1 Sources - these sources with respect to which management has the highest
level of confidence in the availability of funds. NOTE: In the event of a
"Liquidity Event" as defined within the Bank's Contingency Funding Plan. Bank
Management should evaluate and utilize these liquidity sources in the order listed
below:
1. Cash - Excess vault cash, excess reserves at the Federal Reserve or other
correspondent banks, excess cash in ATMs or foreign currency reserves.
2. Money Market Assets - consists primarily of fed funds sold, commercial
paper and agency discount notes. Other instruments may occasionally be
used, however, only those alternatives that can be converted to cash in one
business day are included.
3. Any unencumbered Government or Government agency security, which is
expected to be relatively nominal as generally all eligible collateral is
pledged to the FHLB.
4. Scheduled or anticipated cash flows from loans and investment securities
principal andlor interest payments or sales.
5. Scheduled or anticipated (non-loan sale) fee income.
6. Available FHLB advances - this is tracked from the FHLB website and
reported in the daily liquidity report ..
7. Other unpledged securities that can be offered in a standard repurchase
agreement. Pledging requirements and pledged securities are tracked daily
and reported on the daily Liquidity Report, which covers all encumbered
securities.
Tier 2 Sources - these are sources with respect to which management has a high
level of confidence in the availability of funds but whose availability either has
not been tested or could change based on sudden or unexpected changes in the
market conditions or events unique to the Bank such as bad pUblicity. NOTE: In
the event of a "Liquidity Event" as defined within the Bank's Contingency
Funding Plan, Bank Management should evaluate and utilize these liquidity
sources in the order listed below once Tier 1 alternatives are considered:
1. CD's originated outside of the Bank branch network - Availability of the
funds may be sourced through internet deposit bulletin boards or other
sources. Estimates of availability are based on dealer input and market
analysis.
2. Large (non-brokered) Processing andlor Trust Deposits that can be
gathered quickly based on key and longstanding relationships between the
Bank, its management, and various processing andlor trust companies.
UNITED WESTERN BANK
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This is a subjective estimate based on feedback from relationship Officers
and the Bank.
3. Unpledged securities that may be difficult to offer in a standard repurchase
agreement or liquidate in a short time period. Impact to capital and
earnings needs to be evaluated in advance of liquidating or pledging these
assets.
4. Brokered CDs (including CDARS) - This channel assumes retention of
a well-capitalized status, thereby a l l o ~ g the Bank to utilize this source
without specific FDIC approval. Altematively, it could only be utilized
with prior regulatory non-objection.
5. Deposit promotions designed by ALCO within the constraints of any
regulatory requirements that exist at the time.
Secondary Sources - These are sources that are considered subordinate to Primary
sources of liquidity. However, they consist of sources that management has a
lower level of confidence as to whether such sources will be available. The
difference is whether the source will be willing to provide liquidity when needed
and the timing of availability. Secondary sources could take as long as 90+ days
to implement.
Examples include:
1. Unused FED fund purchase lines
2. Federal Reserve Discount Window
3. Loan securitizations
4. Loan sales or participations
5. Other asset sales (e.g., liquidation ofBOLI or sale of branch real estate)
The Bank would also immediately limit new lending activities, outside of already
existing commitments in the following order:
1. Temporarily cease community bank commercial and mortgage lending.
2. Curtail small consumer loans.
3. Discontinue the purchase of GNMA loans from the MFSC servicing
portfolio.
The Bank would also consider liquidating additional assets, including branches and or
lines of business, under certain circumstances. We realize the timirlg of these asset sales
may take in excess of 90 days.
Monthly reporting and analysis of liquidity is based on current market conditions. A
Contingent Liquidity Plan is in place and updated quarterly or more frequently if
determined by the IC or the ALCO. This plan is presented to ALCO and Board
Investment Committee quarterly. Contingency profiles are covered in the Contingent
Liquidity Plan.
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LIQUIDITY RISK METRICS
NOTE: Many of the limits and guidelines listed below were adopted by the Board on
April 8.2010. The Board is adopting these additional limits and guidelines to move the
Bank towards the liquidity management practices outlined in the March 17. 2010
Interagency Policy Statement on Funding and Liquidity Risk Management. The Board
and Management recognize it will take some time to develop the tools to accurately
measure and report some of the limits below. It will likely take additional time for the
Bank to achieve compliance with some of these guidelines and limits.
With the adoption of this Policy, Management commits to having these ratios and
guidelines reported at the May 2010 ALCO meeting. Variances from these limits and
guidelines will be reported at each subsequent regularly scheduled ALCO and Board
Investment Committee. ALCO will develop a plan to present at the May 2010 meeting to
achieve substantial compliance with the Policy by October 31,2010.
MINIMUM LIMIT
Maintain $100 Million in cash and at least $100 Million in off-
balance sheet funding capacity to absorb unanticipated withdrawals
from depositors. including processing and trust deposit withdrawals.
Tier 1 Liquidity to 60 day maturity of time deposits plus 5% attrition
of non-maturity retail deposits.
Tier 2 Liquidity to 120 day maturity of time deposits plus 10%
attrition of non-maturity retail deposits.
Unencumbered securities and investments plus cash to 30 day
maturity liabilities plus 5% attrition of non-maturity retail deposits.
MAXIMUM LIMIT
Pledged securities*rrotal investments plus cash.
A vg. Total Investments plus cash to A vg. Total Assets.
Avg. Total Loans to Avg. Total Deposits.
Unsecured wholesale funding with <90 days to maturity to Total
Investments
Total Non-CorelNon-Relationship (wholesale/internet channel)
Deposits as a percentage of total deposits.
Brokered Deposits (when permitted) / Total Deposits.
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100%
100%
100%
150%
65%
15%- 35%
105%
35%
25%
20%
11
MAXIMUM LIMIT Continued
Total time deposits as a percentage of total deposits maturing in any 10%
one calendar month over the next twelve months.
Total term debt (including CDs) as a percentage of total term debt 25%
maturing in anyone calendar month over the next twelve months.
Percentage of deposits from anyone source including customers, 25%
deposit aggregators, individual trust andlor processing accounts,
trustees, etc. with less than one year remainlng to contractual
maturity. * *
Percentage of deposits from anyone source including customers, 25%
deposit aggregators, individual trust andlor processing accounts,
trustees, etc. with one year or longer remaining to contractual
maturity.**
NOTE: all deposit concentrations greater than 5% of total deposits will be
reported to ALCO, but deposit concentrations due to CD or other deposits used to
collateralize a loan will not be considered a Policy Exception.
To further diversify the risk of deposit maturity concentrations, the Bank 'NiH also
work to stagger the contractual expirations of its trust and processing deposit
contracts.
Ratios which violate the limits will be highlighted and discussed at ALCO monthly.
The Committee will decide if action is warranted to manage the ratio higher or lower
and over what time period that reduction will occur. Ratios in violation oflimits will
also be reported to Board Investment Committee along with ALCO's
recommendation.
Averages will be evaluated on a monthly basis.
* Pledged securities include all investment securities pledged or otherwise provided
as committed collateral to specific debt obligations. Securities safe kept at a third
party (including the FHLB and FED) that are not pledged to a specific debt
obligation would be considered not pledged for this calculation. This liquidity
guideline ratio is defined as total pledged securities divided by total investment
securities.
** Non maturity deposits placed under an omnibus contract will have the contractual
maturity of the contraCt expiration date; otherwise non maturity deposits will be
considered to have a contractual maturity of less than one year for the purpose of this
calculation.
LIQUIDITY MONITORING
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':',' "
Liquidity is monitored in the following manner:
1. Daily Liquidity Report - reviewed daily by CFO, CAO, and COO. Reported to
Balance Sheet Strategy Group weekly, and ALeO and Board Investment
Committee monthly.
2. Balance Sheet Tracker Report. Key officers receive daily statement of condition
where changes in the balance sheet can be observed. This is monitored by all
ALCO members for irregularities and changes in condition that could negatively
affect liquidity if not corrected.
3. Bank Cash Flow Analysis Report - produced and reviewed weekly by Balance
Sheet Strategy Committee. Report can be produced to reflect various liquidity
contingencies as part of Contingency Funding Plan.
4. Large Depositor Trend Report - produced at least monthly and reviewed by
ALCO.
5. Key officer feedback - this comes from a variety of sources that occur as part of
the nonnal conduct of business. For example:
a. Weekly Executive Staff meeting.
b. Pricing discussions. as needed between senior baJJk officers and ALCO
members.
c. Monthly Pricing Committee meetings
d. Monthly ALCO Meetings.
e. Weekly Balance Sheet Strategy Committee meetings.
6. Contingent Funding Lines Test Report (annual testing at a minimum)
7. Contingency Liquidity Plan - Financial Indicator Report
Third-party evaluations concerning the Bank's ,credit capacity may also be
indicators of more serious problems. Such evaluations include:
Adverse news about the Bank in local or trade media
DOwrlgrades of credit rating by rating agencies
Customers are contacting relationship managers, fixed income sales
representatives, and branch employees requesting information
Other secondary matket events may also be early warning signs for potential
liquidity problems. Bearish activity in the Bank's securities may signal declining
value. Management shall consider:
Drops in stock price
Adverse earnings trends
Wider secondary spreads on the Bank's senior and subordinated debt, and
increasing trading of the Bank's debt
Brokers/dealers who become reluctant to show the Bank's name in the market
forcing Bank management to arrange ''friendly'' broker/dealer support
The BaJJk's funding market may also provide early information as credit support
is contracted or demanded. The funding market may also begin to ask for better
credit terms or shorter duration lending which can lead to more costly liquidity for
UNITED WESTERN BANK
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the Bank. Management will be cognizant of signs of funding deterioration to
include:
Increases in overall funding costs
Requests for collateral by counter parties
Elimination or decreases in credit line availability by correspondent Banks
causing the Bank to make larger purchases in the brokered funds market
Unusually large volumes of tum-downs in the brokered markets forcing the
Bank to deal directly with fewer willing counter parties
Abandonment by rating-sensitive providers such as trust mangers, money
managers, and public entities
An unwillingness by counter parties and brokers to deal in unsecured or
longer dated transactions
Decreasing transaction sizes and counter parties that are unwilling to enter
into even short-dated transactions
ADDITONAL LIQUIDITY PROCEDURES
The Bank will always have a portion of its loan and investment securities portfolio
maturing and/or paying down or cash flowing. Yearly cash flow (principal and interest)
from. these maturities, likely call and/or pay downs will at a minimum be equal to 6% of
total assets.
Additional liquidity ratios to be monitored on a monthly basis include:
Unused Loan Commitments to Excess Funding Capacity*
All unsecured funding lines will be reviewed and tested, where practicable, on an
annual basis.
*Excess Funding Capacity is defined to the unused federal funds lines, Fed
Funds Sold, cash and unencumbered investment securities available for sale.
LIQUIDITY CONTROL
The control process for liquidity policy and risk limits is as follows:
1. Liquidity limits will be reviewed and revised at least annually in conjunction with
the annual review of this Policy.
2. ALCO reviews the liquidity position at least monthly and discusses trends within
the balance sheet that affects liquidity.
3. Finance and Operations report significant changes in liquidity to Balance Sheet
Strategy and ALCO Committees. .
4. Board Investment Committee reviews policy guidelines monthly along with
trends in the balance sheet.
UNITED WESTERN BANK
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636
This Policy willbe reviewed at least annually with presentations to and approval by the
Board of Directors, reporting of actual versus limits will be done monthly. Any variances
must be approved by ALCO as an exception and action plan initiated to bring the Bank
within limit. Exceptions will be reported to Board Investment Committee.
VII. DEPOSITS
Deposits are the largest source of the Bank's funds. Therefore, it is important the
Bank implement policies and procedures to generate and retain a diversified
deposit base as well as to monitor its overall deposit structure, including rates,
maturities, products and concentrations. The Bank's overall deposit process will
include:
A clearly defined marketing strategy within the business plan that identifies the
desired market share in terms of growth or shrinkage, market niche, and present
and potential competition.
Identification of core and volatile deposits and analysis of the cost of core and
volatile deposits, including operating costs to maintain the various deposit
products and deposit branches, and
Targeted spreads between deposit costs and earnings on assets funded by deposits.
Periodic analysis of present and anticipated funding and liquidity needs and
comparative analysis of costs of deposits versus alternative sources of funds to
meet those needs.
Frequent review of deposit pricing, volume, sources, volatility, and trends in
relation to overall funds management goals, interest rate risk exposure, spread, net
interest margin, and profitability.
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637
VIII. PROCESSING AND TRUST DEPOSITS
Processing and trust deposits comprise a majority of the overall deposits at the
Bank. The Bank has continued to capitalize on its longstanding core deposit base
through the development of processing and trust deposit relationships (which
include securities clearing and settlement, custodial, trust and escrow) that
provide a stable, long-lived and inexpensive compliment to the traditional branch
banking concept. We anticipate that management will evaluate additional sources
to this strategy, and prospectively may consider acquiring deposits from
processing businesses that have significant deposit generating capacity that is
incidental to their primary purpose.
Management will monitor processing and trust deposits as follows:
Each relationship with individual or aggregated deposits of 5 percent of total
deposits or greater shall require the following:
Regular reporting atALCO
An assigned executive officer of the Bank
A contract term, or a contract of withdrawal notice, where possible ..
A contractual rate of interest.
These relationships and key terms of the relationship are reported to ALCO.
More detailed reports are reviewed by the CCO, CFO, COO and/or CAO daily.
IX. BORROWINGS
Use of borrowings shall be managed prudently in order to achieve the Bank's
funding goals and assist in controlling interest rate and liquidity risks. Ensuring
. that dependable borrowing facilities are in place represents an integral part of the
Bank's liquidity and funds management practices. The Bank may utilize
borrowings obtained from financial intermediaries including: the FHLBank of
Topeka (existing borrowings outstanding at FHLBank of Dallas) other
commercial banks, securities firms and other financial entities. Other commercial
banks, securities firms and other financial entities must be approved as an
acceptable counterparty by ALCO prior to use. Because the nature and extent of
wholesale funding activities will depend greatly on the Bank's overall balance
sheet risk position, the administration of these activities falls under ALCO.
Short-term borrowings, ranging in maturities from overnight to two weeks can be
executed with prior approval from one of the following: BankCFO, Bank
President or CEO, Chief Accounting Officer, Chief Investment Officer, or
Assistant Treasurer. Term borrowing in excess of two weeks requires prior
approval from ALCO prior to execution. Amounts borrowed are governed by
pre-existing, board approved limits.
As a member of the FHLBank system the Bank will generally look to obtain
. borrowings from the FHLBankof Topeka as its first choice. However, approved
staff or ALCO are allowed to obtain quotes on appropriate borrowings from other
entities including commercial banks and securities firms.
UNITED WESTERN BANK
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16
The Bank. may also borrow from the FED under terms and conditions defined by
the FED, with the same required approvals as FHLB advances and other third
party sources.
FHLBank. (HILB) Advances: The Bank. is authorized to borrow from the FHLB.
FHLB advances are generally advantageous due to both the dependability of the
FHLB as a provider of funds and the availability of a broad range of maturities
(overnight to 10+ years) with a variety of characteristics that can be tailored to the
needs of the Bank: and its interest rate risk position and interest rate risk goals.
The FHLB lends on a collateralized basis and as it exists today it must have
collateral that contains a mortgage or be guaranteed by the US Government or an
agency thereof, (i.e. single family loans, U.S. Government and Agency securities,
and commercial real estate loans). The advances are subject to an advance rate
("haircuts") based on the collateral and current market conditions applied by the
FHLB depending on the nature of the instnunents pledged.
Periodically at the direction of ALCC, a senior member of management shall
discuss or meet with FHLB of Topeka to review the financial status of the Bank,
assess the Bank's relationship with FHLB of Topeka, and ensure the continued
availability of funding on a collateralized basis. Should FHLB of Topeka indicate
that continued availability of funding will not or may not be forthcoming, this
would constitute a Stage 2 or Stage 3 Liquidity Risk, depending on all available
facts and circumstances.
Repurchase Agreements (Repo): When appropriate, the Bank may utilize reverse
repurchase agreements. These agreements serve as another form of wholesale
borrowings collateralized by securities as an alternative source of funds. In the
capacity as community Bank repos will be used to collateralize certain
community Bank deposits from known customers. In the capacity as wholesale
repos, repo lines may be established with commercial banks, securities firms and
other financial institutions that are ALCC approved counterparties. Repos range
from short- to long-term in nature (overnight to several years.) These agreements
may be structured with various instruments, including derivatives, to assist the
Bank. in managing its interest rate risk. The various instruments may include lock
outs from calling the debt by either party, and embedded derivative securities (i.e.
floors, caps or collars) that protect the Bank, up to the notional amount of the
derivative, against certain changes in interest rates.
Management understands the potential for increased sensitivity to market and
liquidity risks associated with more complex funding instruments that may
include embedded options. As such, the following management techniques shall
be considered as the Bank: secures wholesale borrowings:
Review the Bank.' s borrowing contracts for embedded options or other
features that may affect the Bank's liquidity and sensitivity to market risks.
Management will also review collateral agreements for fees, collateral
maintenance requirements, triggers for increases in collateral, and other
features that may affect the Bank's liquidity and earnings.
UNITED WESTERN BANK
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639
Assess the Bank's management processes for identification and monitoring of
risks associated with the various terms of each borrowing contract, including
. penalties and option features over the expected life of the contract
Stress testing borrowing contracts prior to entering into the agreement and
periodically thereafter. Stress testing shall not be reliant on the results and/or
assumptions provided by the funds provider. Tests will cover a reasonable
range of contractual triggers and external events, including interest rate
changes that could result in the exercise of embedded options, if any, or the
Bank's termination of the agreement. PrePayment penalties may result.
Evaluate management processes for controlling risks, including interest rate
risks arising from the borrowings and liquidity risks. Contingent funding plans
sball encompass the potential for agreement terminations. Contingent funding
plans will also consider any hedges or other plans for minimizing the adverse
affects of penalties or interest rate changes and other triggers for embedded
options.
Determining whether ALCO or the Board has been fully informed of the risks
and ramifications of complex wholesale borrowing agreements prior to
engaging in the transactions as well as on an ongoing basis.
Determining whether funding strategies regarding wholesale borrowings,
particularly those with optionality, are consistent with both the portfolio
objectives of the Bank and the level of sophistication of the Bank's risk.
management.
Other funding sources, including overnight and term Fed Funds are also
authorized with prior ALCO counterparty approval.
X COMWLEXVVHOLESALEBORROvnNGS
Use of complex wholesale borrowings (with "Complex" having a definition
consistent with the FHLB's definition) shall only be utilized subsequent to
management conducting a thorough review of the borrowing and the Bank's risk
levels. Management will maintain and develop a sound risk management process
to monitor such borrowings.
In assessing the Bank's wholesale borrowing practices, the following steps shall
be performed: .
Review of the Bank's borrowing contracts for embedded options or other ,
features that may affect the Bank's liquidity and sensitivity to market risks.
Review collateral agreements for fees, collateral maintenance requirements
including triggers for increases in collateral, and other features that may affect
the Bank's liquidity and earnings.
Assess the Bank's management processes for identifying and monitoring the
risks of the various terms of each borrowing contract, including penalties and
option features over the expected life of the contract.
Completion of stress testing prior to and periodically thereafter, entering into
borrowing agreements.
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640
When relymg on third party testing, review underlying assumptions and test
.
Evaluate management processes for controlling risks, including interest rate
risks arising from the borrowings, as well as liquidity risks.
Ensure the ALCO or board is fully informed of the risks and ramifications of
complex wholesale borrowing agreements prior to engaging in the
transactions as well as on an ongoing basis.
Determine whether funding strategies regarding wholesale borrowings,
those with optionality, are consistent with both the portfolio
objectives of the Bank and the level of sophistication of the Bank's risk
management.
XI. BROKERED DEPOSITS
A. Regulatory Definitions and Internal Guidelines
Brokered deposits are defIned as all deposits directly or indirectly obtained
through deposit brokers for deposit in one or more accounts under 12 CFR
337.6. Deposit brokers include any individual, partnership, or corporation that
is engaged in the business of brokering or placing deposits from third parties.
The Bank may only enter into new or renew existing brokered deposits provided
the brokering entity has been approved as a counterparty, that the Bank is
designated as well-capitalized under PCA provisions under FDICIA and is not
subject to any other regulatory objections.
The definition of deposit broker excludes insured depository institutions acting as
intermediaries or agents for government agencies and departments placing money
in Banks owned by women or minorities.
Deposit brokers are prohibited from soliciting or placing any deposit With the
Bank unless the broker has provided the FDIC with written notice that it is a
deposit broker. The FDIC may prescribe the form and content of the written
notice.
ALCO is responsible for thoroughly analyzing the terms, maturities, and sources
before contracting with any individual third party. deposit source and to
collaborate with the General Counsel to detennine whether or not a deposit wowd
be determined as "brokered" under 12 CFR 337.6. All such requests for
contracts, placement, or access to such funds will be reviewed and approved prior
to execution by ALCO.
Dealers are restricted to reCognized names in the brokerage business, and fees will
not be paid in advance of:full disclosures of all terms concerning the availability
of such funds.
B. FDICIA Limits on Brokered Deposit Use
It is the policy of the Bank to comply with the FDrCIA limits on the use of
brokered deposits, as follows:
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D Well-capitalized insured depository institutions may accept, renew, or roll
over broke red deposits without fIrst obtaining a waiver from the FDIC. A
well-capitalized institution is one that has a total risk-based capital ratio of
10 percent or greater, a tier 1 risk-based capital ratio of 6 percent or
greater, and a leverage ratio of 5 percent or greater. Also, it is not subject
to any formal written agreement, order, capital directive, or prompt
corrective action directive to meet and maintain a specifIc capital level for
any capital measme.
D Adequately capitalized insured depository institutions are prohibited from
accepting, renewing, or rolling over brokered deposits unless they first
obtain a waiver from the FDIC. An adequately capitalized institution is
one that has a total risk-based capital ratio of 8 percent or greater, a tier 1
risk-based capital ratio of 4 percent or greater, and a leverage ratio of 4
percent or greater (or a leverage ratio of 3 percent or greater if the
institution is rated composite 1 under the CAMEL or MACRO rating
system in its most recent report of examination, subject to appropriate
federal Banking agency guidelines), and does not meet the defInition of a
well-capitalized institution.
D Undercapitalized insured depository institutions are prohibited from
accepting, renewing, or rolling over brokered deposits. An
undercapitalized institution is one that has a total risk-based capital ratio
of less than 8 percent, a tier 1 risk-based capital ratio of less than 4
percent, and a leverage ratio of less than 4 percent (or a leverage ratio of
less than 3 percent if the institution is rated composite 1 under the
CAMEL or MACRO rating system in its most recent report of
examination, subject to appropriate federal Banking agency guidelines).
D Adequately capitalized and undercapitalized institutions are prohibited
from soliciting deposits by offering rates of interest that are 75 basis points
above the "national rate" deposit market rates as reported weekly on the
FDIC web site.
D Notwithstanding any of the foregoing, if the Bank: receives any
correspondence from its regulatory agencies that affect the foregoing, that
guidance will be provided to ALCO for its immediate evaluation.
Management is responsible for monitoring the Bank's capital level and for
ensuring that the Bank is in compliance with any regulatory restrictions and
limitations.
c. Adequately Capitalized Institutions
In a situation where the Bank may fall below the well-capitalized institution
capital profiles (total risk-based capital ratio of 10 percent; Tier 1 risk-based
capital ratio of 6 percent; and a leverage ratio of 5 percent), or otherwise be
designated as less than well-capitalized, management must obtain a waiver to
accept brokered deposits. The FDIC may waive the brokered deposits prohibitions
placed on an 'adequately capitalized' depository institution; this waiver is
determined on a case-by-case basis.
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If the Bank is designated as less than well-capitalized by the regulatory agencies,
the Bank may attempt to obtain a waiver. ALCO will coordinate any attempt to
obtain a waiver with the General Counsel. In addition, restrictions limiting the
amount of interest that the Bank can pay on brokered or other deposits will also
apply.
Specifically, the FDIC. may grant such a waiver if the acceptance of broke red
deposits do not constitute an unsafe or unsound banking practice, and the
institution's brokered deposit operations do not pose an undue risk to the
organization. To obtain a waiver to accept brokered deposits, the Bank must file a
written application with its FDIC regional director for supervision. The format of
the application may be a written letter; however, it is important that the letter
includes the following:
Time period for which the waiver may be needed
Policy statement for the Bank establishing corporate governance regarding .
the usage of brokered deposits in the organization's overall funds
management and liquidity initiatives
Details on the volume, rates, and maturities for the brokered deposits
currently held and anticipated during the requested waiver period,
including any internal .limits placed on terms, solicitation, and use of
brokered deposits
Description of how the brokered deposits are cost-analyzed and compared
to other funding alternatives
Description of the Bank's lending and investment activities will use the
brokered deposits, with specific reference to future asset growth
_ Description of procedures and controls used to solicit brokered deposits,
including identification of the principal sources of the deposits
Description of the management information systems utilized to supervise
the solicitation, acceptance, and use of broke red deposits
Recent consolidated statement with balance sheet and income statements
Reasons that the board of directors and management have considered the
acceptance, renewal, or roll over of brokered deposits pose no undue risk
t o ~ B a n k . I
In addition, the waiver request should include the net interest spread being earned
on these deposits, the need for such deposits, and the maturity of matched assets.
D. Deposit Broker Records and Reports
The FDIC may require, by regulation, that each deposit broker maintain separate
records relating to the total amounts and maturities of the deposits placed by the
broker for each insured depository institution. The FDIC may also require each
deposit broker to file with the FDIC separate quarterly reports relating to the total
amounts and maturities of the deposits that the broker placed for each depository
institution during the applicable quarter.
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21
The Chief Accounting Officer andlor Controller are responsible for ensuring that
the Bank's regulatory reports filed with the FDIC are consistent with any reports
filed by a deposit broker.
ALCO shall manage Bank use of brokered deposits to ensure those deposits are
benefiCial to the Bank, within acceptable risk parameters, including pricing, and
maturity and source concentrations. Management shall develop prudent reviews
of brokered deposits to ensure risk identification and management of these
deposits.
The following elements shall be addressed by ALCO in the risk management
process as they relate to the Bank's usage of broke red deposits:
Proper funds management policies
Adequate due diligence when assessing deposit brokers
Due diligence in assessing the potential risk to earnings and capital associated
with brokered or other rate-sensitive deposits and prudent strategies for their
use
Reasonable control structures to limit funding concentrations. Limit structures
shall consider typical behavioral patterns for depositors or investors and be
designated to control excessive reliance on any significant sources or type of
funding.
Management information systems (MIS) that clearly identify non-relationship
or higher-cost funding programs and allow management to track performance,
manage funding gaps, and monitor compliance with concentration and other
risk limits
Contingency funding plans that address the risk that these. deposits may not
"roll over" and provide a reasonable alternative funding strategy
XII. CONTINGENCY FUNDING PLAN
Management has a Contingency Funding Plan (CFP) as part of the Bank's
liquidity risk management process. The CFP will include cash flow projections
and comprehensive funding plans that forecast funding needs and funding sources
under various market scenarios including aggressive asset growth or rapid liability
erosion. The Bank's CFP will be used for the following purposes:
Routine liquidity management
Monitoring/planning during periods of extraordinary asset growth
Contingency planning during emergency and distress environments
The CFP will anticipate all of the Bank's funding and liquidity needs during both
temporary and long-term liquidity changes by:
Analyzing and making quantitative projections of all significant on- and off-
balance sheet funds flows and their related effects
Matching potential cash flow sources and uses of funds
UNITED WESTERN BANK
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. Establishing indicators that alert management to a predetermined level of
potential risks
The CFP .shall identify, quantify, and rank all sources of funding by preference
including:
Reducing assets (e.g. regular sales of guaranteed portions of originated SBA
loans, irregular sales of other interest earning assets)
Modifying the liability structure or increasing liabilities
Using off-balance sheet sources, such as securitizations
Using other alternatives for controlling balance sheet changes
Management sh8ll also consider asset management strategies for responding to a
liquidity crisis including: .
Whether to liquidate surplus money market assets
When held-to-maturity assets should be transferred to available-for-sale,
liquidated, if needed
Whether to sell liquid securities in the repo markets
When to sell longer term assets, fixed assets, or certain lines of business
The following liability funding strategies shall be addressed by management:
Establishing an overall pricing policy for funding
Identifying dealers who will assist in maintaining orderly markets in the
Bank's negotiable instruments
Identifying particular funding markets to avoid, such as high-volatility
accounts
Developing strategies on how to interact with nontraditional funding sources
Setting forth a policy for early redemption requests by retail customers
Estimating the Bank's potential Federal Reserve Bank. discount window
borrowings. if any, stipulating timing, duration, and source of repayment
Management will also be required to address the following administrative policies
and procedures during a liquidity crisis:
The responsibilities of senior management during a funding crisis
Names, addresses, and telephone numbers of members of the crisis team
Who will be assigned responsibility to initiate external contacts with
regulators, analysts, investors, external auditors, press, significant customers,
and others
How internal communications will flow between management, ALCO the
Board, employees, and others
How to ensure that the ALCO receives management reports that are pertinent
and timely enough to allow membersto understand the severity of the Bank's
circumstances and to implement appropriate responses
UNITED WESTERN BANK
Liquidity Policy
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645
23
The Bank's CFP will be reported and approved by the Board on at least an annual
basis to ensure it remains a practical and useful management tool. Appendix A is
the Bank's CFP.
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
24
646
........
Appendix A
CONTINGENCY FUNDING PLAN
The Contingency Funding Plan (CFP) is designed to provide management with a
framework for assessing and communicating the need for additional liquidity in a
dynamic market environment.
The CFP will have six key elements:
1) Define the level or stages of a potential funding crisis;
2) Defme appropriate triggers for each stage;
3) Generate estimates for potential funding needs and available funding sources, .
under different scenarios with different degrees of severity;
4) Define appropriate responses and establish reporting requirements for each crisis.
stage;
5) Plan communications and assign internal contact responsibilities between Bank
functional divisions, Bank management, ALCO and the Board. Plan and assign
external contact responsibilities for major funds providers, regulators, press, and
shareholders;
6) Testing the CFP.
Given the high level of potential risk in these activities a carefully designed
framework is in place to govern this activity. The framework is built on senior
management accountability and oversight, policies and procedmes, segregation of
duties, limits, and risk-management culture consistent with the goals of the Board of
Directors.
1) Derme the level or stages of a potential funding crisis;
ALCO has responsibility for assessing the Bank's level of liquidity risk. It will use the
Bank's adherence to Liquidity Policy limits, its Contingency Funding Plan Triggers, and
market intelligence and other qualitative factors to assess the Bank's level of liquidity
risk.
Baseline Case - Ordinary Comse of Business
Stage 1 Liquidity Risk - Minor Impairment,. the Bank retains pricing flexibility with
loans and deposits, situation's full extent may not be in public domain. ,
UNITED WESTERN BANK
Liquidity Policy
May7,2010
647
25
Stage 1 Liquidity Risk - Reduction in Confidence - the Bank has to significantly alter
pricing to attract or retain customers, more than usual negative news on the Bank in
market place
Stage 3 Liquidity Risk -.Severe Liquidity Risk - Organization's viability is at risk
within a 30-day horizon.
2) Define appropriate triggers for each stage;
ALCO will use both quantitative and qualitative measures to assess the Bank's level of
liquidity risk.
Quantitative triggers help identify potential problems while they are manageable and are
objective. The absence of quantitative trigger breaches does not necessarily mean that
liquidity risk exposures are normal.
Qualitative triggers permit management to exercise judgment. Violating one or two
quantitative triggers does not necessarily mean risks are elevated, but warrants further
analysis and discussion.
Baseline Case - Ordinary Course of Business
Stage 1 Liquidity Risk - Will generally be declared if at least 2 or more Liquidity Risk
Metrics are out of policy during the same month or the same policy limit is out of
compliance for 2 or more consecutive months, or if ALCO determines that any
Contingency Funding Triggers demonstrate a deteriorating trend. If these conditions
exist and ALCO does not declare a Stage 1 event, a written summary of the decision will
be provided to the Board Investment Committee. The Bank has no regulatory restrictions
to access deposit and fimding sources.
Stage 1 Liquidity Risk - Will generally be declared if at least 3 or more Liquidity Risk: .
Metrics are out of policy during the same month or if at least 2 Metrics are out of
compliance for 2 or more consecutive months, or if the ALCO determines that multiple
Contingency Funding Triggers demonstrate a deteriorating trend. If these conditions exist
and ALCO does not declare a Stage 2 event, a written sununary of the decision will be
provided to the Board Investment Committee. The Bank has specific regulatory
limitations on either. deposit rates it can pay, e.g. FDIC rate-caps; or specific deposit or
fimding products it can enter into, e.g. brokered deposits or Fed Discount Window.
Stage 3 Liquidity Risk - Will generally be declared if at least 5 or more Liquidity Risk
Metrics are out of policy during the same month or if at least 3 Metrics are out of'
compliance for 2 or more consecutive months, or if the ALCO determines that multiple
Contingency Funding Triggers demonstrate a deteriorating trend. If these conditions exist
and ALCO does not declare a Stage 3 event, a written sununary of the decision will be
provided to the Board Investment Committee.
UNITED WESTERN BANK
Liquicflly Policy
May 7, 2010
26
648
CONTINGENCY LIQUIDITY PLAN TRIGGERS
Increasing level of delinquent and non
current loans-
% ofloans 90 days Past Due/Total Loans
% of Non-accrual Loans/Total Loans
Net Short-Term 30 days) Fed Funds
Bought/Sold
% Non-corelNon-relationsbip deposits
(wholesale/internet channel) / Total Deposits
United Western Bancorp Stock Price
Bank Earning Trends
Core Deposit Growth Trends
Retail Transaction Deposits
CD's <$lOOK
CD's>$lOOK
CDARS Deposits
Processing and Trust Deposits
Turndown of borrowing request?
If so, what?
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
649
Current
Last
Month
3
Months
Ago
6
Months
Ago
27
Case-Shiller 20 City Housing Index
Leading Economic Indicators
National Unemployment Rate
National GDP (quarterly)
United Western Bank. news in the market?
3) Generate estimates for potential funding needs and available funding
sources under different scenarios with different degrees of severity;
Operations and Finance will collaborate to generate at least 3 separate estimates of
funding needs over a I80-day horizon and present them to ALCO at least monthly (more
frequently if required by liquidity risk level). Additional scenarios can be added
depending on specific situations and regulatory guidance.
If the Bank is in a Stage 2 or Stage 3 Liquidity Risk situation, Operations and Finance
will generate 2 additional scenarios, detailed below as scenarios four and five.
The first scenario will analyze the Bank's coverage of Tier 1 liquidity to maturing term
debt obligations, a 10% reduction in retail non-maturity deposits and all anticipated loan
fundings. The report will indicate whether or not the Bank has sufficient Tier 1 liquidity
to its risk limits and be called the Tier 1 Liquidity Report.
The second scenario will analyze the Bank's coverage of Tier 2 liquidity to maturing
term debt obligations, and anticipated loan fundings. The report will indicate whether or
not the Bank. has sufficient Tier 2. liquidity to its risk limits and be called the Tier 2
Liquidity Report.
The third scenario will include all the cash flows analyzed in the first two scenarios but
exclude any uncommitted Bank lines from available liquidity. It will also presume no
CDs of any kind can be renewed and includes a 5% reduction in retail non-maturity
deposits each month. This is a "worst case" scenario. An example of this report is
attached as an exhibit. It is called the Bank: Cash Flow Analysis Report.
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
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650
The fourth scenario will presume the Bank: is less than well capitalized pursuant to PCA
provisions under FDICIA. It presumes that no CDs of any kind will be renewed,
brokered or otherwise. It presumes a 5% reduction in retail non-maturity deposits each
month, and that certain other trust and processing deposits may be deemed brokered by
FDIC. It presumes that these trust and processing deposit maturities are governed by
their omnibus contractual maturity status. Under this scenario and presumption Equity
Trust deposits would exist until June 27, 2014, MSCS deposits would remain at the Bank
until July 5, 2010, Lincoln Trust deposits would remain until February I, 2011 and
Legent Clearing deposits would remain at the Bank: until September 30, 2010.
Although management and the Board understand that the FDIC may deem these deposits
to be brokered, the Bank did obtain legal opinions from two highly regarded law firms
that expressly confirms that such deposits are not legally brokered deposits. Accordingly,
if the FDIC or another regulatory agency were to deem these brokered deposits the Bank
would respectfully pursue administrative or judicial relief from such a conclusion. In
addition, the Bank would also contemporaneously consider the application for a waiver
of either the conclusion, or for an extension of time in order to revise its liability base in a
prudent fashion.
Under scenario 4, the Bank would have already implemented many of the steps
enumerated above including increased activity in the marketplace for bulletin board
internet based certificates, ceased the majority of lending and look for the timely and
orderly disposition of certain assets.
Scenario 4 is a better scenario for the Bank than scenario 5 discussed below. Scenario 4
would be beneficial to the Bank, its processing and trust depositors, and the Bank's
regulators as it avoids possible legal action on the part of the processing and trust
depositors associated with the Bank breaking its legally enforceable contracts that were
made with these entities in the good faith understanding that such deposits were not
brokered and represent a core source of funding of the Bank's balance sheet.
The fifth scenario will presume the Bank: is less than well capitalized pursuant to PCA
provisions under FDICIA. It presumes that no CDs of any kind will be renewed,
brokered or otherwise. It presumes a 5% reduction in retail non-maturity deposits each
month, and that certain other trust and processing deposits may be deemed brokered by
FDIC. It presumes that these trust and processing deposit maturities are governed by
their sub-account contractual maturity status.
First, scenario 5 represents a scenario that based on our understanding and discussions
with our processing and trust depositors is impossible to achieve given the nature of the
systems and the requirements imposed by such a scenario. Under scenario 5, each
individual account that comprises the total of the processing or trust deposit relationship
could be prohibited from adding to their cash balance that is placed at the Bank. The
operations of the trust and processing businesses are not established in a fashion
conducive to this nor are their IT systems. All of an account holder's cash is generally
swept in accordance with the instructions provided, or swept if no instructions are
provided, which end up in the Barik. It is physically impossible for the trust and
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
29
651
processing client to say that effective on any particular date that their customer's account
is frozen at a dollar amount based on that date and that any amounts of deposits in that
same account must be placed in a different bank.
Further, scenario 5 would likely raise legal issues for the Bank if the Bank were caused to
break existing contractual obligations with these entities.
Nevertheless, in an effort to provide a smooth transition for our customer and considering
the adminstrative, judicial and waiver approach discussed above that would be
considered, the Bank would also consider and implement the following:
1. Purchase of Legent Clearing, subject to the filing of an application and receipt of
from the OTS and other appropriate regulatory authorities to do so.
The ownership of this entity provides the Bank with control over a significant
balance of deposits. The Bank has a history of successful processing and trust
deposit relationships that have been core to our operations, including Sterling
Trust. This is a significant part of our business plan for prudently reducing
certain deposit concentrations that exist on the balance sheet currently. In
addition, the Bank would call on up to $400 million of additional processing and
trust deposits from Legent prior to closing of the purchase if such deposits were
necessary relative to a risk of the withdrawal of Equity Trust deposits or a
regulatory requirement to move such deposits.
2. Request an extension of time to achieve compliance with the request of six to
twelve months depending on the nature of the specific request and determination.
3. Acquire additional internet based bulletin board deposits that are deemed non-
brokered by the FDIC. The Bank has tested this and raised $100 million of
deposits in a four week period at rates well below the FDIC imposed rate caps.
4. We would sell assets, in this order items a. through d. within 90 days:
a. SBA purchased loans and pooled securities approximately $100 million.
Sales price would be approximately 103 to 105 (the Bank owns these at
approximately 108.) The loss would not significantly impact core capital.
This would reduce availability at FHLB; however would be cash
advantageous as the haircut is approximately 15%.
b. Sale of the single tenant portfolio approximately $32 million. Estimated
sales price would be approximately par, (the Bank owns these at
approximately 101.) The loss would not significantly impact core capital.
This would reduce availability at FHLB; however, this would be cash
advantageous as the haircut is approximately 45%.
c. Sale of residential loans, specifically the DCAL loans approximately $58
million. Estimated sales price would be approximately par, (the Bank
owns these at approximately 101.5.) The loss would not significantly
UNITED WESTERN BANK
Liquidity Policy
30
May 7, 2010
652
impact core capital. This would reduce availability at FHLB; however
would be cash advantageous as the haircut is 15%.
d. Sale of GNMA buyouts approximately $20 million. Estimated sales price
at or above par. The Bank owns these at par. No impact to core capital .
. The haircut is 7% at FHLB.
e. Other community bank loans, or loan participations determined based on
maximizing cash flow and minimizing negative impact to core capital,
potentially $1.1 billion of loans graded pass or above. Longer term sale
cycle and likely bigger negative impact to core capital.
f. Redeem BOLl. We own approximately $26.5 million. Results in taxable
income and tax penalty; however, results in over $20 million of cash.
g. Sale of other assets, branch land, business line, could be done, but lower
return and longer sale cycle.
4) Define appropriate responses and establish reporting requirements
for each crisis stage;
Baseline Case - Ordinary Course of Business. Normal monthly ALCO reporting and
oversight
Stage 1 Liquidity Risk - Minor Impairment, the Bank retains pricing flexibility with
loans and deposits, situation's full extent may not be in public domain. ALCO will
prepare an action plan within 7 days of recognition of impairment The plan will be
reviewed at the next ALCO meeting and will be presented to the executive committee.
Plan will include an estimate of costs andlor diminished revenues to accomplish the task.
The Investment Committee will receive word of Stage 1 designation. The Daily
Liquidity Report will be reviewed at Balance Sheet Strategy (BSS) meetings as
scheduled.
Plan may include a review of opportunities to increase the size of the liquidity reserve,
intensify collateral management practices to free additional collateral, and review
opportunities to increase net cash flow cushions at overnight, 7-day, 30-day and 90 day
horizons.
Stage 2 Liquidity Risk - Reduction in Confidence- the Bank has to significantly alter
pricing to attract or retain customers, more than usual negative news on the Bank in
market place. ALCO will develop a plan withlnS days of ALCO meeting on steps
necessary to bring liquidity risk measures into compliance and present the plan to the
Balance Sheet Strategy Committee. Plan will include an estimate of costs andlor
diminished revenues to accomplish the task. Upon BSS review, the Plan will be shared
with the President - CEO andlor the Executive Committee.
UNITED WESTERN BANK
Liquidlty Policy
May 7, 2010
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653
BSS will meet at least weekly. COO and CAO/CFO will have daily communication to
review Bank balance sheet and liquidity positions. Plan may include asset sales and/or
participations, and slowing new asset generation. Profonna capital ratios will also be
analyzed each week.. The Board will receive word of Stage 2 designation. The Daily
Liquidity Report will be reviewed by COO and CAO/CFO Daily. Balance Sheet Strategy
will include explicit analysis of key balance sheet trends, key depositor concentrations,
feedback from loan officers, BDOs and others on the Bank's perception in the market
place, and report on progress of liquidity risk remediation plans. It will also include a
specific discussion of emerging credit risk or other risks to earnings. CFO/CAO will
initiate more frequent contact with key liquidity providers such as FHLB, bank line
providers, FRB and report weekly to Balance Sheet Strategy Group. CEO, President
andlor Vice Chairman may initiate contact with large shareholders.
Stage 3 Liquidity Risk - Severe Liquidity Risk - Organization's viability is at risk
within a 30-day horizon. COO and CFO/CAO will develop a plan within 3 days of
ALCO meeting on steps necessary to bring liquidity risk measures into compliance and
present the plan to the Balance Sheet Strategy Group. Plan will include an estimate of
costs andlor diminished revenues to accomplish the task..
Plan may include asset sales and/or participations, and restricting new asset generation
without risking further reduction in customer confidence. Proforma capital ratios will
also be analyzed each week. Board Investment Committee will receive immediate word
of Stage 3 designation. The Daily Liquidity Report will be reviewed daily by CFO/CAO
and COO, Balance Sheet Strategy Group will include explicit analysis of key balance
sheet trends, key depositor concentrations, feedback from BDOs and others on the Bank's
perception in the market place, and report on progress of liquidity risk remediation plans.
It will also include a specific discussion of emerging credit risk or other risks to earnings.
COO and CFO/CAO will initiate more frequent contact with key liquidity providers such
as FIILB, bank line providers, FRB and institutional depositors and report weekly to BSS
Group. Plan may consider increasing cash held in branches and ATMs to avoid any
shortages, moving additional collateral to FRB, reaffirming funding plans with key
institutional depositors, intensifying efforts, employee and/or customer incentives for
deposit retention, and evaluating opportunities to sell illiquid assets or business units as
conditions dictate.
If ALCO determines that under any conditions, the Bank needs to add or augment its
liquidity under a "Liquidity Event" it will follow the list of preferred liquidity sources
spelled out in the Liquidity Policy and the summary below.
5) Plan communications and assign internal contact responsibilities
between the Bank functional divisions, layers of Bank management, and
the Board. Plan and assign external contact responsibilities for major
funds providers, regulators, press, and shareholders;
ALCO will have overall responsibility for executing the CFP communications plan. The
ALCO Chainnan will be the primary contact point and manager of a CFP
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
32
654
communications plan, in concert with the Executive Committee. The Balance Sheet
Strategy Group will be the primary forum for evaluating and refining the CFP
communication plan's ongoing effectiveness. The COO will facilitate communications
between home office and branches and LPOs. The Chief Information Technology
Officer is responsible for maintaining the Bank website in consultation with the CFO and
COO on liquidity issues. Balance Sheet Strategy Group members are responsible for
communicating with their respective teams, ensuring that the Balance Sheet Strategy
Group hears concerns or issues raised among staff. The President - CEO and Vice
Chairman will manage communications with major funds providers and the Bank. The
CFO/CAO, COO, and/or President - CEO will manage communications with regulatory
bodies. The President/CEO or Vice Chairman will coordinate communications with ,
shareholders, press, and other media. The CFO/CAO, COO, and/or President - CEO will
manage communications with the Board Investment Committee. The President - CEO
will manage communication with the Board BDOs and Regional Presidents are
responsible for managing communications with their individual customers, and ensuring
the Balance Sheet Strategy Group is apprised of all developments.
Outside . consultants may be required to assist management craft an appropriate
communication plan to external stakeholders.
6) Testing theCFP
Testing the CFP, done properly, can greatly increase the likelihood of effective liquidity
risk management.
The Chief Investment Officer and Assistant Treasurer wiil maintain a log of various third
party funding sources and report to ALCO quarterly on the timing, rate, and relative
success of sourcing funds from these providers.
The Bank may periodically test its loan liquidity by selling or participating existing loans
from time to time. Such tests will be discussed with ALCO in advance and results
reported to ALCO.
Testing may involve running simulations late in the business day to highlight specific
issues such as difficulty sourcing :funds late in the day. It may also identify staffing
bottlenecks or lack of staff willingness to work overtime.
The ALCO will review the CFP testing program on an annual basis and report results to
the Board Investment Committee.
The following plan outlines the steps that will be followed in the Bank's
Contingency Funding Plan. in the event ALCO deems this necessary. Each step is
laid out in order of execution with the objective of providing liquidity at the least
possible cost. It should be noted that steps below may be reordered in priority and
utilization based on current market pricing and other factOrs considered by ALCO.
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
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655
Step 1 Initial requests for funds will be met out of the Bank's short-term. cash and
equivalent position (e.g. fed fim.ds sold). This would provide the least
expensive source offunds.
Step 2 The Bank's membership in FHLB gives it ready access to the FHLB's
advances program utilizing qualifying collateral. .
Step 3 Acquire additional trust and processing deposits.
Step 4 Acquire additional brokered deposits, if eligible.
Step 5 Borrowings against the fed:funds purchased line.
Step 6 Deposit specials and deposit programs.
Step 7 Draw on the holding company's line of credit at another institution, if
available.
In addition to the foregoing, asset . sales as discussed above, may be. used to
generate cash/increase liquidity. In the current market environment liquidity is of
significant importance and there is a general lack of liquidity for many of the
primary instruments owned by the Bank (single family loans and most J]1ortgage
backed securities), which has impacted their value. As such it is possible that the
sale of such assets would generally be a last resort as it appears. that it would
result in giving up more yield than the borrowing costs outlined above or
incurring losses which may fuel concerns and exacerbate the liquidity problem.
If ALCO determines that 1) the cause(s) of the implementation of the Liquidity
Risk Management Plan is systemic and unlikely to be corrected in the normal
course of business, and 2) the execution of the above steps is deemed inadequate
for prudently weathering the liquidity crisis, then ALCO shall at a minimum, take
the following steps (not necessarily in this order):
Review all deposit gathering programs and accelerate those that it can without
unduly impacting A. the net income of the Bank, B. the interest rate risk profile of
the Bank.
Access available brokered CD facilities to pay down pledged borrowings in
order to un-encumber marketable securities (or temporarily park funds in
money market instruments). In this regard, the Bank would target terms in
excess of 6 months.
Extend the maturities of short-term borrowings, especially those highly
dependent upon the Bank's credit risk, and thus more susceptible to non-
replacement.
Access available institutional depositing gathering facilities for possible
increases to free up unused capacity at FHLB.
Consider, review and prepare to implement plans to securitize and/or sell
portions of the loan portfolio.
UNITED WESTERN BANK
Liquidity Policy
May 7,2010
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656
Reduce new asset growth and restrict lending to existing customers only.
If the above steps do not sufficiently mitigate the liquidity risk management
concerns, ALCO shall (not necessarily in this order):
Sell loans as outlined above.
Intensify deposit-gathering programs.
Transfer unencumbered securities and loans to the Federal Reserve and
borrow at the discount window.
Cease all lending, except for loans approved byALCO.
The Plan Summary on the following page will be updated on a periodic basis in
order for the Bank to monitor its available liquidity under crisis conditions.
XIH. POLICY EXCEPTIONS
This Policy represents the official Policy Statement of the Board of Directors.
Any specific transactions or situations not covered by this Policy in the
foreseeable future, the IC, ALCO and CFO/CAO, COO must use sound judgment
in the decision-making process. If these guidelines do not address a material
situation occurring in the foreseeable future, an exception to this Policy may need
to be made. In those instances, the CFO/CAO, COO will communicate this to the
ALCO, IC or full Board of Directors before any action is taken if that is possible,
or report to those bodies in a timely fashion thereafter if prior communication is
not possible. All exceptions to this Policy will be documented in the minutes.
The above not withstanding, any regulatory directives received by the Bank will
supersede any policy limits, guidelines or processes enumerated above for as long
as they are in force.
UNITED WESTERN BANK
Uquldlty Policy
May 7, 2010
35
657
CONTINGENCY PLAN SUMMARY
PLAN SUMMARY AS OF: _May 7,2010, ____ _
United Western Bank
HypotheticalContingency Plan Scenario 5
Timing 90 days to execute
Step
TIER 1
1
2
3
4
5
6
7
Tier 2
Description
Available cash
Money Market Assets
Unencumbered Govts
Anticipated cash flows from assets
anticipated fee income
FHLB Capcaity
Other un pledged securities
Total Tier 1
1 CDs -internet bulletin board
2 Large processing and or trust deposits
3 Unpledged securities (separate from 7 above)
4 Brokered CDs & CDARS
5 Deposit promotion
Total TIer 2
Secondary .
1 Unused FED fund lines capacity
2 Federal Reserve Discount Window
3 Loan securitlzatlons
4 Loan sales or participations
5 Other asset sales
UNITED WESTERN BANK
. Uquldlty Policy
May7,2010
658
Dollars
(in thousand
333,822
-
-
45000
-
191,055
-
569877
100000
100000
-
-
5,000
205,000
20,100
25000
Description
s),.--__ .....
f------'--I From dally liquidity
Est Cost
f-----l $20 M securities, $25 million
36
ALCO Committee Composition* (as of May 7, 2010) :
Chainnan - Holding Company
President! CEO Bank
Chief Investment Officer
Chief Accounting Officer (ALCO Chair)
Chief Credit Officer
Chief Operations Officer
Assistant Treasurer
Regional President - Appointed by President - CEO Bank:
* Membership subject to Board approval.
Balance Sheet Strategy Committee Composition:
Chair - Chief Accounting Officer
Chief Investment Officer
Chief Credit Officer or designee
Chief Operations Officer or designee
Controller
AssistantTreasurer
AppendixB
Others as may be appointed by CFO/CAO or COO depending on
circumstances
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
37
659
.. ... .
.. . ........ -. ~ .
TabC
Exhibit 22
660
Paul Hastings
Allanla
Beijing
Brussels
Chicago
Frankfurt
Hong Kong
london
los Angeles
Milan
New York
Orange County
Palo Alto
Paris
San Diego
San Francisco
Shanghai
Tokyo
Washington. DC
(202) 551-1829
lawrencekaplan@paulhastings.com
July 2,2010
VIAE-MAIL
Lori]. Quigley, Acting Regional Director
Nicholas J. Dyer, Assistant Director
Office of Thrift Supervision, Western Region
2001 Junipero Serra Boulevard
Suite 650
Daly City, CA 94014-3897
Re: United Western Bank
Dear Ms. Quigley and Mr. Dyer:
Paul, Hastings. Janofsky & Walker liP
875 15th Street, N. W.
Washington, DC 20005
telephone 202-551-1700' faCSimile 202-551-1705 www.paulhasUngs.com
Confidential Treatment Requested
1
On behalf of United Western Bank ("UWB" or the "Bank''), this letter is to confl11n
discussions between the Bank and staff of the Office of Thrift Supervision ("OTS',) and
FDIC during a Washington, D.C. meeting on June 30, 2010 regarding the letter dated
May 24,2010 issued to UWB by the FDIC's Dallas Regional Office (<<FDIC Letter,').2
The Bank believes the meeting was productive and useful in allowing the Bank to better
understand the FDIC's position and to share with the OTS and the FDIC its proposed
approach to respond to the preliminary broker deposits determinations in the FDIC
Letter. .
As a threshold matter. as discussed at the meeting, the Bank does not believe that the
newly-deemed "brokered deposits" are deposits obtained from deposit brokers, as defined
by the Federal Deposit Insurance Act and FDIC regulations, but instead are core, low-tate
deposits that did not fuel the rapid growth of the Bank. In this regard, it was discussed
that the Bank intends to pursue its appeal rights within the FDIC appeals process and we
1 Thjs letter contains confidential information concerning United Western Bank (the ''Bank'') and is not in
the public domain. This infonnation is being provided to the Office of Thrift Supervision and Federal
Deposit Insurance Corporation, the agencies responsible for the regulation and supervision of the Bank as
materials related to the examination and operations of the Bank. Any public disclosure of confidential
information could result ill substantial harm to the Bank. Accordingly, confidential treatment of this letter is
requested, pursuant to 5 U.S.c. 552(b)(4) and (8) is requested.
2 Although the FDIC Letter is dated May 24, 2010, it was not deliveted to the Bank until June 2, 2010.
661
Paul Hastings
LoriJ. Quigley, Acting Regional Director
Nicholas J. Dyer, Assistant Director
July 2, 2010
Page 2
discussed and agreed upon the appropriate steps to be taken to pursue such an appeal.
The Bank is preparing to file a request for review of the preliminary FDIC determination
with the FDIC Director of the Division of Supervision and Consumer Protection, the first
step in the appeals process. It is possible that the determination will be reversed by the
Director but, if it is not, the Bank may appeal to the FDIC Supervision Appeals Review
. Committee However, as also discussed at the meet:iJ?g, the Bank has
committed that it will at the same time pursue a multi-step strategy to address the FDIC's
preliminary determination and to achieve compliance with the June 25, 2010 Cease and
Desist Order (the "OTS (i) seeking a formal waiver from the FDIC to
permit the acceptance, renewal and rolling over of the newly-deemed brokered deposits; .
(it) undertaking a significant capital raise by the Bank's parent, United Westem Bancorp,
Inc. so as to exceed the standards required by the Order; (iii) restructuring its
operations pursuant to the Bank acquisition of Legent Clearing llC and
(iv) evaluating strategies to gradually eliminate the newly-deemed brokered deposits that
permit the Bank to continue to operate as a viable entity. .
During the meeting, the Bank sought assurance that the approach outlined above would
be acceptable to both the OTS and the FDIC and that the Bank and its officers and
directors will not be considered in violation of the OTS Order or the brokered deposit
statute or regulations during the interim period while it is appealing the preliminary
determination. It is our understanding that the FDIC and OTS agree that the Bank may
pursue the approach outlined above consistent with the expectations of both agencies.
We ask that you prompdy contact the undersigned if our understanding is in any way
inconsistent with the recollections of OTS and FDIC staff that attended the meeting or
with the views of others at the OTS and FDICwith supervisory responsibilities for this
matter.
As you are aware, on June 10, 2010, the Bank filed with the FDIC a request for a waiver
from the brokered deposit restrictions pursuant to 12 U.S.C. 1831 and 12 C.F.R.
337.6(c). At the meeting senior FDIC staff described the FDIC Letter as a preliminary
determination. Additionally, FDIC staff expressed a willingness to consider favorably the
Bank's pending waiver request for the Bank to continue acceptance, renewal and rolling
over.of deposits newly-deemed to be brokered. FDIC staff did, however, express
concerns aboutthe Bank's fee structure and the FDIC's inability to waive fee restrictions
if it is determined that such fee restrictions ate implicated by the newly-deemedbrokered
deposits. To address this concem, the Bank will be providing the FDIC with additional
documentation that substantiate its fee and rate structures and representative industry
costs to demonstrate that the Bank's fees are not in excess of FDIC national rate
standards.
662
Paul Hastings
Lori J. Quigley, Acting Regional Director
Nicholas J. Dyer, Assistant Director
July 2, 2010
Page 3
As summarized at the meeting, UWBI currently is undertaking a significant capital raise.
To date, multiple investors, including banks have expressed interest and have been actively
conducting due diligence to evaluate strategic transactions, each with a goal of returning
the Bank to awell capitalized status. Goldman Sachs & Co, UWBI's investment banker,
has received significant expressions of interest from multiple investors, demonstrating the
high likelihood of a private-sector solution to the Bank's current challenges. As discussed
in the Bank's June 10 waiver request to the FDIC, upon consummating such a capital
transaction, the Bank and UWBI will seek modification of the OTS Order to remove the
"meet and maintain" provision, which at that time would be the only impediment to being
deemed well capitalized, triggering restrictions on the acceptance of brokered deposits.
As also discussed at the meeting, the Bank also will soon befiling an operating subsidiary
application with the OTS and FDIC concerning the acquisition of Legent and
establishment of Legent as an operating subsidiary of the Bank. Legent is one of the
deposit relationships that was raised in the FDIC Letter. The proposed acquisition will
cause deposits attributed to Legent to be attributed to the Bank itself, as OTS's
subordinate organizations regulations$ and applicable guidance provide that an operating
subsidiary and its parent federal savings association are generally consolidated and treated
as a unit for statutory and regulatory purposes.
4
Accordingly, we will be submitting
information to support the Bank's position that to the extent deposits at Legent currently
are deemed by the agencies to be btokered deposits at the Bank, after the acquisition, they
will be core deposits.
Finally, the Bank is also exploring options to gradually elitninate the newly-deemed
brokered deposits. To accomplish such an elimination without jeopardizing the Bank's
operations and without disrupting depositors' businesses and consumers' access to the
important services provided to them will require careful planning and time.
In. conclusion, we appreciate that the staff of both agencies participated in the very
productive discussion of the issues raised in the FDIC Letter, and the Bank's multi-
pronged plan to address such. We also appreciate the time and efforts extended by both
the OTS and FDIC to work with the Bank and UWBI to overcome their current
challenges. We have sought to accurately describe in this letter the Bank's understanding
of the current expectations of the OTS and FDIC to ensure that the Bank moves forward
in a manner consistent with the expectations of its regulators as to the newly-deemed
brokered deposits, as well as compliance with the OTS Order.
3. 12 C.F,R., Part 559.
412 C.F.R. 559.3(h)(1). See OTS Op. Chief Counsel P-2006-6, 3-4 O-uly 20, 2006}.
663
Paul Hastings
Lori J. Quigley, Acting Regional Director
Nicholas J. Dyer, Assistant Director
July 2,2010
Page 4
Please advise us if the Bank's understandings are in any way inaccurate.
Sincerely,
c?tictf
cc; Boards of Directors of UWB and UWBI
Theodore AbariotesJ Esq.
Serena L. Owens
Associate Director
Division of Supervision and Consumer Protection, FDIC
Andrew L. Sandler, Esq.
Jeremiah S. Buckley, Esq.
Liana Pietro, Esq.
Buckley Sandler, LLP
Kevin L. Petrasic, Esq.
Paul, Hastings, Janofsky & Walker LLP
664
TabC
Exhibit 23
665
Office of Thrift Supervision
Department of the Treasury
. . .. ' .
Regional Director. Wes,ern Region
22S East John Freewa)'. Suite 500. IrVing. TIC 75062-2326 Telephone:
r.o. Box 619027. DallaslFort Worth. TX75261-9027" Fax: (972) 277-9501
July 15, 2010
VIA SECURE EMAIL
AND UPS NEXTDAY AIR
. OTS Docket No. 06679
Board of Directors
Attn: Mr. James R.Peoples
Chairman of the Board, CEO and, President
United Western Bank
.700 17th Street, Suite 2100
Denver, CO 80202
Dear MemberS of the Board:
In light of the current liquidity position of UnitedWestetn Bank(Association), theAssociation's
current "5" Liquidity rating, and concerns raised by the Federal Deposit Insurance Corporation
, (FDIC) regarding the treatment of certain deposits under the brokered deposit restrictions set
forth in 12U.S.C. 1831fand 12 C.F.R. 337.6, OTS imposes the following restrictions or
requirements upon the Association.
Effective immediately, upon receipt orany oral or written communication from any of the
institutional depositors listed below. indicating that such depositor: (a) intends to terminate its
deposit relationship with the Association; (b) intends to terminate, amend, or revise any contract
relating to deposits placed with the' Association; or (c) otherwise intends to withdraw in
aggregate more than five percent (5%) of the total dollar amount of deposits placed by such
depositor at the Association, the Association shall immediately notify the Regional Director of
such communication and shall immediately provide the Regional Director with a copy of any
written communication.
Such institutional depositors shall include: Equity Trust Company (ETC) and its related
Companies (Equity Administrative Services, Inc. and Sterling Administrative Services, LLC);
Matrix Settlement and Clearance Services. LLC; Lincoln Trust Company; Legent Clearing LLC;
UW Trust Company; Deutsche Bank Trust Company Americas; Trust Management, Inc.;
Constellation Trust Company; any other one depositor or deposit broker responsible for
placement of deposits with the Association in an aggregate amount of more than $5 million; and
any successor company to any of the foregoing.
666
Board of Directors
United Western Bank
Page 2
July 15, 2010
The restrictions and requirements set forth above are effective immediately upon receipt of this
directive and shall remain in effect until terminated, modified. or suspended by the Regional
Director. The OTS reserves all of its rights. Nothing in this directive shall be construed as: (1)
restricting the OTS in any way from taking such actions (enforcement or otherwise) as it
detennines are appropriate and authorized; or (2) allowing the Association tovioJate any law,
rule. regulation. or policy statement to which it is subject.
The Order to Cease and Desist.and its accompanying Stipulation and ConsenNo the issuance by
the OTS (OTS Order No. WN-l()"()19) against the AssociationonJune 25. 2010 remain in effect.
The restrictions and requirements set forth in this Directive are in addition to the restrictions and
requirements set forth in the Order to Cease and Desist .
. If you have questions. please contact Assistant Director Nicholas J. Dyer at (650) 746-7025 or
Field Manager Kevin Swanson at (650) 746.,.7066.
tJ .. '. lyy
Philip A. Gerbick
Regional Director
cc: Ms. Kristie K.Elmquist. Acting Regional Director. FDIC-Dallas
Mr. Joseph A. Meade,Assistant Regional Director. FDIC.,.DaUas
Mr. ThomasL.Trujillo, Case Manager, FDIC-Dallas .
Mr. Lawrence Kaplan, Paul, Hastings. Janofsky & Walker LLP
667
Board of Directors
United Western Bank
Page 3
July 15, 2010
epdf: E. Chow
C. Coon
I. Corral-Chavez
A. Dayao
N.Dyer
S. Harris
J. Hendriksen
W. Santos
Y. Sosa
K. Swanson
M. Sweeney
K. Walter
668
TabC
Exhibit 24
669
Office of Thrift Supervision
Department of the Treasury RegionalDirector. Western Region
Pacific Plaza. 2001 Junipero Serra Boulevard. Suite 650, Daly City, CA 94014-3897 Daly City Area Office
P.O. Box 7165, San Francisco, CA 9412(}"7165 Telephone; (650) 746-7000 Fax: (650) 746-7001
July 15; 2010
VIA SECURE E-MAIL
AND UPS NEXT DAYAIR
OTS Docket No. 06679
Mr. James R. Peoples
Chairman, CEO. and President
United Western Bank
700 17th Street. Suite 2100
Denver, CO 80202
Re: contingency Plan and Capital Deadline Extension Requests
Dear Mr. Peoples:
This is in response to two of your previous letters, as follows:
Contingency Plan
First, in your letter of July 2, 2010 to Acting Regional Director Lori Quigley and Assistant
Director Nicholas Dyer on behalf of the Board of Directors of United Western Bank (UWB or
Association). a Contingency Plan was submitted in response to Paragraph 8 of OTS Order No.
(Order);
The letter notes that the Order requires the submission of a Contingency Plan that would achieve
a:
(a) merger with, or acquisition by. another federally insured depository institution or
. holding company thereof; or (b ) voluntary liquidation by filing an appropriate application
with the OTS in conformity with federal laws and regulations.
670
Mr. James R. Peoples
Chairman, CEO, and President
United Western Bank
Page 2
July 15,2010
The letter requests that OTS consider the Capital Plan also submitted with the letter to be the
Association's Contingency Plan. The Capital Plan, however, contains no plan to achieve either
of the scenarios required by the Contingency Plan provision.ofthe Order.
Accordingly, the Association is hereby directed to prepare and submit within seven days of this
letter a Contingency Plan that specifically details the actions to be taken to achieve one of the
results described in the Contingency Plan provision of the Order.
Please be advised that OTS continues to review the Bank Capital Plan, Liquidity Contingency
Plan and Company Consolidated Capital Plan also submitted with the July 2nd letter and will
communicate comments relatedto those respective plans as appropriate.
Capital Deadline Extension Requests
In addition, we are in receipt of your letter of July 7,2010, in which the Association and its
holding company United Western Bancorp, Inc. renewed their previous requests to extend the
time to comply with the June 30,2010 capital requirement contained in the Order. We have
considered your requests and again deny the requests.
If you have any questions, please contact Assistant Director Nicholas Dyer at (650) 746-7025.
Gerbick
Regional Director
671
Mr. James R. Peoples
Chairman, CEO, and President
United Western Bank
Page 3
July 15,2010
epdf: E. Chow
C. Coon
I. Corral-Chavez
A. Dayao
N. Dyer
S. Harris
J. Hendriksen
W. Santos
Y. So sa
K. Swanson
M. Sweeney
K. Walter
672
TabC
Exhibit 25
673
J]
UNJ'I1!D
MSTE
. ............. .RN .'.' ...... .
<.
". . ." ." . . .
BANCORP
July30l 2010
.Y/A,EJ,ECTR()JV1CMi(l1lAJIIDtJ'VERNiC1il't DEt1JlEill
KristieK. Elmquist
ActingR.egioililtDirclQt .
eder.I DepositlJlSuratJCe Corporation
Tew15201
lfE: ... .. t to
.ndU
DearActingRegiOnaI DiieetotElii:lqUist:
'l1U$letter the appliJtiQl) 201 Osul>imttl Feder8t
DepOSit ,
nenver,Colol'ado(the to Dep6Sit lliSUtance
Secnon337.6(c) of the tuleU.nd ,. ationsoftheFPI<; _eking petmis$iorttoQtltinue
rolloverbrokereddep()$its(the ". .' . . Tl1jsletter addresses by the Fl)le
Waiver Request PU1l!wuu#l 1\11)'8. which the. 13an.k on JuJy U.
, ,.
lIlti'odUetion
aan.k onJune2,2010
iThi$leuet8ndtbe encloSed busineSSinformatiOiiofUnlfed WesternBankatid its holding
cOmpany that is iiOtm 1hepublic doniaiil.Thi&lett.eris beingptOvidedtothefedertll banktegulatotsofUnited western
Blilikitl 13ank and therelot'e shOuld bogr8n.teci confidential
confidential andsupervisionexemptiollStotheFreeoom .oflnfonnat1oo ACt.
5 fQld.
enclosures. us ifanyone"Submiba FreedQnl oftbi$
eiWlosures. . .'
. the
JUly any in,
. aletterdattdJuly27, 2010, ooJuJy 2010. a
cQPYQf.b is setroff,hatgxhibit .
'* A copy. o'ftlieJune 10,2010 WaiVer set torthatJ3x\Ubit
4A1thQugh dleFOIC W8SJl9t Ul1iil
Iit.fact the FDIC Letter ws notevendeliveted to until Frldl,ly,.May
the B_ oftl1e .
MenioiialDaY holiday. '. .' . . ... ' . . ..
80202
.. .
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30,2010
Page 2 of14
institutional deposits should be deemed to be brokered deposits ("Newly-Deemed Brokered Deposits,,).l In a .
separate letter dated and received after the FDIC Letter on June 2, 2010, the Bank's primary federal regulator, the
Office of Thrift Supervision (the "OTS"), directed the Bank to file the Waiver Request with the FDIC. OTS
subse<I.zuently downgraded the Bank's Liquidity Component examination rating to a "5" as a result of the FDIC
Letter.
As noted in the Waiver Request as well as at a subsequent meeting held with representatives of the FDIC and OTS
at the FDIC's headquarters in Washington, D.C. on June 30, 2010, the Bank strongly disagrees with the
conclusions set forth in the FDIC Letter and reserved all rights with respect to seeking a review of the
determinations in the FDIC Letter. Pending such review, the Bank is taking appropriate steps to satisfy all required
regulatory directives. At the June 30th meeting, it was discussed how the Bank would seek a formal review ofthe
FDIC Letter through the FDIC's Division of Supervision and Consumer Protection and ultimately, if needed, by the
FDIC's Supervisory Appeal Review Committee ("SARC"). Such initial appeal would normally be due on August
2,2010, sixty days after the Bank's receipt of the FDIC Letter. However, on July 19,2010, at the request of the
FDIC's Assistant Regional Director, the Bank requested an extension of such deadline until October 31,2010, to
permit the FDIC to review this supplemental filing to the pending Waiver Request.
3
A formal extension until
October 2,2010 was thereafter granted in a letter dated July 27,2010.
4
In sum, for the following reasons, we believe that the conclusions set forth in the FDIC Letter have no legal basis
and that the deposit relationships discussed in the FDIC Letter are not brokered deposits. In this regard, the FDIC
Letter asserts that the various counterparties addressed in the letter meet the definition of a deposit broker because
each counterparty facilitates the placement of deposits ofthird parties with the Bank (and other insured
institutions). We strongly disagree.
As a threshold matter for present purposes, the definition of "deposit broker" in section 29 of the FDIA includes
"any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties
with insured depository institutions." See 12 C.F.R. 337.6(a)(5)(i). Excluded from the defmition of "deposit
broker" are agents or nominees whose "primary purpose" is not the placement of funds with depository institutions.
12 U.S.C. 183lf(g)(2)(I) and 12 C.F.R. 337.6(aX5)(ii){I). Under the plain meaning of the FDIA and FDIC
regulations promulgated thereunder, a person or entity must be engaged in the "business" of placing deposits or
facilitating the placement of deposits of third parties with insured institutions in order to be considered to be a
"deposit broker" for purposes of the FD IA. Thus, if the primary purpose or intent of a person or entity is not to
place or facilitate the placement of deposits of third parties with an insured institution, such person or entity is not a
"deposit broker."
Similarly, both the FDIA and FDIC regulations explicitly exclude from the definition of a "deposit broker" "a
person acting as a plan administrator ... in connection with a pension plan or other employee benefit plan provided
that person is performing managerial functions with respect to the plan." 12 U.s.C. 183lf{g)(2)(E) and 12 C.F.R.
337.6{a)(5)(ii)(E). Accordingly, a person who acts as a plan administrator in connection with a pension plan or
other employee benefit plan also is not a deposit broker.
These explicit statutory and regulatory exceptions from the term "deposit broker" clearly are based upon the
underlying rationale for Section 29 of the FDIA, as set forth in its legislative history. Specifically, Section 29 was
enacted to preclude troubled institutions from using high rate deposits, or "hot money," to fund rapid growth and/or
1 The Bank was also directed by its primary federal regulator to file a Waiver Request pursuant to a directive dated June 2,
2010, issued upon notice that the Bank received the FDIC Letter.
2 See ors Letter dated June 22, 2010, provided at Exhibit C.
3 A copy of the Bank's request for an extension to file its appeal of the determinations set forth in the FDIC Letter is set
forth at Exhibit D.
4 A copy of the FDIC's response to the request for an extension to file an appeal of the determinations set forth in the FDIC
Letter is set forth at Exhibit Eo
675
Krlstie K.
..
Fe4eral
JUlylO.201Q
page3o.f14.
support strugglmg'msiitutlonsthat 0#etlputSiledrlsqlnvestmei1tanG lld1ng strategies.
t
FDIC frQm$l ..
iftheitlslitutionwere1(l and
payout . the eltWated
irtterestrates thattheaOOuhtholdersmay haverecelved fumy event-the
legiStative eoneemaddreSsedby Section29w8stQptObibitbiSh tatebtOketed 4epositsior that .
trequent1yservedaS anunstabledep6Sit '. . . ' .
. The .. ....
.
core or loog-tenndepo$i1S . six of seven o.fthe relanonsbips discussedlJltMFDIC Utter are. governed
ofa high or elevated; .
or llomineeS .'
PlUPose is not tbeplacing (fepositsorfacilitatingtheplacement of deposits with the Bank (orauyother bank); and
to the extent motiVationmttyb'e detected itt myc<\Uiltetpm1.Y.the' primary pui'pOse of the oountetparty
eleariyiS nottoplqfund$ vrithtbellank (adisussedbelQw). .. ..' . '.
QitheF1:)lA
f;\ll Within elfOll,1$Ot)$4
any
pi'Stunab1y beCilUsethephIiQ;meal:iil1toftheseexclusions .. .
ThOugh theFPIChaStheStatUfory obligatiOn: tbinterpret
"dep9!litbroker" topreclude.eny pOrsoli or entity trom:relying'upqn
itt Interpreqrti()lt. .CQl,Ili:s have1qngheld
3
Thus,.FDIC cieternilitationstsucl1B,thoseset forthll,'l the cann0tIgrioreor Vitiate stIitUtOryexelusionS
1<> satiSfY a current policy concern.
anumber j)finstitutions witlladvisotY
opiniOtl$' .. inFt>lG
A4vjspO'opiniQn for the
with respect to. each oftheCQunterparties. H9W8Ver; ofadVi$ory
(long. ... '
,i$ con(leltted.by the ready above-imatket.rates.
.
iSeealSoRematkS MUrkOWski in With his tbe.brOkered deposit provi$ionin FIRREA at
135 COng. RecOtdS4238(April19.1989) (Bromeddeposita by
a tOio QUtimdSOlicitffum iildMdUalCerlifiCateS ofdeposit.investOtsandthe1i go to .
1 oi'f$et.ther:unofftbey ha-ve had in tlieif core depoSits. 8nd these
atabigtJ,er-:than-trWbt .... Ttieyfujve wh!l!ethe
for tbe m9J10Y atahigJ1errate theh,eal,tby.tompefitor; and'
.3 SOl U.S. lQ4$112 (1991).
thattml lettet$that ate notbindiDg on tlieFDIC. it:fBoardofDirectors.oranyboard
FDIC Law. Regulatiofis. :Related ActS';"A.dVisoiy ..
'oPinions,' .'
676
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30, 2010
Page40f14
June 30, 2010, Advisory Opinioil 05 .. 02 does not set forth a test that must be satisfied in all cases in order to qualify
for the primary purpose exclusion. Instead, the analysis of whether the counterparties come within the primary
purpose exclusion must be based on the statutory language and the specific facts and circumstances of these
particular deposit relationships. A proper analysis leads to the conclusion that none of the Bank's counterparties
are deposit brokers.
All of the deposit relationships at issue in the current are subject to long-term and longstanding agreements
negotiated at arms-length by the Bank and the counterparties. These agreements are structured in a manner that
allows the Bank to pay a reasonable fee for recordkeeping and similar administrative services provided by the
counterparty, as discussed below. Bank payments to the counterparties are not payments for the placement of
deposits, also as discussed in detail below. Bolstering this view is the efficient cost structure to cover the costs of
the counterparties and the low interest rate structure for these deposits, making one of Congress' primary
motivations for imposing a limit on certain banks accepting brokereddeposits inapplicable here. Further, as
previously noted, in several of the agreements under scrutiny, the counterparty is.acting in a trustee or custodial
capacity of the subject plan or as a plan administrator in connection with a pension or employee benefit plan. As
explicitly provided for in the FDIA and the FDIC's own regulations, persons or entities acting in these capacities
are not deposit brokers.
For all of these reasons, we understand the FDIC is further reviewing the conclusions set forth in the FDIC Letter
as well as the underlying assumptions relating to the determinations set forth therein to determine whether the
various counterparties subject to the agreements with the Bank are deposit brokers. Particularly compelling in this
regard is that the various agreements have been in place for many years, during which time most were subject to
review and examination by the Bank's regulators, including the FDIC. Fundamentally, none ofthe counterparties
are primarily engaged in the business of placing deposits or facilitating the placement of deposits at any insured
institution. As such, the subject of this inquiry should end there. Nonetheless, while the FDIC re-examines the
issue, we respectfully request that a waiver be granted rather than suddenly and abruptly require
material changes to the long-standing operations of the Bank based upon a preliminary determination.
The Bank's Responses to the FDIC's Questions from July 8. 2010 Letter
Notwithstanding the Bank's well-reasoned beliefs that the various institutional deposit relationships addressed in
the FDIC Letter do not result in the Bank's acceptance of broke red deposits, the Bank filed the Waiver Request. In
response to the Waiver Request, by letter dated July 8, 2010, the FDIC has requested that the Bank respond to
various questions and information requests. The Bank's responses are set forth below:
1. Provide additional background information as to why the potential acquisition of Legent Clearing LLC
as an operating subsidiary should not be considered to be a brokered deposit relationship_ .
Preliminarily, Legent Clearing LLC ("Legent Clearing") is not a deposit broker. The provision of depository
services is an incidental accommodation to its customers in connection with its primary business of securities
settlement and clearing services for broker dealers and their customers. Neither its primary purpose nor primary
intent is to provide deposit insurance or deposit placement services for its customers. .
As announced on June 15,2010, the Bank entered into a purchase agreement to acquire Legent Clearing and
hold Legi.mt Clearing as an operating subsidiary, which will engage in securities clearing and related activities. The
purchase ofLegent Clearing is subject to the prior approval of the FDIC and OTS under Section 18(m) of the FDIA
and Part 559 of the rules and regulations of the OTS. This transaction complies with Section 18(m) of the FDIA and
Part 559 of the rules and regulations of the OTS because the activities conducted by Legent Clearing are authorized
activities for federal savings associations, as supported by the opinion of the OTS Chief Counsel, dated November
28, 2006.
1
Therefore, we believe that it is well established and non-controversial that an operating subsidiary may
lOTS Op. Chief Counsel P-2006-7 (Nov. 28, 2006), attached at Exhibit F.
677
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30, 2010
PageS of14
engage in securities clearing and related activities. Therefore, for the purposes of this discussion, we assume that the
acquisition ofLegent Clearing as an operating subsidiary of the Bank will be approved by the OTS and the FDIC.
Under the OTS' s subordinate organizations regulations
l
and applicable guidance, "operating subsidiaries
have traditionally been viewed as mere operating departments of or divisions of their parent savings associations.,,2
Accordingly, an operating subsidiary and its parent federal savings association are generally consolidated and treated
as a single unit for statutory and regulatory purposes? In particular, the assets of a federal savings association and an
operating subsidiary are aggregated when calculating investment limitations
4
and are consolidated for all capital
purposes.
s
Furthermore, unless otherwise specifically p r ~ v i d e d by statute, regulation, or OTS policy, allfederal
statutes and regulations apply to operating subsidiaries in the same manner as they apply to the parent savings
association, and operating subsidiaries are subject to examination and supervision by the OTS to the same extent as
the parent savings association.
6
.
As OTS guidance explains, "[t}he rationale for authorizing federal thrifts to establish operating subsidiaries
is to provide thrifts with flexibility in structuring their operations," which also "enables federal thrifts to have parity
with national banks, which have been authorized to invest in operating subsidiaries for quite some time.,,7 In the
analogous context of national banks, the United states Supreme Court has treated operating subsidiaries as equivalent
to their parent banks with respect to powers exercised under federal law (except where federal law provides
otherwise).8 Specifically, the Court held in Watters v. Wachovia Bank, N.A. that national banks may engage in
expressly permitted activities through an operating subsidiary, subject to the same terms and conditions that govern
the national bank itselr,9 . .
As an operating subsidiary of the Bank, Legent Clearing will become subject to the same terms and
conditions as federal savings associations, including the full supervisory authority of the ors.IO This change will
expose Legent Clearing to significantly more federal oversight than it currently is subject to. Moreover, as a
subsidiary of the Bank, Legent Clearing has no independent ability to collect deposits. As an incidental aspect of its
business of providing customers with securities clearing and settlement services, Legent Clearing will place deposits
at the Bank as a division of the Bank.
ll
.
1 12 C.F.R. Part 559.
2 See ors Op. Chief Counsel (Oct 17, 1994), citing to a former ors regulation authorizing the establishment of operating
subsidiaries, 12 C.F.R. 574.74(c).
3 12 C.F.R. 559.3(h)(1). See ors Op. Chief Counsel P-2006-6, 3-4 (July 20,2006).
4 12 C.F.R. 559.3(i)(1).
5 12 C.F.R. 559.30)(1).
6 12 C.F.R. 559.3(h)(1). See also Section 730, ors Examination Handbook, 9 (Jan. 1994) (emphasis added).
7 Section 730, ors Examination Handbook, 9-10 (Jan. 1994).
8 Watters v. Wachovia Bank, N.A., 550 U,s. 1, 18 (2007). We note that Section 1044 of the recently enacted Dodd-Frank
. Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") repeals the availability offederal preemption for
operating subsidiaries of federal savings banks.
9Id at 1, 7.
10 In accordance withthe Dodd-Frank Act, the OCC will assume the supervisory ftmctions of the ors as early as July 2011.
11 Based on communications with other Banks, we are aware that other industry participants are structured in the same way,
without regulatory criticism that they are engaged in accepting brokered deposits. For example Plains Capital Corporation,
678
J(rlstieKEImqtii$t .
.. ' .'
CotpOJ:'ltiqn
"depOsit
ic[#)ny the
:with insuted .@pOsitotYinstitutions; or the.bUSiness .o.fplacingdepositJ
puq,ostfofsellmg intereSts in those deposits to third t>arties/'See and 12.C.P,R. *.
exc1Udeftoni the tenn tIsPostl b1!o1cer.llmongothertbirigs
other in.Qed. .
depoSitorfinstitUtiotiSin 12C.PiR:. "33Uj(a)(ji)(A):'and (iii).
A
.a; ... .;iv asano ......... Iin\T Pi1;. ..
',' ___ ;l .,.-r.'''' .' ... '..' W1I:'c
&sa division o(theBank. Moreover, wfthFDIC regq1atioD$ the deposit broker for
t'Uiidsphwed ratespaidOhStich
national Jjlte. cap setbytheFPIC: .. as tile ofinierest;inex-. oithiS
Interest rates outtemly i'lidby tite Bank to
of ifltere$t offetedby forthOlltb.e$UJllirlatyOfthevarlousd '. .it
cQrtcntly
onjum,bornoney
()f 0.43rO; resultitlg ina national tate cap of 1.18% as of lu1Y21,2010.
1
Thus, even itfec;sfot serviccs.tendered .
total to LeSerttClearinJ.iS riOtsignificantly
higber.tbantlwpteVtlUiogllational
Moreover, we; notethatpaymentSrnadeby the Bank of two
. t'eOnikeel>in$ancfModrtiStrative'serviCeSprOVitkdon behalf0ftheBarik ..
Clearing retains payments Qn
ofthe8ank .
. am.lengthnegotiation betWeen LegentCleartngand.tIleBank to
proVideS as4iSCUsSed in
seetion.29.oftheFOIAatultheFDICsregulationsitnplttnenting:sUChseetiOiL .. Aeommonlyused definlUon.of .
usea is "OOfiipehsatiOil to
'(tifi'lwltjet" tile fiJn(Is;;:,3 properly
a bank holding rompan)' regt.1latedby tb.eFedri Reserve. tb:roughan aequisitionvehide,PWns CapitalFk$t .
mc FitsfSOUthweStHolam"LLC;whicJ).beCame.a
Tbrougb thi$aequisition;PlainsNationtiBankaCq,itited FirSt Southwest tbeeUeilt
otFir$tS0uthwtS,t btOkerMdepoSfuiby PlamsNatiOnalBank,liifact. they are
. '':';'..1, '.' . PlainsNatiOililBank. . .' ".
8$00111 ..... ...,... U7 .' '. ....... ... '.
1 PUl'Suantto arecertuulemakiDg; the.FDIChasadopted
679
("'IRS")Form. l099MlSC tOi"fees'paid iOrservices.. An;ms Form l099,.MISc,isteqWred tax yesta
. .. 8.$SUmil1g:the,{e# fQi
be with
for,service$.
'ACCQtdIDgly. an
c t . , llbeA"""""'ts ... ...;a "...:U-.:butedto .. 1.i-Banka. .... arenot dhi..,;t.. .. .,A._- . ail"" ;...:....., f .' " ,":.1
... ........... ,WJif ........ ........... ... '
byQtherln$uted tltcJ r.te SmYey.
agreed to td:maintain.atleast $150 milJionil1 depoStfS.atth"B8rik at all tiines,these depositswiIl
Q(lntmUe'to proVide aStable, Idw-coSt 9fliqUiditJ to tMBimk. '.
.. C ...... n4brfO,.tlmlastowhf 1:rWTnstcc. ... ,. ... eo.,..ysho.14.
Ilotbe.:coltdckteda brokereddepositreiatioDShlp; .' .
. , Pending CU$totner
instt'UmiOh$tf'lmdS'!Ue htllfina depoSitoocountat the Bank aeti.viUes, lJWtCcannOlbe
.. Asa resUlt,
ihereunder.;
fundS With depository institutibnS"u JJrQvidedf()t.at of the :Fl:>fJ\. hySeetUm
As YmQ .sbtce.
.enacted
guidiilice beYond it mererepetitionof'theleplative Over set forth
be
ld.;JQve. Accor4JnglY,unlike ij}estattUol"y gqidanee
Provl<bi . . .
Nontbele$$, that"ptiinaryPUXPoseJ;, as
to 19f)O);
staf'thas set.forth along..st:andin$View tbatthe "primarypurposoexception"applle$ to an agentwM plac$tUnds.
into a depOsitory mstitiltlon.forasubStantiatJ:lUiPOsemhetthan to obtain deposit fusuraiIeeOOYerage for aeUStOmet
$el'Viee, 'Applying tllis analysis mvariOU$
staft'has .tabfl.
another barikwould not be a dpOSit pu1'pOSe
lf
oftbeeteditcardbankwu
petfectedseCurlty interest in.ootlatetal.OOttdprovldea itS custometS .... AdWoryOpfuion
No..
, accoUnt at .a bankiti order to .S.i\tiSfY' by
satiStiesthe "pmnatyputpOSe . eXcept1on"because the btolrer..dealet's "priniary'putpose" wu.tosatiSfy the SEC rtJ10
nOt to provige @, opinioilNo.9+39 17? 1994). in
680
Krlstie KElmqui$t
Acting Regional Director
Federal Deposit lnsurdtlceCorpQration
July 30,2010
PageSof14
AdViSQIY forrecordkeeping andadmirlistratiyeserviees
and not [as]payment for the placement of deposits; . '.' the existence of the fees t:ioes notchange[theFDlC's]
cOnclusion" that the primary purposeexc!usionissatisfied.
Thepdmary intent and, therefore,. primary pl'1rpose of UWTC's deposjt relatIonship with the Bank is not
to place deposits with Ii depository institution. but is toprovideescrowadmlnistrativeservices its cust01l)ers,
Accordingly consistent with the plain language of Secti()n;29 of the FPIA and the l1,lles and regUlations oftheF'DIC
promulgated thereunder,. each ofwruchare binding upon the Bank, andcQnsistentWithVarious FDIC. guidance
which, by their own.terms and statements. by the FDIC,are not binding on either the Ballkor the FDIC, UWTC is. not
engaged in a deposit broket relationship with the Bank.
3) Provide additional information to demonstrate thaHheoombinedsnb-accounting fees and interest rates
paid on tlutinstitutlon;d depositS listed under Exhibit .Dol your :with the
raterestrlctions outlined within FDIC RUles and Regulation 337.6 Deposits;
ExhibitDto the WaiVer Request setS forth variousintci'estrates paid by institutional depositors addressed in
meF})ICLetter, As setforth in such exhibit, rates varied from 0.0% to 1.1%. These rate must beeompared tome
national rate for interest on jumbo money market accounts of 0,430/0, of as
ofJuly 27,2010.
1
Thns,interestpayments to each of the various institutional depositors comply withthe national.rate
caps:
The Bankalso paysvariolls fees for services rendered to the Bank on behalfofifl; custo:mers. A listing of
various setvicesby provider is set forthatExhibitG hereto, UnlikeinterSt, which is compensation 10rJheuse oh
customer's funds, these are payments for time and tesoureese:lcpehdedby the provider of the services. The services
provldedare not.ootnntodities with standardizerlor defined l'ate$ .. Thus,a variety of fu.ctol'S.are.oollsidered bytbe
parties in their 8l'1l'lS"'length negotiations with respect to fees for services, resulting in ratesvaryingrromprovider to
. provider.
A conclusion that fees for services renderedbya third party to the Bank constitute interest would be contrary
to the cOmmon deftnitionof what constitutes. interest - compensation for the useoffunds; FeesJof
to the Bank. are not fees for the use offuods.,but are fees fOl'tirtle and resources of the third party providing the .
services. Supporting the notion that paymentof feeS to ser\'iceproviders is not interest,we note that theBallk, under
penalty of perjury, issues to various service providers for feeS paidfotServices; An IRS Form
requiredif ducinga tax year apersOll is paidaUeast$600. in$rvices (including Parts and materials).
2
This requirement must be compared to the instructions for lR.S Form l099-INT, whkbisrequiredfor amounts ()f $] ().
or more, "whether or not designated as Interest, that are paid or credittoa person's account .. /,3 for
IRS Ponn l099 .. INTprovide that"illterest is paid when it is credited or set apart foiaperson without any substantial
limitation or restcictionas to the time, manner or condition Ilf payment."
The payment of interest fees tor servicesl,mderthe varioU$ agreements the Bank
maintains with the various instiitttionaldepositorsdiscussed. in the FDIC Letter .. Ingenetal,fees for services rendered
are paid tocompensatetheproyider for administrative servicesprovlde9 to customers such mrcustomer service.
z See201Q InStntctions forFotm rQ99-MlSC,
3 See .2010 Instructions for Form 1 099.-INT;avaHable
681
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30,2010
Page 9 of14
staffing, third party vendor costs, printing and mailing of statements. However, unlike the Bank's unlimited
obligation to pay interest for the use of a customer's funds, the Bank has the right to stop paying fees for services if
the service provider breaches its obligations to provide the services.
Accordingly, the mere fact that the Bank pays a depositor fees for services rendered to the Bank does not
mean that such fees are interest. Banks routinely pay third parties for services rendered. Moreover, banks routinely
out-source various functions to their customers and pay valid consideration for such services. Accordingly
recharacterizing payments to a service provider as interest is inappropriate, unique and incorrect. Because a
conclusion that fees for services constitute interest would have significant consequences to the industry as a whole,
the Bank would be required to appeal such conclusion to the SARC or seek appropriate relief from such an erroneous
determination.
4) On any accounts that do not comply with the rate restrictions, provide a plan to reduce the sub-
accounting fees and or rates to ensure compliance;
The Bank has reviewed its various contractual obligations and believes that interest payments paid fully
comply with the current national rate caps. As noted on Exhibit D to the Waiver Request, and as discussed above,
interest rates paid to the institutional depositors do not exceed the national rate cap for interest on jumbo money
market accounts, which is 1.18% as of July 27, 2010. Moreover, as discussed above, the Bank is of the view that fees
paid for services rendered cannot be properly characterized as interest for purposes of compliance with the national
rate caps. Nonetheless, in the event of a final FDIC determination that fees for services cause the Bank to be paying
interest rates that exceed the national rate caps, pending an unsuccessful appeal of such conclusion, the Bank would
seek to renegotiate its current fee structure to comply with such determination, consistent with safe and sound
practices so as to not cause a liquidity crisis.
682
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30, 2010
PagelOof14
S) Provide additional documentation to support that the individual sub-accounting fees are arm's length
transactions between two equally advantaged parties (The March 18, 2010, Trost Company Profitability
analysis prepared by Thomas J. Kientz does not differentiate why the sub-accounting fees provided to
Equity Trust Company are substantially different than UW Trost Company, when the majority of
accounts now managed by ETC were acquired from UW Trost Company in June 2009);
The sub-accounting agreements between Equity Trust Company and the Bank as wen as UWTC and the
Bank were each arms-length transactions between two equally advantaged parties. In both cases the agreements were
individually negotiated. The terms of the agreements vary from one another with respect to contractual provisions
that include key terms and fees paid, due to a number offactors and differences between the two entities, as
summarized below: .
United Western Trust Company Equity Trost Company
UWTC and Equity Trust Company have vastly different lines of business. Equity
Trust Company handles self-directed retirement plans, which are labor intensive
and historically involve more active operations and account transactions,
including deposits, withdrawals and client contact.
UWTC focuses on escrow services. Escrowed funds are typically deposited up
front and are held for a stated period of time. Moreover, escrowed deposits
require minimal client contact and few disbursements during the life of the
account.
Light
Approximately 2,500 different escrow
arrangements, representing 15,140
accounts
$15.7 million
<-':::' .... Indefinite, however either party can
: .... \:Y<i'; ;'.: . terminate on 30 days' notice
Heavy
120,000
$9.8 billion
Approximately 400
June 2012, 2014 and 2016
The size of each institution, in terms of assets under administration, number of accounts, and number of employees
plays a significant factor in the overall cost associated with providing sub-accounting services. Finally, UWTC is an
affiliate of the Bank and, therefore, in accordance with Section 11 of the Home Owners' Loan Act, transactions
between the Bank and UWTCare subject to the restrictions of Section 23B of the Federal Reserve Act, and
Regulation W thereunder.
Another factor affecting the differences in fee payments by the Bank to each of Equity Trust Company and
UWTC relates to their internal operating systems. UWTC, which is formerly known as Sterling Trust Company,
utilizes a sophisticated proprietary trust system it developed, which was built around the sweep function. As a result,
based upon our experience, UWTC operates with greater efficiencies than Equity Trust Company in term.s of
683
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30, 2010
Page 11 of14
handling the day-to-day processing of deposits and withdrawals, as well as balancing and reconciling these
transactions.
Accordingly, based upon the foregoing considerations, the differences in sub-accounting fees paid by the
Bank to UWTC and Equity Trust Company are both reasonable and justifiable.
6) Provide a breakdown of the sub-accounting expenses associated with the institutional depositS&ioutlined
within Exhibit D of your application which are either applicable to iuterest expense or non-interest
expense (differentiate between each deposit and explain why one relationship may be higher or lower
than another);
From the Bank's perspective in negotiating fees to be paid to service providers, the Bank considers a variety of
factors including the length of the Bank's existing relationship with the service provider with the Bank, the
length of the term ofthe proposed agreement, market conditions when an agreement is being
negotiated/executed, proposed minimum deposit balances that the provider plans to hold at the Bank during the
term of the contract, as well as the number of accounts the provider is servicing on behalf of the Bank. These
factors result in the variety of actual fees paid to the various providers (see also, the Bank's response to
Question 5 as to why the sub-accounting fees vary. Exhibit G hereto sets forth a chart of each provider, the
various activities performed by each provider on behalf of the Bank, as well as certain factors supporting the
various fees paid to such providers.
The expense information requested by the FDIC generally is proprietary information of the various institutional
depositors. Nonetheless, in an effort to be responsive to the FDIC's request for information, counsel to the Bank
retained an independent third party (the "Consultant") to conduct a survey among various trust companies in an
effort to obtain information about their relationships with depository institutions. This survey requested the trust
companies to provide detailed information about the following:
Number of accounts;
Fair market value of assets under administration;
Number of employees;
Number of depository institutions utilized;
Current sweep deposit balances; and
Sub-accounting agreements, including:
a. Whether such agreements are written or implied;
b. Term of such agreements;
c. Fees paid to trust company by depository institutions;
d. Rate structure for sub-accounting fees;
e. Interest rates paid by depository institution to trust company customers; and
f. Cost incurred by trust companies to provide sub-accounting services.
During the initial phase of this project, when the Consultant made his first contact with various trust companies,
a number expressed significant concerns about providing the requested information, inasmuch as it represents
proprietary information. Information from other trust companies was not available as the appropriate officials
were out of the office on summer holidays. Notwithstanding the foregoing, the Consultant was able to obtain
certain information from several trust companies including UWTC and Lincoln Trust Company and expects he
may be able to gather several more after their senior executives return from various summer vacations. In
addition, the Bank was able to secure certain financial information relating to sub-accounting costs from Equity
Trust Company.
684
KristieK EhnquiSt
Acting Regional Director
Fedel'alDeposit InsuranceCorp6tatiort
July 30, 2010
Page 12of14
In accordance witbthe FDIC's request for actual sub-acCQuntingexpenses, based upon iIlformationknownto
the Bank, we baveprepareda chart provided at Exhibit H demoostratingthe annual eJ{pensesrelated to sub
accounting for UWTC,EquityTrust Company. and Lincoln Trustalong with what we estimate as eacb
compant sactual sub.accQunting ex;pense per account.
When juxtaposed to Exhibit O. it is cleat that service!! art! 119tc01'fimoditiesJorwhich there is a
marketbasedprice. importanttoTeCogruze that the various trust companies are located in
variollS:geographic locations. and each has due in part to differences in local labor arid
facilities (rent) costs, Thus. upon reviewoftheinformati9n set forth on ExhibitsG and H,areaderwill see
significant discrepancies. For example; in 200$. Constellati9nTtllst Company negotUl,tedan annual sub,.,
accounting fee of $25.00, which equates toanttfuiual per accountfee of0J.1lY $0. 10 .. We.clearly recognize that
this. fee is.low .andcQuld be viewed as below market.; but Constellation Trust Company has never requested a
mO(iific.ation of the structure and We have no Qurselves to increase their
oompensationto provide a market-rate.
Q:mstellationTrust' s rate is in stark contrast to:the arms4ength, annUal per account
Equity Trust Company of$166.0Q. Tbefeespaid tQ Equity Trust Company are based
uponavariety of factors. First and foremost, .isthe factthat Equity Trust Company has approximately $70()
million on deposit at the.Barik (mitially,under thesubacoouriting agreement, the capon deposits Was set at.$l
billion. however. itwas lowered to $700 million), fromapproximfi.tely nO.OOOindividual accOtints,c()lUparedto
only $3.5 million on dep<>sitfrom COUStellatiOil Trust" from approx"unatcly 4,40() accounts, While frequently; a
iargerorganization has various economies of scale, in the case of Equity TrustCompany. the larger siZ also
involves grearer services and expenses on behalf of . customers. Secolid. thehigherfeespaid .toEquity Trust
reflect their various commitments to maintain funds atthe Bank over an extended period oitime,
1
Specifically.
Equity has to maintain over$700111iUiononde.positsfora. term ()fthree. years (and
committed t6maintain at least$32S million for two or four more years under certain other conditionS). On the
othernaud, Lincoln Trust.Company's one-year agreement With the Bank contains .nocommitment.to. maintain
deposits at. the Bank for any period()f time after thefitstyear. Thus, it is and market-based to pay
Lincoln Trufit Company lowerJees than to Equity Tl'U$tCompany. Moreover, it .18 logical and
market-based that deposits associated with Equity Trust Company resultinthe Bank fees.
ExhibitsGand H document that UWTC'sexpenses per. account arelcss than Equii:)f Trust Company and
LincolnTrust Company. makes perfect sense be(;ause UWTC has less $UDaccoUllt$with
smaller cash batanCs, as well as less entpl()yeesprovidingservices fortbese accounts. Moreover.lJWTC's
servicesreiate to primarily to escrow ooministrationservices. which is tess labor intensive than the self directed
IRA accounts that both EquitY Trust Company and Lmcoln Trust Conipany service.
ExhlbitH also supports the notion that fees paid bythe13ank are rationally related to the sub-
accounting. expenses actually incurred by thetiuStcompanies. Arms-lengilinegotiationsbetweentheparties,
resulted in the Bank a variety "f.sub-accounting fees to these trust companies that is reasomlbly
related to the actual.sub-accounting expenses incurred .bythe trust companies.
lThe FDIC's own .. WeeklyNat;ional.Ratesa,nd Caps summary demonstrates earn higher interest
rateS yl)ttlpared to deposits that can be held
685
Kristie K. Elmquist
A,ctingR,eglonalPire<;tOf
Federal. Deposit Insuran<;e Corporation
JuLy 3(),2()10
Page 13 ofl4
Please be advised thatthe Bank. through its courisel.wUl gathetindustry information
to. supplement this response witblnfonnation that is outside of the control of the Bank.
7} Provide additioualinformationtosupporttheltte<t toanow 2S percent aggregategrowtb in <tbe
mstitutional dejKIsits Ulerequeste4waiyet' period (Le.,account bistories);
Based onhlswtical norms, theJ3ank te<;ognizesthat deposit incret\Se and decrease llasedQu market
conditions and timing. In light of the ongoing review of the FDIC Letter, the }3ank seeks to maintain its normal
course ofbusmessand nOt UnposeunnedessarychilUenges to its customers which have not yet established
relationships with altemmve depository institutions. Precluding the Bank from an increase in instituti()nal
deposits could adversely affect the Bank's customers.
8) Provide a oopyof the bank's Liquidity/Contmgeney FundiDg Plan;
$eeExhibit 1.
9) Provide a copy of the baJ'dt'sJuue30,lOlO balance sheet and iucomestatement.
See Exhibit J.
W appreCiatetbetime and resol,ll'ces tliatthe FDICisdevotirigtt> re\liewingthis matter. of out clients are
concel11edthatthey have been preliminarily deemed to be deposit brokers .. based on numerous
discussiotlS, marty of our clientS incorrectly believe that their funds are no longer eligible for FDIC deposit
inSura:tlce coverage becauseofsucb "broker" statUs. Accol'd.ingly, for the reasons set forth in the WaiyerReq\,lest .
and as well as set forth above, we respectfully request that the FDIC promptlypennitthe Bank to continue to
accept, reneW and roll overtheNewly-Deemed .srokered Dep<>sits penqingarevlew of the propriety of the
the FDIC Letter and for a period.of at least ninety (90) if ultima.telytJ:te
SARC'sdetertnitmlion upbolds such determinations; We believethatsucb action will avoid unnecessary ant.!
highly-preventable withdl'awalsof funds during the period in which the FDIC considers the ramifications of the
issues addressed in the FDIC Letter}
If you have any questlons regarding the fotegoing, pleli$edo not hesitate to contact me at(720)9.56-6516 or
Thomli$ Kientz at (72Q) 956-6548.
Enclosure
Sineer,ely,
./
-" James R. Peoples
Chairman, President and CEO
cc: Joseph A.Meade. Assistant Regional Direclof.FDlC
1 Toavoidatiy additional unnecessaty delays, request that our counsel be advised of any c()mmumcations
from the FDlCsO.that we can manually retrieve any communications fromtneFDlC Headquaners.in
lnsteadofhavil'lg to await delivery viaU.S. mail. .
686
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
July 30, 2010
Page 14of14
Thomas L. Trujillo, Case Manager, FDIC
Serena L. Owens, FDIC
Philip A. Gerbick, Regional Director, OTS
Edwin Chow, Regional Deputy Director, OTS
Nicholas Dyer, Regional Assistant Director, OTS
Boards of Directors of United Western Bank and United Western Bancorp, Inc.
Lawrence D. Kaplan, Esq.
Kevin L. Petrasic, Esq.
Paul, Hastings, Janofsky & Walker, LLP
Andrew L. Sandler, Esq.
Jeremiah B. Buckley, Esq.
Liana R. Prieto, Esq.
BuckleySandler LLP
687
TabC
Exhibit 25 A
688
Exhibit A
689
I J J
UNITED
WESTERN
BANK
James R. Peoples
Chairman, President &
ChiefExecuti.ve Officer
720.956.6576
jpeoples@uwbank.com
CONFIDENTIAL TREATMENT REQUESTED 1
June 10, 2010
Kristie K. Elmquist
Acting Regional Director
Federal Deposit InSUJ8llCe Corporation
1601 Bryan Street
Dallas, Texas 75201
SENTYIA OVERNIGHT MAIL DELIVERY SERVICE
RE: Brokered Deposit Waiver Request Pursuant to 12 U.S. C. 1831(c) ud 12 C.F.R.
337.6(e) by United Western Buk, Denver, Colorado
Dear Director Elmquist:
This letter is an application to the Federal Deposit Insurance Corporation (the "FDIC")
pUrsuant to Section 29{c) of the Federal Deposit Insurance Act (the "FDIA'') and Section
337.6{c) of the rules and regulations of the FDIC, seeking permission for United Western. Bank,
a federal savings bank headquartered in Denver, Colorado (the ''Bank'') to continue to accept,
renew and . rollover certain brokered deposits described in the May 24, 2010 FDIC letter
addressed to the Bank (the "FDIC Letter"), as discussed below.
2
The Bank currently is deemed to
be "adequately capitalized' as such term is defined at Section 565.4(b)(2) of the rules and
regulations of the Office of Thrift Supervision (the "OTS"). As a result, under Section 29(a) of
the FDIA, absent a waiver, the Bank may not accept, renew or roll ()ver for deposit funds
obtained directly or indirectly by or through any deposit broker. See 12 U.S.C. 1831f(a).
As you are aware, in the FDIC Letter, which was dated May 24, 2010, but delivered to the
Bank on June 2, 2010,3 the FDIC determined that a significant portion of the Bank's institutional
l1his letter and the Ollclosed doc::uments oontain c::onfidentia1. business iDfonnation not in the publlc domain. This letter is being
provided to the federal bank: regulators of United Western Bank in tbeir supervisory capacity over the Bank: and therefore should
be granted confidential t:rea1:Jnmlt pursuant to the bank examination and supervision exemption to'the Freedom oflDbmation
Act. According1y, we request, pursuant to 5 U.S.C. SS2(bX8), c::onfidential treatmentofsuch materials and enc::losures. PleaSe
DO;;Uy us if anyone submits a Freedom ofInformatiOll Ac::t request for a copy of this lcUer or the enclosures.
2 A copy of the FDIC Letter is provided at Exhibit A hereto. In the FDIC Letter, the FDIC deemed the following seven
institrdional deposit relationships with the Bank to be brokmed deposits: Equity Trust Company, MSCS, Linc:oln Trust
Company, Legent Clearing, ILC, Constellation Trust Company. T.MI and UW Trust Company. The Bank: seeks a waiver from
the FDIC from accepting. renewing or rollover of such deposit relationships.
3 Although the FDIC Letter is dated Monday, May 24. 2010, it was not delivered to the Bank lDltil Wednesday, June 2, 2010. In
fact, the FDIC Letter was not even delivered to United Parcel Service until Friday, May 28, 2010. Acc::ordingly, the Bank was
United Western Financial Center
700 Seventeenth Street Denver, Colorado 80202
tel: 303.595.9898 fax 303390.0952
www.uwbllllCOtDcom
" 690
Ms. Kristie K. Elmquist
June 10, 2010
Page20fS
deposits should be deemed to be brokered deposits (the "Newly-Deemed Brokered Deposits',).
While the Bank strongly disagrees with the conclusions set forth in the FDIC Letter and reserves
all rights with respect to seeking a review of the determination in the FDIC Letter, pending such
review, the Bank. is taking appropriate steps to satisfy all required regulatory directives.
Specifically, via a letter dated June 2, 2010, the Bank's primary federal regulator, the
OTS, directed the Bank to file a brokered deposit waiv.er request with the FDIC. On a case-by-
case basis and upon application by an insured depository institution that is adequately capitalized.,
the FDIC is authorized to waive the applicability of such prohibition upon a finding that
acceptance of such deposits do not constitute an unsafe or unsound practice with respect to such
institution. See 12 U.S.C. 1831f(c).
A waiver would be consistent with the FDIC Letter, which explicitly states that the FDIC
"stands ready to consider the Bank's strategies to gradually eU.".ate these brokered deposits
until such time as the Bank. becomes well capitalized and is not subject to any Federally issued
written agreement containing a 'meet and maintain' capital provision" (emphasis added). The
Bank has tentatively scheduled a meeting for the week of June 21
st
with representatives of the
FDIC in Washington, D.C. to d i s c ~ appropriate strategies and implement a plan to ensure
compliance with all applicable laws as recently interpreted by the FDIC.
A key initial component to such strategies is for the Bank to meet and maintain enhanced
capital requirements. United Western Bancorp, Inc. (the "Company"), the Bank's holding
company, expects to consummate. a capital raising transaction in the near future
4
at the
completion of which the Company will contribute additional capital to the Bank with a view to
bringing the Bank into compliance with OTS mandated enhanced core and total risk based
capital ratio requirements. Upon exceeding these enhanced capital standards, the Bank expects to
petition the agency to modify these requirements. On a longer-teJ:m basis, in the event that OTS
does not modify its ''meet and maintain" directive, as described below, the Bank will cease
renewing. any brokered deposits as they come to term. For example, frOltl March 4, 2010 to
May 31, 2010, the Barik shed over $271 million in deposits (see Exhibit B). Similarly, unless the
FDIC peimits the renewal of specific institutional deposit relationships, the Bank shall take
appropriate steps consistent with those relationships to terminate those relationships.
Finally, we note that the Bank received the FDIC Letter on Wednesday June 2, 2010,
which requires fundamental restructuring of the Bank's current operations. On the same date, the
Bank was directed by the OTS to file this waiver request. Accordingly, the Bank expects to
undertake a more comprehensive review Qf certain methods to reduce its exposure to brokered
deposits, after meeting with FDIC officials in Washington, D.C., tentatively scheduled for the
week. of June 21 fit. as well as taking into account the Bank's capital status upon Consummation of
the capital raise transaction, which should occur dming the next ninety (90) days. As discussed
. not on notice of the determinations set forth in the FDIC Letter until Wednesday, lune 2, 2010, after the Memorial Day
holiday.
41be Company retained Goldman Sachs & Company in March 2010 to represent it in capital raising transaction. The Company.
assisted by Goldman. Sachs, is cummtly in discussions with over 10 finDs. either private ~ groups or bank holding
companies. anyone of whom may provide the required level of financing for the Company to allow the Bank to meet or
exceed its eohanced capital ratio targets.
691
Ms. Kristie K. Elmquist
, June 10,2010
Page 3 oU
below, as the initial waiver would be for a minimum of ninety (90) days, additional strategies
will be formulated and submitted to the FDIC to the extent waivers are required in the future.
Until such immediate strategies can be implemented, given the conclusions set forth in
the FDIC Letter, we believe that a waiver of the prohibition against the Bank from accepting,
renewing or rolling over deposits deemed by the FDIC Letter as brokered is appropriate for the
Bank, consistent with Section 29{c) of the FDIA, ,as discussed below, since the continued
acceptance of the deposits addressed in the FDIC Letter, does not constitute an unsafe or unsound
practice with respect to the Bank. '
Background
The Bank has taken all appropriate steps to eli:minate the acceptance of any and all
deposits that are brokered under FDIC regulations (e.g., 'CDAR.S@ deposits, traditional brokered
deposits and certain brokered institutional deposit relationships). Further, the Bank. is not
renewing any such deposits as they come ,to tenn. Attached as Exhibit B is a chart representing
the reduction in the amount of broke red deposits from March 4,2010 to May 31,2010, that the
Bank previously determined to ,be brokered deposits.
The facts surrounding the Bank's use of well recognized brokered deposits such as
CDARS are markedly different from those in the Bank's current situation arising out of the
recent FDIC Letter in which deposit relationships of long tenure have recently been deemed to be
''brokered deposits" under applicable FDIC regulation. As previously described to the FDIC (see
attached Exhibit C. which is a copy of a White Paper entitled, United, Western Bank Core
Deposit Strategic Planning and Regulatory Positions, dated March 8, 2010 on the brokered
deposit issue, prepared by the' Bank. and previously submitted to the FDIC ), the Bank has long
term contractUa1 relationships pertaining to these accounts. These institutional relationships have
extended over a decade in many instances. As a consequence, the Bank finds itself in a unique
situation that requires a waiver under Section 29{c) of the FDIA in order to preclude a completely
preventable liquidity crisis.
As the FDIC is aware, the Bank has entered into a number of agreements ~ institutions
that have custody of customer funds, pursuant to which these institutions, as agent for, their
customers, maintain deposit funds in money market and/or demand deposit accounts at the Bank.
These are ordinary course deposit relationships between the institutions and their clients which
are provided to their retail customers as an incident of the institutions' primary businesses; in no
instance is it the primary business of any of these institutions to place deposits with the Bank or
any other bank or FDIC insured depository institution. The FDIC is well versed in the history of
these relationships, some of which have persisted fur over thirteen years and all of which show
consistent growth and stability over the time period the funds have been on dePosit with the Bank
(see Exhibit D).
As of May 31,2010, the Bank had approximately $1.2 billion in deposits (67% of the
aggregate) of the Newly-Deemed Brokered Deposits under the FDIC Letter, out of a total deposit
base of approximately $1.8 billion. The inability to accept, renew or rollover the Newly-Deemed
Brokered Deposits would have an unsafe and unsound effect on the Bank as such newly-imposed
regulatory impediment would unnecessarily impair the Bank's ability to have sufficient liquid
692
Ms. Kristie K. Elmquist
June 10,2010
Page 40f8
assets to address possible deposit withdrawals in the ordinary course by customers in compliance
with Section 29 of the FDIA.
We note that the Newly-Deemed Brokered Deposits are not inappropriate "hot money"
that has been gathered by a deposit broker who shops for financial institutions paying the highest
rates, as has previously been explained to the FDIC (see attached White P,aper in Exhibit C).
Rates paid on the deposits held by the Bank under its contractual relationships range from 0 basis
points to 1.10%.5 Moreover, these funds are stable deposits, unlikely to move out of the Bank.
absent an adverse, inappropriate regulatory determination. As set forth on Exhibit D, the balances
in the various contractual relationships have increased over time. This historical data
conclusively demonstrates that the Newly-Deemed Brokered Deposits are in reality stable and
not rate-sensitive and, therefore, do not possess the characteristics of deposits that the FDIC
typically attributes to "hot money."
Required Information for a Waiver Pursuant to Section 303.243(c)
In accordance with Section 303.243(c) of the rules and regulations of the FDIC,
applications to the FDIC for a waiver must set forth: the time frame for the waiver, a statement of
the bank's policy governing the use of brokered deposits in the bank's overall funding and
liquidity management program, current and anticipated volumes, rates and maturities, internal
limits, explanation of how brokered deposits are priced and other funding alternatives; as well as
a detailed discussion of the Bank's asset growth plans, procedures and practices to solicit
brokered deposits, management systems to oversee the solicitation, acceptance and use of such
deposits, and an explanation as to why the acceptance, renewal or rollover poses no undue risk to
the Bank. 12 C.F.R. 303.243(c). The required information is set forth below and in the
enclosures herewith.
Time Frame for Waiver
The Bank seeks a waiver from the limitation in Section 29(a) of the FDIA and Section
337.6(b) of the FDIC rules for a minimum period of ninety (90) days, subject to renewal. The
Bank's current adequately capitalized status is based upon the fact that its total risk based capital
ratio fell below 10% at March 31, 2010. At such date, the Bank's core capital ratio was 6.6%. It
should also be noted that the Bank's core capital ratio is projected to exceed 7% as of June 30,
2010. The Bank further notes that the OTS may seek to require that the Bank enter into a formal
enforcement agreement that reiterates specific "meet and maintain" capital ratios. However, as
noted above. as a result of the Company's ongoing capital raising 1ransaction, the Bank expects
to meet and exceed both the traditional prompt corrective action "well capitalized" level ratios as
well as enhanced capital ratios in the near term. Accordingly, the Bank will seek approval of the
OTS to terminate any such OTS mandated ''meet and maintain" provisions as promptly as
possible after exceeding the regulatory capital requirements in any OTS' directive.
5 Note that the rates paid on the subject deposits do not include subaccounting and administrative fees paid to the institutional
depositoIS pursuant to the contractual agreements.
693
Ms. Kristie K. Elmquist
June 10,2010
Page 5 of8
Bank's Policy Governing the Use of Brokered Deposits in the Bank's Overall Funding and
Liquidity Management Program
Bank policy eschews the use of interest rate sensitive brokered deposits as a primaxy or
secondary source of liquidity. The Bank. has and will continue to seek long-term stable sources of
deposit funding. Despite theFDIC's conclusions in the FDIC Letter, the Bank still believes that
the deposits subject to the FDIC Letter were such types of deposits.
6
The Bank's belief is based
.upon the stable, long tenured history of such deposits as evidenced by the chart on Exhibit D and
as discussed in detail in the White Paper. Generally, retail deposits will first be sought, and then
the availability of FHLB advances versus projected liquidity needs will be evaluated to detennine
the secondary source of funding. The deposits subject to the FDIC Letter are stable, generally low
rate deposits, consistent with deposits that are long-term in nature and that are not interest rate
sensitive.
In addition, the Bank will shortly enter into a binding agreement, subject to OTS and
FDIC approval as well as other regulatory approvals, to acquire a 100% interest in Legent
Clearing LLC ("Legent Clearing"), a FINRA member firm engaged in securities clearing and
processing services. Legent Clearing will become an operating subsidiary of the Bank. As the
FDIC is well aware, an operating subsidiary of a federally or nationally chartered bank is treated
as a division of the Bank itself. See e.g., Waters v. Wachovia, N.A., 550 U.S. 1, 35-36 (2007)
Legent Clearing clients currently have approximately $700 million of cash balances that will be
available to the Bank as additional liquidity and. such deposits should not be classified as
"brokered deposits."
Current and Anticipated Volumes, Rates and Maturities
Exhibit D sets forth a listing of the Newly-Deemed Brokered Deposits under the FDIC
Letter. These deposits represent approximately 75% of the Bank's deposit base, net of deposits
truly deemed to be brokered, and are critical to the Bank's current operations. In sum, these
deposits have no attributes of brokered deposits that have been criticized for years by federal
regulatory agencies. Specifically, these are low-rate and stable deposits. These deposits are not
being raised to fund unsustainable rapid growth, support risk and speculative asset investment by
a weak or insolvent institution. Requiring the Bank: to divest of this long-lived, stable source of
liquidity while the Bank is temporarily adequately capitalized is imprudent, unsafe and unsound.
Elimination of these deposits does not address the concerns repeatedly expressed about the
transient nature ofbrokered deposits by FDIC Chairman Sheila Bair.
Further, these deposits are controlled by agreements which provide that the customer
deposits will be maintained atthe Bank for a specific term. The Bank submits that the FDIC can
and should find that the tenor of the deposit relationships are controlled by these agreements, not
the terms of the underlying account paperwork as the superior agreements bind the institutions to
maintain the omnibus deposit accounts as agent for the underlying retail customers.
6 Further, notwithstanding the FDIC Letter, the Bank is ofth.e opinion, bam:d on the advice of competent collllSel, that the subject
deposits are not "brokered deposits" for pmposes of Section 29 ofllie Federal Deposit Insuamce Act and under applicable
regulations and the Bank will consider all options available to it to reconcile its position vis a vis the FDIC Letter.
694
Ms. Kristi.e K. Elmquist
1une 10,2010
Page 6 ofS
For example, the Bank's deposit relationship with MSCS is governed by an Amended and
Restated Services Agreement datedJuly 5, 2007 (the "Services Agreemenf,).7 Pursuant to the
terms of such agreement, the Services Agreement automatically renews on July 5,2010. The
Bank. therefore seeks explicit FDIC waiver of the newly imposed brokered deposit restrictions
with respect to this deposit relationship pursuant to this letter.
Internal Limits
Until the time that the Bank andthe FDIC formally resolve the definition of "brokered
deposits," the Bank will treat the relationships noted in the FDIC Letter; with the ,exception of aU
deposits associated with UW Trust Company, a wholly owned subsidiary of the Company and an
affiliate of the as "brokered deposits." The Bank and the Company believe that it is
inappropriate to deem the UW Trust Company deposits as brokered since UW Trust Company is
a part of the affiliated group controlled by the Company. In addition, the UW Trust Company
deposits represent escrow deposits maintained on behalf of life settlement investors and as such
these deposits are clearly not brokered
The Bank also will limit growth of the Newly-Deemed Brokered Deposits to no more
than 25% in the aggregate the amounts held by the Bank as of the date of this letter. This
limit is to account for transitory amounts that may be deposited with the Bank due to underlying
customer demands (e.g., monthly or quarterly deposits received in light of 401k plan
contributions via employee withholding) that are in transit to mutual fund or other investments.
In no case will the Bank. employ these amounts to increase any asset position other than
gOVernD1ent gqaranteed (e.g., GNMA certificates) or deposits within the Federal
Reserve system. This self-imposed limit should adequately provide comfort to the FDIC that the
Bank is not using "hot money" to balloon its balance sheet in risky investments.
Explanation of how Brokered Deposits are Priced
The Newly-Deemed Brokered Deposits are priced in accordance with long-term
contractual relationships and are not priced as traditional "hot money" designed to fund rapid
growth. Exhibit D sets forth the pricing of the deposits for each relationship addressed in the
FDIC Letter.
As of June 1, 2010, the weekly national average interest rate for money market accounts
was 0.30% with a rate cap of 1.05%. As set forth on Exhibit D, the Bank's deposits do not
otherwise materially exceed these amounts. To the extent interest rates exceed the national
average, the Bank is notifYing the counterparties that the rates are being adjusted accordingly, as
of the date the Bank was notified of the FDIC's determination on June 2, 2010.
7 'lbe Bank's rel.lIIiooship with MSCS bas been on-goiug since'l998 and the Services Agrccmcnt bas been renewed throughout
that period.
695
,
, '
Ms. Kristie K. Elmquist
June 10, 2010
Page 7 ofs
Funding Alternatives
The Bank u t i l i z e ~ FHLB advances in addition to deposits to meet 'its funding needs.
Currently, the Bank has $268.5 million available through FHLB advances to meet funding needs,
in addition to currently outstanding FHLB advances in the amount of $180.5 million. As
described above; the acquisition of Legent Clearing, which can be accomplished within 10
business days following approval of the acquisition by the OTS and the FDIC, FINRA and the
SEC, will add approximately $700 million of liquidity to the Bank which it will employ to
supplant the deposits questioned by the FDIC in the FDIC Letter.
Asset Growth PJans
At this time, the Bank has no short term. plans to increase its asset base. In fact, from
February 28, 2010 to May 31, 2010, the Bank's total assets declined approximately $731 million.
The Bank will limit its growth in accordance with the terms of the current or any future directive
from the OTS.
Procedures and Practices to Solicit Brokered Deposits
The Bank currently does not solicit traditional, interest rate sensitive ''hot money"
brokered deposits. The Bank, however, will not seek new deposit relationships with the retail
clients of institutional processing companies of the type giving rise to the FDIC Letter until such
time as the definition of brokered deposits is resolved with the FDIC or until the time that the
Bank returns to well capitalized status.
Management Systems to Ovenee the Solicitation, Acceptance and Use of Broke red Deposits
The Bank has procedures in place to direct brokered deposit inquiries to a centralized area
within deposit operations. The Bank's deposit operation's staff will not open any additional
accounts without the written approval of either the Bank's COO or CFO. As a final precaution,
an enhanced due diligence (EDD) questionnaire is completed on every new account prior to
opening the account. The compliance. department of the Bank reviews the questionnaires and
would determine if the deposit originated from a deposit broker. Finally, all branch personnel are
trained to identify all potential deposit brokers.
Why the Acceptance, Renewal or RoUover Poses No Undue Kilk to the Bank.
The Bank's continued acceptance, renewal and rollover of the Newly-Deemed Brokered
I?eposits poses no undue risk to the Bank because:
1. these deposits are cOntrolled by written agreements with the customers' agents which
provide for a set term. of the relationship and the Bank is not under threat of these
contracts being terminated or abrogated unless the FDIC were to cause such action due to
its recent determination as to the brokered ~ of these deposits;
2. the Bank is not expanding its balance. sheet. and is not endangering its liquidity by
. accreting additional, illiquid assets to its balance sheet;
696
Ms. Kristie K. Elmquist
June 10,2010
Page 8 ofS
3. with time and the approval of the Legent Clearing LLC acquisition as an operating
subsidiary of the Bank, the Bank will be in position to effectively release non-controlled
deposits, regardless of their status as Brok:ered Deposits or n.ot,to reduce the
concentrations at Equity Trust Company client and other client deposits; and
4. there is not now, nor does the Bank expect that, any depositor concern will cause a
sudden diminishment in the balance of deposits directed to the Bank by the clients of the
processing companies questioned in the FDIC Letter as "deposit brokers."
In fact, the Newly-Deemed Brokered Deposits enhance the safe and sound operations of
the Bank because they enhance the Bank's liquidity status. As the FDIC is aware, a significant
portion of the Bank's operations center around the deposits recently deemed by the FDIC as
brokered. EJimination of these relationships will cause significant hann to the Bank, while
retention of the deposits, or a slow, gradual elimination, as provided for in the FDIC Letter,
mitigates the harm caused by recent regulatory determinations and reactions resulting in a
precipitous withdrawal of these deposits.
. For the foregoing reasons, we respectfully request that the FDIC permit the Bank to
continue to' accept, renew and roll over the Newly-Deemed Brokered Deposits in accordance
with the terms of this request for a minimwn of ninety (90) days. We note that time is of the
essence with respect to this request for a waiver. If you have any questions regarding the .
foregoing, please do not hesitate to contact me at (720) 956-6576 or Thomas Kientz at (720) 956-
6548.
Sincerely,
~ ~ ' 4 - -
James R. Peoples .
C ~ President and CEO
cc: Joseph A. Meade, Assistant Regional Director, FDIC
Thomas L. Trujillo, Case Manager, FDIC
Lori A. Quigley, Acting Regional Director, OTS
Edwin Chow, Regional Deputy Director, OTS
Nicholas Dyer, Regional Assistant Director, OTS
Lawrence D. Kaplan, Esq. I Paul Hastings Janofsky & Walker, lLP
Enclosures
697
TabC
Exhibit 25 A (a)
698
Federal Deposit Insurance Corporation
Dallas Regional Office
1601 Bryan Street, Dallas, Texas 75201
(BOO) 568-9161 FAX (972)
lMr. James R Peoples
Chainnan of the Board
CEO and
United Western. Bank
700 17
th
Street, Suite 100
Denver, CO 80202
Re: Deposit Agreements
Dear Mr. Peoples:
Division of Supervision and Consumer Protection
Memphis Area Office
5100 Poplar Avenue, Suite 1900, Memphis, Tennessee 38137
(901) 6851603 FAX (901) 821-5308
May 24, 2010
This letter is to notifY the Bank: that the FDIC has determined that the Bank's deposits from
seven institutional relationships described below are brokered dePosits. The seven institutional
depositors facilitate the placement of deposits of their respective customers by opening omnibus
. accounts at the Bank. These accounts. which consist ofMMDA's, non-interest bearing accounts
and NOW accounts, are typically opened in the name of the institutional depositor for the benefit
of their customers. In turn, the institutional depositors maintain detailed records at the account
level of each of their customers' ownership interest in each omnibus account. The FDIC realizes
the impact that this determination has on the Ba.nl4 particularly in light of the bank's current
Adequately Capitalized" position under the Prompt Corrective Action provisions of Section 38
of the Federal Deposit Insurance Act, 12 U.S.C. 18310. The current "Adequately Capitalized"
position triggers the requirement that adequately capitalized insured depository institutions may
not accept, renew or roll over any brokered. depgsit unless it has applied for and been granted a
waiver by the FDIC. Accordingly, the FDIC stands ready to consider the Bank's strategies to
gradually eliminate these deposits, until such time as the Bank becomes well
capitalized and not subject to any Federally issued written agreement containing a "meet and
maintain" capital provision. Please note that since it is the individual customers who own the
deposits in the omnibus accounts, the maturity date of the deposits is not the contractual.-maturity
date of the contracts between the institutional depositors and the Ba.nl4 but the maturity date of
the deposit instruments comprising the omnibus accounts.
In connection with FDIC's brokered deposits determination, the FDIC;s Division of Supervision
and Consumer Protection and the Legal Division reviewed numerous agreements, legal opinions
and other documents, including the following:
1. Amended and Restated Agreement between Bank, Equity Trust Company
("ETC"), Administrative Semces, Inc. (''BAS'') and Sterling Administrative
699
.....
..
. Services, Ltc ("SAS"), with an effective date of June 27, but with no year provided,
1
as
revised by the First Amendment to Amended and Restated Subaccounting Agreement
dated February 24,2010 (',?TC Agreement");'
2. Third Amended and Restated Administrative Services Agreement between Bank, Matrix .
Settlement and Clearance Services, L.L.C. ("MSCS'1 and MG Colorado Holdings, Inc.,
dated July 5, 2007, as revised by Amendment to The Addendum, dated February
11,2010 ("MSCS Agreement");
3. Subaccounting Agreement between Lincoln Trust Company ("Lincoln") and Bank, with
an effective date of February 1,2010 (''Lincoln Agreement");
4. Program Bank Fee Agreement between Bank and Legent Clearing ILC ("Legent''), dated
Novembj3f 24, 2008, as amended by Amendment Number One To Program Bank Fee
Agreement, dated January 25, 2010 (''Legent Agreement"). We were also provided with
three other agreements pertai:J;rlng to Legent: Legent Insured Deposits Bank and Broker-
Dearier Agreement between Bank and Legent, dated May 11,2006; Broker-Dealer
Money Market Deposit Account Agreement dated November 18, 2008, between
Deutsche Bank Trust Company Americas and Legent; and Program Bank
Money Market Deposit Account Agreement, dated June 2006, between DBTCA and
.
5. Subaccounting Agreement between Matrix Capital Bank, Constellation Trust Company
and Gemini Fund Services, LLC ("GFS',), dated May 11, 2005 ("Constellation Trust
Agreement'');
6. Services Agreement between Matrix Capital Bank and Trust
Management, Inc. (''TMI'j, dated May 10, 1999 ("TMI Agreement"); and
7. Amended and Restated Omnibus Subaccounting Agreement between Bank and UW Trust
'- Company ('''UWTC''), dated June 26, 2009 t'UWTC Agreement'j.
8. Four Bank counsel legal opinions from Luse Gorman Pomerenk & Schick ("Luse
GOIman"). dated February 23. 2010; .
9. Two Luse Gorman legal opinions dated March 8,2010;
10. Bank counsel legal opinion from Buckley Sandler LLP, dated March 10, 2010;
11. United Western Bank Core Deposit Management Strategic Planning and Regulatory
Positions, dated March 8, 2010 ("White Paper');
12. '"Legent and the Clearing IndustrY' Memorandum from Guy A Gibson, Michael J.
McCloskey and Michael A Stallings, to the Board of Directors of United Western
Bancorp, Inc. and United Western Bank, dated January 7, 2010 ("Legent
Memorandum'j; .' .
13. The Equity Trust Company Application For Traditional, Roth, and SEP Accounts;
14. ''Legent FDIC Insured Deposits," from wwwJegentclearing.comlps_cms.php;
15. Sterling Trust Company Self-Directed IRA Application Kit; and
16. Equity Trust Company Traditional and Roth, IRA Custodial Account Agreements a!).d
Disclosure Statements. .
A summary of our assessment of each of the seven deposit agreements reviewed is set forth.
below.
I This agreement cites other agreemeuls executed in 2009.
2
700 .
. .....
..'
,-
.. '
Equity Trust Company Agreement
According to the White Paper, ETC ''is a self directed IRA custodian that offers custodial and
managerial business services to individual participants' accounts in employee benefit plans,
individual retirement plans and other qualified plan accounts thereby providing its clients with
the ability to invest in real estate, private placements, tax liens and other non-traditional assets
witbina IRA or 401(k) plan" and has been a Bank client since 2000. Each
. individual retirement account, the White Paper indicates, maintains certain liquidity that is
typicallY less than 10% of the total assets in such This liquidity is deposited in multiple
omnibus accounts at the Bank. Under the ETC Agreement, ETC has agreed to place deposits
with the Bank in order to obtain the benefits of pass through deposit insurance coverage under 12
C.F.R. 330.5 for the benefit ofits customers. ETC represents in the agreement that as
custodian it ''provides custodial and business services to individual participants' accounts in
employee benefit plans, individual retirement plaD:S and other quali:fied accounts." The other two
parties to the agreement, BAS and SAS, which are affiliates ofETe, agree to also open accoUnts
at the Bank in order to secure pass through deposit insurance coverage for the benefit of ETC's -
custodial account holders. EAS, SAS and the Bank further agree under the contract that BAS
and SAS, as agents for the Bank, will provide the Bank with account-holder and record-keeping
services for the custodial account holders. The agreement is for a term. consisting of the later of
five years, or the date all amounts owing under the Financing," as defined in the Purchase
Agreement of April 7, 2009, pursuant to which ETC and SAS agreed to acquire :from SAS its
individual retirement and qualified plan business. Following this initial term, the agreement
automatically renews on a yearly unless a party provides a 60-daynotice of terinination .
before the next renewal date. -
Based on the foregoing, ETC, BAS and SAS the definition of a deposit broker since they
have facilitated the placement of deposits of third parties with insured depository institutions.
The next step in the analysis is to determine whether these entities meet any of the exceptions
from the deposit broker definition as set forth in 12 C.F.R. 337.6(a)(S)(ii). In the Luse Gonnan
legal opinion of February 23, 2010, on this contract; the Bank contends that ETC, "as a
custodian, provides.custodial and business services to individual participants' accounts in
employee benefit plans, individual retirement accomrts, and other qualified plan accounts."
Bank counsel further indicates that although ETC "does not exercise any invesbnent discretion
over the accounts ofits customers, it perfonns managerial and administrative functions for its
customers by, for example, collecting rents, paying taxes, collecting reports and annual
evaluations of the assets maintained in the custom.ers accounts and the like." Bank counsel
concludes that ETC should not be deemec;i a deposit broker because ETC "is acting as a plan
admiiristrator for its customers and performs a managerial function for its customers." Luse
Gonnan makes a:similar conclusion in its March 8, 2010, opinion on this contract, and the
Buckley Sandler LIP legal opinion of March 10, 2010, on this contract also reaches a similar
conclusion.
The FDIC intezprets the plan administrator exception to require that the entity be the plan
administrator for a pension plan or other employee benefit plan and that such entityperfonn
managerial functions with respect to the plan. Accordingly, the Bank bas not proven. that ETC
3
701
---
i
... ", ... '
...
meets the "plan administrator" exception since the Bank has not proven that ETC is the plan
administrator of a pension plan or other employee benefit plan.
In the legal opinion, Bank. counsel also contends that since ETC's customers have investment
discretion oyer their accounts ''the primary putpose of the deposit accounts is to facilitate the
customers' exercise.ofthat investment discretion."z Although not specifically contended in the
legal opinion, this statement from Bank counsel appears to be an attempt to bring ETC under the
primary pwpose exception of 12 C.F.R. 337.6(a)(5).
FDIC Advisory Opinion ~ o . 05-02 explains the "primary purpose exception" by referencing
previous FDIC oginions where the phrase "primary purpose" is deemed synonymous with
"primary intent." The FDIC Advisory Opinions clarify that the "primary purpose exception"
. applies to an agent who places funds into a depository institution when the agent's primary
intention is something other than obtaining deposit insurance coverage for a customer or to
provide the customer with a deposit placement service. For example, in Advisory Opinion No.
94-13,4 a credit card bank assisted would-be cardholders in placing security deposits at another
bank. The FDIC staff determm.ed that the ''primary purpose exception" was applicable because
the "primary purpose" ofthe credit card bank was "to obtain a perfected security interest in
collateral, not to provide a deposit-placing service to its customers." In Advisory Opinion No.
94-39,5 a registered broker-dealer placed client funds into an account at a bank in order to satisfy
a reserve requirement enforced by the SEC. In that case, the "primary purpose exception" was
applicable because the broker-dealer's "primary purpose" was to satisfy the SEC rule, not to
provide a deposit-placement service.
In FDIC Advisory Opinion 05-02,6 the FDIC applied the primary purpose exception to a sweep
program into money market and transaction accounts at two affiliated banks provided by
Company on behalf of its customers for whom Company provided securities' services. The
FDIC determined that such a program would qualify for the primary purpose exception if the
following criteria were met:
1. The swept funds should not exceed 10% ofthe total assets being handled for the
customers ("permissible ratio');
2. The 10% limit should be applied on a monthly basis (the "monthly ratio',);
3. The permissible ratio is not exceeded on consecutive months. or the permissible ratio is
not exceeded for three months during any 12-month period; and
4. The fees paid by the depository institution to Company were for recordkeeping and not
payment for the placement of deposits. .
The fact that ETC's customers possess investment discretion does not mean that ETC can not be
a "deposit broker." In fact, investment discretion is possessed by many, if not most depositors
2 Luse Gorman legal opinion of February 23, 2010.
) See, e.g., Advisoxy Opinion No. 90-21 (May 29, 1990); Advisory Opinion No. 94-13 (March 11,1994); and
Advisory Opinion No. 94-39 (August 17,1994).
4 http://www.fdic.gov/regulationsflawslrulesf4000-8850.h1ml
5 http://www.fdic.govltegulationsllawslrules/4000-9110.h1ln1.
6 http://lwww.fdic.gov/regulationsflawsfrulesl4000-10350.html.
4
702
:..:;' .. "'"' .... =' -,"'':-' .. -"'-' ''"-''_.... . ,.;...' ---'"-' ':"':':';-'=':-::;':'-;::':'--;=..-:..;:' -"'::--='--':"",
who use the services of deposit brokers. Moreover. when a customer exercises discretion to
place funds into deposit accounts, no distinction exists between "facilitating the customer's
exercise of investment discretion" and "facilitating the customer's placement of deposits." In
both cases, the facilitator is a "deposit broker" who does not qualify for the "primary purpose
exception." In addition, even assuming that "facilitating the exercise of investment discretion"
might be the type of purpose covered by the "primary pmpose exception," we do not believe that
this exception is applicable in this case.
Despite Bank: counsel's contention, there is substantial evidence in the agreement that
contravenes the contention that the primary purpose ofthe deposit accounts is to facilit:ate the
customers' exercise of that inv'estment discretion. First, under numbered paragraph I of the
agreement, ETC, BAS and SAS may withdraw from and move these deposits to another financial
institution up to $100 million should they desire to do so in the event certain individuals were to
acquire control oftbis other financial mstitution.
7
These individuals own a con.trolling interest in
BTC. Accordingly. this provision in the agreement tends to show that the selection of the BaDk
was not to facilitate an investment discretion. but to benefit the controlling shareholders of ETC
by allowing them the option to transfer $100 million to an institution these shareholders might
controL
Second, the fees paid by the Bank: to at least BAS and SAS for certain administrative services
might not be directly related to the administrative services provided. Under the ETC Agreement,
the parties agree to pay EAS and SAS ("Companies") a fee ''based upon the number of Custodial
Accounts at Bank and the aggregate monthly balance of such Custodial Accounts in light of the
amount of recordkeeping services and other associated services to be provided by the Companies
with respect to the Custodial Accounts." Specifically. under nUlllbered paragraph 6 of the
. agreement, the Bank pays BAS and SAS a monthly fee of $40 times the number of active deposit
accounts placed by ETC and the Companies with the Bank. Furthermore, this sum is subject to a
maximum cap, which is tied to the interest yield paid by the Bapk on these deposit accounts. By
tying the maximum compensation that EAS and SAS may receive for their recordkeeping and
other serviCes to the balance on deposit accounts, the Bank appears to be compensating BAS
and SAS for placing these deposits in the Bank.
In FDIC Advisory Opinion 04-04 (July 28,2004), the FDIC discussed how fees charged by a
listing service might result in the listing service being deemed a deposit broker:
""although tbestaff did not articulate the rationale for this distinction, the rationale is inferable:
compensation based on the amount of deposits placed. through a 'listing service' may create a .
motivation on the part ofthe service to become involved in the placement of deposits. Indeed,
such compensation strongly suggests that the service is involved in some manner in placing
deposits. Therefore, the existence of such compensation will result in the classification of the
'listing service' as a 'deposit broker.'" ,
Similarly, in this agreement, the compensation the BaDk paid the Companies was tied to the
number of deposit accounts and the balance in these accounts placed by these entities with the
7 The three individuals identified in the ETC Agreement are Jeffrey A. Desich, Richard Desich and Richard A.
Desich. 1
5
703
. Bank. There is present therefore a motivation on the part ofEAS, ETC and SAS to place more
customer deposits and to create more customer deposit accounts with the Bank.
Thirdly. under the 2010 revision to the ETC Agreement, the Bank, ETC and the Companies may
agree to participate out deposits in the bank accounts with a third party bank. If such third party
bank pays interest, subaccounting or other administrative fees to ETC and the that
exceed the Contract V mabie Rate the Bank pays under the ETC Agreement, the parties agree to
split on a 50-50 basis the surplus fee. Additionally, if the Contract Variable Rate exceeds the
Third party Rate, the Bank agrees to make ETC and the Companies whole. Clearly, this
provision evidences that the primary purpose of this agreement is for the placement of funds with
. . 8 .
depOSItOry mstltutIons.
Fourthly, ETC and the Companies, under the 2010 revision to the contract, may terminate the
agreement if the Bank: files a financial report reflecting that the Bank is neither "well capitalized"
nor "adequately capitalized." Having this provision in the agreement is an indicia that the .
deposits in question are deposits because a bank that is undercapitalized can not accept,
renew, or roll over any brokered deposit. 12 C.F.R. 337.6(b )(ii)(B)(3)(ii). .
Fill4l11y, under the 2010 revision to the ETC Agreement, the parties acknowledge that despite the
fact Custodial Account Holders have the right to direct Companies and ETC to deposit their
funds at another inStitution, the Companies and ETC agree "to use commercially reasonable
efforts to have cash balances relating to Custodial Accounts retained at the Bank... This
provision oftlle agreement shows that the placement of the deposits in the Bankby the
Companies and ETC was not to facilitate the customers' exercise of their investment discretion
since the Companies and ETC agreed to used their best efforts to keep their customers' funds in
the Bank, presumably even if the Customers wanted to move the funds to another depQsitory
institution.
Based on the foregoing analysis, the FDIC determined that the deposits from the ETC .
Agreement are brokered deposits.
MSCS Agreement
In this agreement MSCS facilitates the clearing of purchase and redemption trades of various
mutual fund shares for its customers by placing these funds on deposit with the Ba,nk According
to the agreement, the funds "are generally qualified employee benefit plan participant funds held
in a fiduciary capacity by a custodian. or other third parties." According to the Luse Gorman
opinion of February 23, 2010. MSCS serves more than 300 MSCS customers by servicing $100
billion in assets through the MSCS platform. In 2009, MSCS kept approximately $260 million
of MSCS customers' deposits with the Bank. Under the terms of agreement, MSCS is acting
as a deposit broker since it is facilitating the placement of deposits with an insured depository
institution. .
8 Recently, ETCrequested permission for the 01'8 to exercise this provision in the contract.
6
704
00::
In their legal opinions, counsel contend MSCS qualifies for the primary purpose exception
and cite FDIC Advisory Opinion 05-02 in of this position. Specifically. Bank counsel
assert the following in support of this position:
1. MSCS' primary business is the clearing of the purchase and redemption trades of various
mutual :funds for MSCS customers;
MSCS' deposits are placed at the Bank primarily to facilitate MSCS' clearing activities
for its customers;
3. The funds placed at the Bank: are a small percentage of the total amount of funds MSCS
. handles for its customers; and
4. The Bank. does not pay a fee to MSCS for the p1acem.ent of the funds with the Bank:.
Despite the Bank's arguments, there are several reasons why the MSCS Agreement does not
meet the pr!nwY pmpose exception. First,. even the issue of the fee the Bank: pays to
MSCS, Bank: counsel'WaB unable to show that MSCS met the :first three factors of the :fI)IC
Advisory Opinion 05-02. Instead, Bank counsel has contended that "the funds placed at the
Bank are a small percentage the total amount of funds MSCS handles for MSCS customers."
Also, in the March 10, 2010. BucJdey Sandler LLP opinion, counsel argues: "Based on the
infonnation provided to us, it also appears that the amount of cash in the MSCS accounts at the
Bank are well below the permimoleratio. These contentions by Bank: counsel, at best, only
satisfy the permissible ratio factor of FDIC Advisory Opinion 05-02. Bank coUnsel's legal
opinions do not address the monthly ratio factor nor the fact that the permissible ratio is not
exceeded on consecutive months or for three months during any 12-month period.
On the other hand, if one were to assume that MSCS met the first three factors of FDIC Advisory
Opinion a5-02, the fourth factor is not met as the fees paid to MSCS appear to have been paid for
the placement of deposits. The fees that the Bank pays to MSCSfor its administrative services
on the deposit accounts MSCS opens at the Bank. for MSCS' customers are tied to the balance of
these deposits. Paragraph 4(d) of the agreement provides as follows: "As such the Bank desired
to limit the fees paid to MSCS pursuant to this Agreement to an amount based upon the actual
deposits generated by MSCS :furnishing Administrative Services to those Customers who have
chosen to deposit their funds with the Bank" In. Exhibit "A" to the MSCS Agreement, these fees
are tied to the amount on deposit at the Bank. This type of compensation for services rendered
based on the amounts deposited is a clear indication that MSCS is acting as a deposit broker.
Furthermore, unlike the parties in Opinion 05-02, MSCS and the Bank. are not affiliated.
The MS CS Agreement commenced on July 5,2007, and terminates on July 5, 2010, but is
subject to two automatic one-year renewals, unless certain conditions occur. Interestingly, one
of these conditions is MSCS' notification to the Bank. of ''its intent to solicit bids from other
depositories." Upon such notification. MSCS is given 4S days to get '"bona fide offers from
independent :financial institutions of the terms upon which such financial institutions desire to
provide the Administrative Services." The Bank. is then given 30 days to match any such bona
fide bid. These provisions clearly show that MSCS is a deposit broker since it is bidding out its
deposits to the highest bidder who will pay MSCS the most for the Administrative Services
MSCS provides.
7
705
The MSCS Agreement is subject to termination if the Bank: is not adequately capitalized
(numbered paragraph 5(b)(i). As discussed in the ETC Agreement analysis above, such a
provision is an indicia that the deposits in question are brokered deposits because a bank that is
not adequately capitalized can not accept. renew or roll over any brokered deposit. 12 C.F .R.
337 .6(b )(2)CI;3)(3 )(ii).
Finally, two other reasons why the primary purpose of the agreement appears to be the placement
of funds with the depository institution are the provision that lists as a cause for termination of
the agreement by MSCS if the Bank refuses to renewa certain line of credit to MO Trust
Company, LLC
9
and the provision that allows the Bank: to terminate the agreement ifMSCS'
customers fail to maintain at anytime a minimum deposit level of $1,000,000.
For the reasons set forth above, the FDIC concluded t h ~ t MSCS' deposits are brokered deposits.
Lincoln Trust Agreement
Lincoln is described in the agreement as a Colorado industrial bank with trust powers. The term
of the .agreement is for one year, with yearly renewals, unless either party provides a 90-day
notice of termination. Under the agreement, Lincoln will deposit with the Bank funds of its
clients that Lincoln holds in a custodial capacity. The Bank: will properly designate these deposit
accounts so that they will receive pass through deposit insurance coverage. Lincoln is therefore
acting as a deposit broker under this agreement since it is facilitating the deposits of the funds of
its customers.
The Bank: has provided a legal opinion concerning this agreement. The opinion summarizes
Bank counsel's understanding of the facts as follows:
10
"Lincoln Trust Company is an industrial bank, with trust powers, that is chartered under the laws
of the State of Colorado ("LTC"). LTC, in its capacity as a custodian, provides custodial and
related services to employee benefit plans, individual retirement accounts, and other qualified
plan accounts ("Customers''). LTC does not exercise any investment discretion over the
accounts of its Customers. However, it performs certain managerial and administrative functions
for its Customers (for example, collecting rents, paying taxes, collecting reports and annual
evaluations of the assets maintained in the Customers accounts and the like). LTCbas entered
into an agreement with the Bank. to establish various custodial deposit accounts at the Bank for
the benefit of the underlying CUstomer. The Bank: does not pay the TLC (sic) a fee for placing
these custodial deposit accounts at the Bank. The Bank, however, pays TLC (sic) a fee for
providing certain administrative services on behalf of the Bank. to its Customers."
Based on these facts, Bank counsel concluded as follows: "It is apparent from the above that
TLC ( sic) is acting as a plan administrator for its Customers and performs a managerial function
for its Customers:'
9 According to the MSCS Agreement, this line of credit was guaranteed by MG Colorado Holdings (sic) to which
entity the line of credit was provided for liquidity putposes. MG Colorado Holdings, Inc. owns MSCS.
10 Luse Gorman opinion of February 23,2010.
8
706
As discussed in the ETC Agreement analysis above, FDIC intexprets the regulatory exception for
a'plan administrator to require that the entity claiming this exception be the actual plan
administrator for a pension plan or other employee benefit plan and that such person perform
managerial functions with respect the plan., The Bank: has not provided any evidence showing
that Uncoln is such plan administrator.
The Lincoln Agreement provides that Lincoln is either "(a) a directed trustee of a pension or
other employef? benefit plan, with respect to funds of the plan; (b) a person acting as a plan
administratPf or an adviser in connection with a pension plan or other employee
benefit plan provided that that person is perfoI1l1i:ng managerial :functions with respect to the
plan; Qr, (c) a trustee Of custodian of a pension or profit sharing plan qualified under section
401(d) or 403(a) of the Internal Revenue Code of 1986; or (d) an Of nominee whose
pr:in1ary pmpose is not the placement of funds with'depository institutions." Despite these
provisions in the agreement, the only exception to the brokered deposit definition which the
Bank argued was the one f()1" a plan discussed above.l1
The Bank does not argue in its legal opinions that the primary purpose exception is applicable in
this case. Were the Bank to argue this exception, the terms of the agreement contravene this
possibility. First, under paragraph 3.2 the Bank agreed tQ pay LincOln a fee for record-keeping
services based upon the aggregate montbly balance in the\accounts of Lincoln's customers: "In
addition to the Rate being paid by Bank with respect to the Deposit Account, Bank shall pay
LTC a monthly fee equaling an annual percentage rate of 0.75% (75 basis points) of the average
collected balance of the Deposit Accomlt." As discussed above, tying the
compensation to the amount deposited is a clear indication that Lincoln is acting as a deposit
broker. In the Buckley Sandler LI.Popinion, Bank counsel concedes that the fee that the Bank
pays to Lincoln is based on the deposit balance: "The LTC (Lincoln) sub accounting relationship
is similar to the ETC subaccounting relationship wherein LTC provides subaccOlmting and
record-keeping services for Bank and Bank pays a fee to LTC fOf such services, based on the
level of deposits.,,12 ,
In light of the foregoing reasons, the FDIC concluded that Lincoln's deposits were brokered
deposits.
11 In the White Paper the BaDk indicated that the main lin,e of business of the tmst companies {"Trust Companies"
for which the Bank bas opened transaction accounts (e.g. money market and demand deposit accounts) is "serving as
an IRC qualified custodian for mAs providing administration and 1ll8Dagerial services for those aCCOUDfS as a named
custodian for such accounts." The White Paper goes on to state: "They may, from time 10 time, serve as custodian.
trustee or plan administralOm for other qualified retirement plans under IRC Sections 401 or 403, but we leave those
seIVices aside because of this discussion since the vast majority of retirement plan accounts administered by the
Trust Companies' Seep. is of White Paper.
12 In its legal opinions sul>mitted, the Bank did not argue that Lincoln qualified under the deposit broker exception
for "a 1nlStee or custodian ofa peusion or profit-sharing plan qualified under section 401( d) or 403(a) oftbe Iutemal
Revenue Code of 1986 (26 U.S.C. 401(d) or 403(a.ft 12 C.F.R.. 337.6(5)(ii)(H). Instead, the Bank made the
statement set forth in footnote 16, supra.
9
707
beyond $100,000 on the deposit accounts it holds at the Bank on behalf of its customers. A1!.a
result, Bank: agrees under the terms of the agreement to provide that TMrs funds are being held
in a custodial capacity by 1M! and that the records reflecting the separate interests ofTMrs
customers in these accounts are maintained byTMI. This provision by the Bank enables TMI's
customers to receive pass through deposit insurance under 12 C.F.R. 330.5. The Bank has not
provided a legal opinion on this agreement On the face of the agreement there is no exception
cited that precludes the conclusion that TMI is a deposit broker and that the funds. deposited
under this agreement are brokered deposits.
UWTC Agreement
This agreement is nearly identical to the agreement and the analysis and conclusion are the
same. In this agreement, 1;JWTC sought pass through deposit insurance fodts customers on
whose behalf it opened deposit accounts at the Bank. The Bank. agreed to properly designate
UWTC'saccounts to show that UWTC's deposits are in a custodial capacity and that the
separate interests ofUWTC's customers are maintained by uwrC.Such an indication on its
'r.ecord by the Bank enables UWTC to obtain pass through deposit insurance for its customers.
UWTC is therefore acting as a deposit broker since it is facilitating the placement of deposits
with the Bank: so as to obtain pass through deposit insurance coverage for its customers. In the
agreement, the Bank agrees to pay UWTC a fee for certain recordkeeping services on the
accounts ofUWTC's customers on whose behalfUWTC is depositing funds with the Bank. The
fee is the greater of a flat fee of $3.00 "per record-keeping non-zero balance account (with the
number of accounts and activity be measured down to the individual investor level)," or a 1%
annual fixed rate on the average daily depositbaJanced kept by UWTC at the Bank. Since the
payment of these fees by the Bank is tied to the amollD:t on deposit by UWTC, this constitutes,
under previously cited advisory guidance by FDIC, a strong indication that UWTC acted as a
deposit broker. The Bank ms not provided a legal opinion on this agreement On the face of the
agreement, there is no exception cited that precludes the conclusion that UWTC. is a deposit
broker and that the funds deposited under this agreement are brokered deposits.
If you have any questions regarding this letter; please contact .AJ?sistant Regional Director Joseph
A. Meade, '(972) 761-2068, or Case Manager Thomas L. TmjiUo, (972) 761-2255. .
..
Kristie K. Elmquist
Acting Regional Director
12
710
,":
TabC
Exhibit 25 A (b)
711
'J
.....
N
United Western Bank:
Brokered Deposit Withdrawals
March 4, 2010 through May 31, 2010
4-Mar-10
CDARS $ 201,600 $
Traditional Brokered 104,492
The Reserve 1,000
ExhibitB
31-May-IO Comment
128,608 Rolling off as maturing, or moved to MMDA or NOW
104,042 $50 mm mature June 30, 2010, $50 million mature July 1,2010
1,000
Total Bank: Solutions 94,976 withdrawn
Insured Network Deposits 103,137 withdrawn
$ 505,205 $ 233,650
TabC
Exhibit 25 A (c)
713
IEXHIBITC
UNITED WESTERN BANK
CORE DEPOSIT MANAGEMENT
STRATEGIC PLANNING
AND REGULATORY POSITIONS
MARCH 8, 2010
714
Executive Summary
United Western Bank has a long history as a processing bank with significant
indirect consumer deposit relationships through institutional relationships. These deposit
positions, approximately $1.6 billion at February 28, 2010, represent stable, core
liabilities that allow the Bank to be profitable from year to year ..
This, body of deposits comes to the Bank from engaged in
providing significant and regulated trust or brokerage services to United States citiZens.
As an indirect incident of these regulated businesses, their customers, United States
consumers, frequently have idle funds that are in transit from one external investment to
another or are awaiting distribution to the consumer. These funds have a legitimate and
necessary business purpose to be on deposit at banks and savings banks in the United
States during these transitory periods. The Bank serves this legitimate and necessary
. purpose by providing omnibus deposit accounts for the consumer customers of Equity
Trust Company, Matrix Settlement and Clearance Services, LLC, Legent Clearing, LLC
and others, the Bank's institutional relationships.
As demonstrated by the facts and arguments set forth below, these indirect
consumer deposits are not "brokered deposits" under applicable FDIC regulations. This is
true because the institutional relationships that create the omnibus deposit accounts with
the Bank are not "deposit brokers" under the applicable FDIC regulations. Further, there
is no policy purpose to be served by characterizing these deposits as "brokered deposits."
Consequently, we conclude, and we have provided legal opinions from qualified
regulatory counsel in support of the position, that the deposits in question are suitable
deposits for the Bank that it should be allowed to retain.
715
TABLE OF CONTENTS
Executive Summary ................................................................................................ 2
A Brief History of United Western Bancorp, Inc ................................................... 2
Formation; First Major Non-Brokered Consumer Deposit Source Identified .... 2
Second Major Non-Brokered Consumer Deposit Source Developed ... ~ ............. 3
Third Major Non-Brokered Consumer Deposit Source Developed ................... 4
Major Non-Brokered Consumer Deposit Source Expanded ...... ~ ........................ 5
Fourth Major Non-Brokered Consumer Deposit Source Identified ......... ; ......... 6
The Company Recapitalizes and Expands Directions for the Bank ................... 7
Solid History of Non-Broke red Core Consumer Deposit Development Through
Data Processing Technology ........................................................................................... 8
Strategic Direction for United Western Bank Deposits ....................................... ~ 10
The United Western Bank Perception of the Deposit Market Place ................. 10
Multi-Directional Deposit Growth Strategy ......................................................... 11
Branch Deposit Growth .................................................................................... 11
QWICK RATE Deposit Growth ........................................................................ 12
Growth from Strength-Capturing Disintemiediated Deposits .......................... 12
Description ofNon-Brokered Consumer Deposit Relationships .......................... 15
Trust Company Omnibus Accounts .................................................................. 15
Equity Trust Company/Equity Administrative Services, IncJSterling
Administrative Services, LLC .................................................................................. 24
The Matrix Settlement & Clearance Services, Inc. Omnibus Account ............ 27
The Legent Clearing Omnibus Account ........................................................... 34
Lack of Volatility of Deposits ............................................................................... 41
Managing Deposit Concentrations ........................................................................ 43
Conclusions ........................................................................................................... 44
Exh.ibi'ts ................................................................................................................ 4S
716
A Brief History of United Western Bancorp, Inc.
Formation; First Major Non-Brokered Consumer Deposit Source
. Identified
The consolidated company that is now United Western Bancorp, Inc. (the parent
company of United Western Bank) was founded in 1989 by Guy A. Gibson.
1
Mr. Gibson
started his formal business career in the business of trading mortgage servicing rights
("MSR") for third parties.
In 1989, Mr. Gibson recognized that there was a significant opportunity in the
acquisition of MSR from distressed banks and savings associations. Mr. Gibson formed
United Financial, Inc. ("United,,) in 1989. United became a full service MSR brokerage
and consulting service company to the mortgage banking industry. United was an
approved loan servicing broker forthe Resolution Trust Company ("RTC").
In 1990, Mr. Gibson formed Matrix Financial Services Corporation ("MFSC")
.which went on to become a major acquirer of MSR from the RTC in the early 1990s. As
is well known, MSR servicers are in control of significant interest free deposits in the
form of monthly principal and interest payments due from as well as low
interest rate escrow balances for the payment of casualty insurance and property taxes.
These large, interest free balances inevitably incline mortgage servicers to acquire FDIC
insured depository institutions to hold these balances in an efficient manner.
In 1993, Mr. Gibson caused MFSC to acquire United Western Bank (the ''Bank'')
which was then a federally chartered savings bank with approxiinately $35 million in
1 United Western Bancorp, Inc. was originally known to 1he OTS and the FDIC as "Matrix Capital
Corporation" and United Western Bank was originally known to OTS and FDIC as the "Donna Anna
Savings & Loan" and later ''Matrix Capital Bank." The charter for Donna Anna Savings Loan was granted
in 1962.
-2-
717
Unitedwestem Bank. Core Deposit Management
Strategic Planning and Regu1atOIy Issues
March 8, 2010
footings. MFSC acquired the Bank with a view to funding the liability side of its balance
sheet with inexpensive, stable MSR related deposits. On the asset side of the balance
sheet, the Bank focused on acquiring 1-4 family residential mortgage loans.
Supplementary activities included MSR valuation and brokerage services and other
sources of fee income.
United Western Bancorp, Inc. (the "Company") completed an initial public
offering in 1996 to increase available capital and expand operations.
Second Major Non-Brokered Consumer Deposit Source Developed
In 1997, the Company acquired UW Trust Company (flkla Sterling Trust
Company), a Waco, Texas based, non-depository trust company regulated by the Texas
Department of Banking. UW Trust, at the time of acquisition, was engaged in the
business of providing custodial and management services for 26,550 individual
retirement account holders2. As an Internal Revenue Code ("IRC") qualified custodian,
UW Trust enabled IRA investors to invest in both traditional investments (e.g., stocks
and bonds) as well as alternative investments (e.g., real estate, energy and other types of
assets). As an incident of these investment activities, IRA holders have idle cash amounts
in their IRAs that require interim position holding. At the time of acquisition by the
Company, these idle cash amounts aggregated approximately $90 million.
Initially, the UW Trust IRA holders idle cash was directed to a third party money
market mutual fund. Following its acquisition by the Company, the Bank developed an
omnibus account for UW Trust's IRA account holders. with the Bank. This allowed
convenient deposit positioning for UW Trust clients while their funds awaited investment
2 In addition to its IRA custodial services business, UW Trost also provided administrative services to
other IRe qualified retirement plans and escrow account management for the life settlement industry
totaling approximately 3,000 additional accounts.
- 3-
718
United Western Bank:. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
or distribution and provided the Bank with an extremely efficient, low cost source of
liabilities.
As UW Trust developed its business, until it sold its IRA custodial business to
Equity Trust Company in June 2009, over 90,000 United States citizens opened accounts
with UW Trust with deposit balances aggregating $327,000,000 at June 2009. The high
water mark for deposit balances from UW Trust clients at the Bank was November 2007
with total average monthly balances of $412,000,000. Deposits decreased in the period
2008-2009 when UW Trust determined to reduce its activities in one escrow services
market.
Third Major Non-Brokered Consumer Deposit Source Deve/oped
In 1998, UW Trust formed Matrix Advisory Services, Inc. ("MAS") to perform custody
services for FlNRA member firms, third-party advisors and others. At that time, MAS
identified a material inefficiency in the mutual fund settlement and clearing business. The
mutual fund industry inefficiency identified by MAS was the inability of major third
party administrators (e.g., Chase, Fifth Third and others) ("TPAs") to efficiently process
mutual fund investments for the benefit of the IRC Section 401 and 403 funds they
managed since none of the TPAs could interact with the thousands of mutual fund
sponsors (e.g., Fidelity Investments) across a common electronic (data processing)
interface.
To resolve this problem, in 1998, MAS acquired a license for software from
Optech. The Optech software was an agnostic data processing interface that worked with
the hundreds of TPAs and.the thousands of mutual fund sponsors in the United States.
This allowed MAS to execute mutual fund trades on an electronic basis instead of with
physical applications and physical bank checks. Optech was formed by Thomas
McInerney, the then managing partner of Welsh, Carson, Anderson and Stowe, a major
private equity firm with offices in New York, NY and which manages over $20 billion of
investor funds. Welsh, Carson has always focused on the electronic processing business
(for example, Welsh Carson founded BISYS Group, now owned by Citicorp).
-4-
719
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
To further exploit and capitalize on the mutual fund industry inefficiency in
communicating with TP AS, McInerney later agreed with the Bank and MAS to joint
venture for the fonnation of Matrix Settlement & Clearance Services, LLC. ("MSCS,,)3
by contributing an exclusive license for the Optech software to MSCS. MSCS went on to
market the Optech solution to hundreds of TPAs and mutual fund families. Today, this
interface processes thousands of daily transactions for over $90 billion of investor funds.
As a result of the processing services provided by MSCS, investor funds are
transmitted into mutual funds for investment and out of mutual funds for distributions or
reinvestment. A portion of those funds at the end of each trading settlement day are
retained in a Bank omnibus account for the benefit of the individual investors for whom
the TP As provide custodial and management services. This provides the Bank with a low
cost, stable source of liabilities that has averaged $179,000,000 over the past three years.
The Bank provides a material amount of services to MSCS as described under
Matrix Settlement & Clearance Services Omnibus Account below. The degree of services
provided to MSCS is both sophisticated and unique. This level of sophistication and
uniqueness allows MSCS to profitably service its TPA client base and encourages MSCS
to remain with the Bank.
Major Non-Brokered Consumer Deposit Source Expanded
In 2000, the Bank developed a client relationship with Equity Trust Company, a
non-depository trust company regulated by the South Dakota Division of Banking. Equity
Trust was, and is, engaged in the same manner of services for IRA holders as UW Trust
was engaged in. Equity Trust required a bank that understood the exigencies of managing
the idle cash of IRA holders and was willing to facilitate an electronic data processing
3 At the time of formation, the Company owned a 45% interest in MSCS. The Company sold an
approximately 38% ownership position in MSCS to a McInerney led group in 2004 and sold its remaining
7% to Mr. McInerney in 2009.
- 5 -
720
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
interface and other services for Equity Trust. The Bank was then, and is today, the best
source of those services for Equity Trust and the relationship progressed to the point that
UW Trust elected to sell its 90,000 IRA and IRC Section 401 account relationships to
Equity Trust in June 2009.
Over the course of the last decade, this relationship has provided a stable, well-
priced source of deposits to the Bank.
Fourth Major Non-Brokered Consumer Deposit Source Identified
In mid-2002, Mr. Gibson stepped down from the active management of the
Company and the Bank to acquire Legent Clearing, LLC, an international securities
clearing company engaged in providing securities clearing services to Financial Industry
Regulatory Authority ("FINRA") member fIrms in the United States. The securities
clearing business was attractive to Mr. Gibson since, like mortgage servicing and mutual
fund settlement and clearing services, the securities clearing company's provide access to
substantial indirect consumer deposit relationships (substantially similar to the UW Trust
and Equity Trust experience).4
When Mr. Gibson acquired Legent Clearing, client accounts held approximately
$35,000,000 of idle cash balances that required deposit account services. As Mr. Gibson
and his teamS developed the Legent Clearing business, client account balances grew to
over $500,000,000 within 24 months. While individual client accounts may have cash
balance volatility, on a collective basis the deposits are very stable and inexpensive.
6
4 The United Western Bancorp, Inc. white paper on Legent Clearing, LLC and the United States
securities clearing industry is attached hereto as Exhibit A.
5 Fonner Legent Clearing management members that continue in management at the Company include
Guy A. Gibson, Michael J. MCCloskey, William D. Snider and Michael A. Stallings.
6 For example, today TD Ameritrade sweeps client idle cash balances to TD Bank, NA., TD Bank
USA, N.A., or both. Assets at each bank are eligible for FDIC insurance of up to $250,000 per depositor.
Because there are two banks in the program, balances could be covered for up to $500,000 per depositor.
TD Bank N.A. and TD Bank USA, N.A. are affiliates of TD AMERITRADE. TD Bank, N.A. has
-6-
721
United Western Bank. Core Deposit Management
Strategic Planning and Regulatoly Issues
March 8.2010
In February 2005, Mr. Gibson sold Legent Clearing to an investor group led by
Mr. Henry C. Duques, the fonner Chairman of the Board and Chief Executive Officer of
First Data Corporation, one of the major electronic data processing companies in the
United States. Mr. Gibson did this to allow him and his team to focus on a strategic
redirection for the Bank.
Legent Clearing has had a deposit relationship with the Bank since 2003
7
This
deposit relationship, described in greater detail below, provides the Bank with a stable
and inexpensive source of deposits. As described in Exhibit A, the Bank now has a non-
binding letter of intent to acquire Legent Clearing.
The Company Recapitalizes and Expands Directions for the Balik
In August 2005,. Mr. Gibson approached OTS with a plan to recapitalize the
Company and redirect the Bank's liability and asset focus into the community banking
sector to aid in the formation of additional, local liabilities and a s s ~ t s for the Bank. The
OTS acquiesced to this plan and Mr. Gibson completed the recapitalization of the
Company in December 2005. New management, led by Scot T. Wetzel, assumed control
of the Company and the Bank: on December 9, 2005.
Since the 2005 recapitalization, the following major developments have occurred:
a. the Bank: has built its community bank branch system to eight branches
from one, covering the front range of Colorado;
approximately $117.5 million in deposits on its latest call report, yet, it doesn't list any brokered deposits
on its call report. TO Bank USA, N.A. lists approximately $400 million of broke red deposits on latest call
report. Interest paid to the underlying customer on these balances is extremely low.
7 The initial deposit relationsbip was negotiated with the Bank by Michael J. McCloskey when he
served as Executive Vice President for Legent Group, Inc. on behalf of Legent Clearing, LLC. Mr.
McCloskey was not an affiliate of the Bank at that time, but is today the Executive Vice President and
General Counsel of United Western Bancorp, Inc.
-7-
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United Western Bank. Core Deposit Management
Strategic Planning IUId RegulatoIy Issues
March 8, 2010
b. in 2006, both the Company and the Bank disposed of several non-critical
business lines (e.g., the charter school loan business, real estate brokerage
and other);
c. The Bank's balance sheet, comprised of approximately $1 billion in 1-4
family residential mortgage loans and $1 billion of mortgage backed
securities at December 31, 2005 has been redirected into higher earning
community bank loans;
d. Community bank deposits have grown from approximately $11,000,000 to
over $400,000,000 at December 31, 2009;
e. UW Trusts sold the significant majority of its custodial rights to service
customer accounts to Equity Trust in June 2009;
f. Equity Trust, at the instructions of and on behalf of over 100,000 IRA and
other accounts, entered into a three to seven year subaccounting agreement
in favor of the Bank;
g. in September 2009, ~ e Company raises $88.8 million of new capital via a
common stock offering and added over $65 million in n ~ w bank capital;
and
h. Total core institutional deposits equaled $1.6 billion at February 28, 2010.
Solid History of Non-Brokered Core Consumer Deposit Development
Through Datil Processing Technology
Since the commencement of significant disintermediation of deposit funds from
banks and savings banks, in 1971 with the advent of The Reserve money market mutual
-8-
723
United Western Bank. Core Deposit Management
StTategic Planning and R.cgulatmy Issues
March 8, 2010
t).md, FDIC insured banks and. thrifts have faced an ever increasing competition for
deposits from multiple sources (see chart below). There is no turning back the clock on
this development as the internet and other sources make access to deposit relationships
from non-bank sources ubiquitous.
In 1990 bank II1d thrfl depoSIts held 84:l% marke1sharaln IRA deposits. As ofthefaurth qua-1erof:lOD8,
the percemege hed dropped 10 8 mara 11 'III. 1IIft111 mutual funds Increased from :l:l% to 44% and broklragl
fhns Increased from 30% 1037%. (FmmtheUS _MIll" TNIIIQ ...... :IIlO8, t_tean,-ytJ_
Re_"'" Furrt_nIIIlr, pWlhhed FebtIJoty IIbL 11 No. 5-Q!l, pIIp 5J
44 Percent of IRA Assets Were Invested In Mutual Funds in the Fourth Quarter of 2008
Bank and thrIftdlposlta Ufalnsurance Securities held In
Mutual Funds 1 companles
z
brokarageaccounta" Totsl
A ta Share' A ta Share' A ta Shara' Asslta Share .sets
1991 188 24 a83 38 43 6 260 34 776
1993 3a1 3:l :lm 26 6:l 6 347 35 993
1997 7111 45 a54 15 136 8 558 3:l 1.7:28
1999 U77 46
2001 1,176 45 :l55 10 :l11 6 978 37
2003 1.3:l7 44 :lea 9 aa5 10 11141 37 :l.993.
2005 1.700 47
2007 :l,304 49 340 7 325 e 7 17781 37 4,7478
. ..
2008:Q2 2.155 46 359 8 321 I 7 1677 1 37 4,5128
2008:Q4 1.596 44 391 11 3011 8 13:l1e 37 3.610.
-9-
724
United Western Bank. Core Deposit Management
Strategic P_ng and Regulatory Issues
March 8, 2010
Facing up to the challenge of disintermediation, United Western Bancorp, Inc.
and United Western Bank have a solid core franchise in the development of indirect
consumer deposit relationships that provide a stable, long-lived and inexpensive
alternative to the traditional branch banking deposit concept.
More importantly, as discussed iti more detail within, these deposits are not
"brokered deposits" under either the applicable FDIC regulations or in the traditional
sense of "rate sensitive customers
s
" that may appropriately concern the various Treasury
departments. Instead, these deposits are well-planned, non-brokered deposits that are tied
to the Bank by the Bank's ability to provide electronic data interfaces for TPAs and
others who are not "deposit brokers" as defined in applicable FDIC regulations.
Strategic Direction for United Western Bank Deposits
The United Western Bank Perception of the Deposit Market Place
The Company and the Bank have surveyed the landscape of today's deposit
market place and determined the following:
a. competition for retail and business deposits will not diminish, b u ~ will
increase as the dominant national banks (e.g . JP Morgan Chase) increase
their branch presence further; these institutions are largely indifferent to
the development cost and, more importantly, the development time of
branch distribution systems;
b. the competitive pressure from the national banks will be reinforced by
branch and deposit gathering competition from the super regional banks
(e.g . Comerica) who are similarly, though less so, indifferent to the cost
and development schedule for branch deposits;
8 Joint Agency Advisory on Brokered and Rate-Sensitive Deposits, May II, 2001
- 10-
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United Western Bank. Core Deposit Management
Strategic Planning and Regulatety Issues
March 8, 2010
c. the migration of business and consumer customers away from bank
branches will increase, not decrease, as the United States population is
further inundated with alternative platfonns (e.g., TD Ameritrade); this
migration will shrink the deposit market share available to banks and
savings bank in general; and
d. those banks and thrifts unable to adequately address this deposit landscape
are destined to be lack luster perfonners at best or something more dire at
worse.
Multi-Directional Deposit Growth Strategy
Branch Deposit Growth
The Bank, over the past four years, has implemented a branch strategy to
supplement its core strengths in an indirect consumer deposit base. Branch deposits are
now a viable direction for the Bank as demonstrated by the deposit growth table shown
below.
Branch deposiis-non-COARs
Branch deposlts-COARS
Total
Balance as of
December 31st (1 ,000s)
$ 217,000 $159,900 $ 89,300 $ 48,100 $ 11,400
248,000 32,000 __ - __ - __ -
$ 465,000 $191,900 $ 89,300 $ 48,100 $ 11,400
Over the next three years, the Bank expects to increase its total number of
branches to 12 and to increase aggregate branch deposits (non-CDARS) to $500,000,000
by January 2013.
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United western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
QWICK RATE Deposit Growth
The Bank has recently augmented its deposit gathering strategy by participating in
two different, internet-based CD bulletin board services, Money Aisle and Qwickrate.
Neither of these sources would be considered brokered deposits. Bank Operations staff
has had training to ensure that brokered deposits will not be accepted through these
channels.
The Bank's ALCO has approved a pricing strategy that positions the bank to
generally be in the second. quartile of banks that are posting at" any point in time and to
always be below the national rate cap levels posted weekly by the FDIC.
The Bank has been posting for CD maturities ranging from 6 months to 2 years
and has raised approximately $53 million. The Bank expects this avenue to generate
$100,000,000 in aggregate deposits by the end of 2010. The Bank. will restrict total
deposits from this source to $100,000,000, subject to further analysis by the Bank's
ALCO and Board Investment Committee oversight.
Growth from Strength-Capturing Disintermediated Deposits
The Bank's best competitive position in addressing the deposit market is to
continue to focus on its historic strengths, servicing businesses which serve the United
States populations' deposit management needs as an indirect incident of other primary
activities for the client. This reversal of disintennediation allows the Bank. to profit from
its ability to service the electronic data processing needs of the third parties who have
interrupted the chain of nonnal deposit relationships over the past 35+ years.
Legent Clearing is an excellent example of this type of initiative. The oWners of
Legent Clearing have agreed to sell100% ofLegent Clearing to a to-be-formed operating
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United Western Bank. Core Deposit Management
Strategic Planning and RegulatOty Issues
March 8, 2010
subsidiary of the Bank at a ,favorable price to the consolidated groUp.9 This acquisition is
attractive to the Bank due to the following factors:
a. given senior management's prior experience in the industry and from
direct ownership of Legent Clearing, the Bank will have resident
experience necessary to effectively and prudently manage' this business
line;
b. significant regulatory precedent exists for ,this manner of acquisition and
the operation of the securities clearing fmn as' an operating subsidiary of a
federal savings bank;
c. a November 2006 opinion of the OTS General Counsel expressly allows
for the acquisition of 4 securities clearing company within an operating
subsidiary of a federal savings bank;
d. as recently as'the fourth quarter of 2008, the Federal Reserve pennitted a
Texas chartered
10
bank to acquire a securities clearing company as a bank
operating subsidiary;'
e. the fully-loaded costs of these deposits will be approximately 0.50% in the
first year' of operations; with increased operating efficiencies at Legent
Clearing, the cost of these deposits will decrease;
f. the Bank can provide' the full panoply of services required to service the
200,000+ client base associated with Legent Clearing; and
9 See footnote 2 above. The price for this transaction is generically defined as book value at closing
plus warrants on three million shares of the Company's common stock.
10 PlainsCapital Corp. acquired First Southwest Securities after the close of business on December 31,
2008.
-13 -
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United western Bank. Core Deposit MarIaPment
Strategic Planning and Regulat.OIy ISsues
March 8, 2010
g. this acquisition will allow the Bank to control current deposit balances
between $500,000,000 to $700,000,000 on a current basis with growth to
$1,000,000,000 in average monthly deposit balances expected within the
next two years.
Through the auspices of UW Trust Company, we are prepared to reenter the life
settlement escrow services business. This is significantly akin to the escrow processing
business Comerica manages on a national basis from its San Francisco offices. While an
exposition of the life settlement business is beyond the scope of this paper, suffice it to
say that, with the resident experience at UW Trust from 15 years in this business sector,
the Bank and its affiliates are a prime competitor for this business which formerly
provided the Bank with over $100,000,000 of stable, low cost deposits.
With the recent scandals in the Section 1031
11
real estate exchange management
business, this market sector has become a greater opportunity for regulated entities such
as the Bank. Unregulated Section 1031 intermediaries have simply proven to be
unreliable stewards of the public trust and banks and savings banks will inherit this
market opportunity as a resUlt
The Bank will capitalize on this opportunity by developing a Section 1031
exchange business with UW Trust We believe this sector to be a significant opportunity,
but real growth here must await a recovery of the transaction volume associated with real
estate transactions. While prices for real estate assets may fail to recover, the absolute
number of transactions may increase causing the investing public to require Section 1031
tax deferral intermediaries. The Bank and UW Trust will combine to be one of those
providers and use the service to generate fee and deposits for the Bank. Because the Bank
can provide any electronic data face necessary to service this sector, it expects to be able
to compete as a market leader.
11 Internal Revenue Code of 1986, as amended (uIRC"), Section 1031
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United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
Description of Non-Brokered Consumer Deposit Relationships
Prior to discussing the question of whether or not the Bank's non-brokered
consumer deposits constitute "brokered deposits" under the applicable FDIC regulations,
an introduction to the underlying business of each of our non-brokered consumer deposit
client relationships may be instructive.
Trust Company Omnibus Accounts
In at least two significant instances,12 the Bank has opened a varietx of common
transaction accounts (e.g., money market and demand deposit accounts) for trust
companiesengageii in managing IRA and other retirement accounts ( a "Trust Company"
or "Trust Companies," collectively) through which the Trust Companies act as plan
administrators for these IRAs. The main line of business for these Trust Companies is
serving as an IRC qualified custodian for IRAs providing administratiV'eand managerial
services for those accounts as a named custodian for such accounts. They may, from time
to time, serve as custodian, trustee or plan administrators for other qualified retirement
plans under IRC Sections 401 or 403, but we leave those services aside of this discussion
since the vast majority of retirement plan accounts administered by the Trust Companies'
areIRAs.
With regard to IRAs it is important to note the following for policy
considerationS
13
:
a. approximately 40% of all United States households owned an IRA in
2009;
12 Here we refer to Equity Trust Company (which includes our fonner trust company, UW Trust, to the
extent of the 75,000 IRA and other accounts transferred to Equity Trust in June 2009) and Lincoln Trust
Company.
13 Sub-items a-c are taken from Investment Company Institute data published in Pebnwy 2010 and
sub-item dis based on the 30 years of experience vested in Paul E. Maxwell, Chairman of the Board and
Chief Executive Officer ofUW Trust Company.
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United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
b. United States citizens of all ages own IRAs, but ownership is greatest
amongst the older age groups; incidence of IRA ownership is greatest
amongst 55 to 64 year old citizens;
c. total retirement assets in the United States as of September 2009 were
$15.6 trillion with IRAs holding approximately $4.1 trillion in assets; and
d. large, regulated c o m p ~ e s (e.g., Charles Schwab, Merrill Lynch,
Millennium Trust Company, UBS, TDAmeritrade and others) all
maintain deposit accounts for their IRA holders at FDIC insured
institutions.
Equity Trust Company is a regulated trust company chartered by the South
Dakota Division of Banking. Lincoln Trust Company is a regulated trust company
chartered by the Colorado Department of Banking. Each of these companies is a qualified
custodian for IRAs under the IRC.
Each Trust Company offers its IRA holders the opportunity to invest in traditional
and alternative investments. Traditional investments include stocks, bonds, mutual funds
and other common variety investments. Alternative investments include indirect
investments in private placements, iimited partnerships and limited liability companies
and direct investments in real estate, oil and gas interests and others. The decision as to
I
selection with regard to these investments is left to the holder of the self directed IRA, .
but the Trust Companies provide significant plan administrative services to the IRA
holder.
The administrative services provided by the Trust Cpmpanies include, among
others, the following:
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United western Bank. Core Deposit Management
Strategic Planning and Regulatoty Issues
March 8, 2010
a. conducting rigorous account opening reviews in accordance with internal
polices;
b. taking custody of all of the assets contributed to the IRA;
c. holding title to the assets of each IRA for the benefit of the individual IRA
holder;
d. executing investment documentS and taking possession of
securities as agent for and for the benefit of the IRA holder at the
directions of the IRA holder;
e. for real property and alterruitive investments; managing lease payments on
behalf of the IRA holder;
f. for real property and alternative inveStments, accounting for cash
investments and distributions on behalf of the IRA holder;
g. for real property and alternative investments, accounting for and paying
real estate, franchise, .excise and other taxes to appropriate agencies on
behalf of the IRA holder.
h. monitoring investments to assure that the IRA holder is not violating any
self-dealing or other restrictions of the IRe as it applies to IRA assets;
i. investing and reinvesting cash deposits on behalf of the IRA;
j. securing annual valuation reports for all assets held by the IRA and being
prepared to report such values;
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United western Bank. Core Deposit Management
Strategic: Planning and RegulatOJy Issues
Man:h 8, 2010
k. administering and accounting for contributions and distributions to the
IRA holder; and
1. preparing mandated tax reporting documents.
Each of the Trust Companies observes a rigorous BSA/AML procedure to assure
that they can properly discharge their duties under the applicable statutes. Copies of the
BSA/AML policy previously employed by UW Trust Company are attached as Exhibit B
to this paper (we cannot provide the confidential BSA/ AML policies of our Trust
Companies clients).
One of the services offered to IRA holders by the Trust Companies is the
opportunity to direct idle cash balances in money market mutual funds and/or cash
deposit accounts with the Bank in the form of omnibus accounts entitled to pass through
FDIC insurance by virtue of applicable regulations. The direction of idle cash balances to
a Bank omnibus account or otherwise is within the purview of the IRA holder. This idle
cash is awaiting either investment or distribution and balances may be affected from
account to account depending on the IRA holder's expectation with regard to future
market performance or future economic conditions or for other reasons. Many accounts
have no cash. Some accounts hold more cash than others. Here, once again, it is the
account holder who directs where to place the idle cash in the IRA.
Equity Trust Company has a total of over 100,000 IRA holders as well as
accounts for ~ e benefit of other qualified retirement plans. Lincoln Trust Company has a
total of over 65,000 IRA holders as well as accounts for the benefit of other qualified
retirement plans
14
14 This information is believed to be reliable and based on detailed information known or reported to
the Bank. While we have absolute confirmation of the data with r ~ g a r d to UW Trust Company, that data
ends as of June 2009, the date we sold the custodial rights to the majority of the UW Trust Company
accounts to Equity Trust Company.
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United western Bank. Core Deposit Management
strategicP1anning and ReguiatolY Issues
March 8, 2010
None of the customers of the Trust Companies come to the Trust Companies for
the sole purpose of investing available cash amounts. These are IRA funds that are
invested for retirement income at a date in the future. Moreover, the rates paid on idle
cash balances by the Bank
ls
in respect to the omnibus accounts is de minimus in all cases
as against other cash investment alternatives (e.g., United States Treasury obligations,
GSE obligations or money market mutual funds). In fact, we believe that the underlying
IRA holders are indifferent to the rate of interest paid on these accounts because the
funds are in suspense awaiting later investment or distribution. As shown in. the below
chart for Equity Trust customers, the rates paid to the underlying account holders on idle
cash balances is extremely low. Given the rates paid versus the national six month
COvered Assets or Exchanged Assets rate, the IRA holders can hardly be accused of
chasing the highest rate by allowing idle funds to be placed on deposit at the Bank.
From the above, it is clearly to be seen that the Trust Companies are: (i) acting as
plan administrator with respect to an employee benefit plan; and (ii) involved in the
business of administering 1RAs. They may incidentally create deposit accounts at the
direction o ~ their IRA holders in the course of their plan administration service
businesses, but they are not in the business of placing deposits with United Western Bank
or any other bank. Their primary business purpose is the administration of IRAs and not
the placement of funds with depository institutions.
15 We believe that the rate the Bank pays on the Equity Trust IRA holders' idle funds is competitive
with other banks in similar situations.
-19 -
734
-....,J
W
lJ1
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
The schematic below represents the key relationships by and between Equity Trust's IRA holders, Equity Trust and the
Bank:
I
'.1
.1. U. N ..I.1. '.E.D
WESTERN
BANK
Schematic Description of Equity Trust COmpany
[This SChematic may also be applied to Lincoln
Trust COmpany as Lincoln Trust Company Is
substantially similar to Equity Trust Company.]
Prepared by: United Western Bank
Prepared: March 5, 2.010
- 20-
-....J
W
(J)
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
The following chart demonstrates the growth in Equity Trust IRA holders deposits on deposit with the Bank and the interest
rate paid on such deposits to those IRA holders (the spike in deposits in the second half of 2009 is attributable to the acquisition of
the UW Trust custodial account agreements):
... Deposit balaoca
Equity Trust Deposit Balance and Customer Rate History
__ UWB Customer Deposit Rate
----r 4.00%
$1,000.000
$900,000 3.50%
$800,000
3.00%
$700,000
2.50%
t
i
$600,000
I
2.00% 1
i
$600,000
- ~ . ~
$300,000
1.60%
1.00%
$200,000
0.50%
$100,000
$- III U I U I U I U I U I U IIII U I U I U I U I U I U I U I U I U I U I U I U I U a I B II U II U g !I,I II .,.111
11
,.11111,9 g.,. P,' II P,UI 0.00%
///////////////////////////////
- 21 -
f
-...J
w
-...J
United Western Bank Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
The following detail supplements the foregoing chart of information pertaining to the Equity Trust IRA holders' deposit
accounts with the Bank::
6.000%
5.000%
4.000%
3.000%
2.000%
1.000%
0.000%
Comparison of Equity Trust
Customer Deposit Rate to National6M CD Rate
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ # # ~ ~ ~ ~ # # ~ ~ ~ ~ # # ~ ~ ~ ~ # # ~ ~ ~
-- - - ... _----- - - - - - - - - . - - - - - - ~ -
...... Pass-through rate _6m CD
-22 -
-...J
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co
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
The following chart shows the relationship of cash balances and assets under custody pertaining to the Equity Trust
operations:
Equity Trust
Cash Balances & Assets Under Custody
In $10,000
,--------------------------------------------------------------------------., 25.000/0
c
.2
$9,000
i
$8,000 20.00%
~ $7,000
.s
o
~
In
$6,000 ::s
(,)
15.00% i
..
CD
$5,000
"0
C
::s
$4,000
-
CD
In
~
$3,000
$2,000
$1,000
...--. . .
$0 I I I I
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
'lI
Ci
~ ' b - ~ ' > ~ I?/. 0Ci ~ ' b - ~ ' > ~ c' 0Ci ~ ~ ' ' > ~ c' 'lI
Ci
~ ~ ' > ~ e:!' rJJ
Q 'S ~ Q 'S Q 'S Q. 'S Q
-II- Asset under custody -+-Ave Cash Balances ..... % Cash Balance/AUC
- 23 -
(,)
c
as
j
10.00% .c
~
-
5.00%
I 0.00%
United Western Bank. Core Deposit Management
. Strategic Planning and RegUlatory Issues
March 8.2010
Equity Trust Company/Equity Administrative Services, Inc./Sterling
Administrative Services, LLC
Equity Trust has been a client of the Bank since 2000
16
Equity Trust is ~ self
directed IRA custodian that offers custodial and managerial business services to
individual participants' accounts in employee benefit plans, individual retirement plans
and other qualified plan accounts thereby providing its clients with the ability to invest in
real estate, private placements, tax liens and other non-traditional assets within a self-
directed IRA or 401(k) plan. Equity Administrative Services ("EAS") and Sterling
Administrative Services ("SAS") are affiliates of Equity Trust and provide certain
administrative and managerial services. to ETC (BAS and SAS collectively referred to
herein as the ''Equity Trust Companies") .. Each individual retirement account maintains a
certain level of liquidity. This is typically less than 10% of total assets in such account.
This liquidity is deposited in multiple omnibus accounts held at Bank. The total deposits
and underlying account holders from Equity Trust have steadily increased over the last
five to six years and represent a stable and reliable source of funds for Bank. Below is a
chart detailing the amount of deposits maintained by ETC and the Equity Trust
Companies at Bank since2004:
At December 31st
2009 2008 2007 2006 2005 2004
Number of Aceouts
43,793 46,006 39,071 34,696 28,501
S balance (1,0008)
$ 557,000 $ 493,000 $ 449,000 $ 455,000 $ 427,000 $
Averall! balance I!!!r account $ 12,719 .$ 10,716 $ 11,492 $ 13,113 $ 14,982 $
Like Equity Trust, UW Trust Company acts as a custodian of self directed IRA
accounts of its clients. The Company purchased UW Trust in 1997. The liquidity created
from UW Trust's self directed IRA accounts has been swept to Bank since 1998. On
16 Equity Trust Company was originally known to the Bank: as Mid-Ohio Securities when the omnibus
accounts were initially created for the benefit of the IRA holders.
-24-
739
21,218
338,000
15,837
United Western Bank. Core Deposit Management
Strategic P1111l11ing and Regulatory Issues
March 8, 2010
June 27,2009, Equity Trust and SAS purchased approximately 90% of the total assets of
UW Trust-such assets of UW Trust relating to its self directed IRA business and
employee benefit plan business. At year end 2009, Equity Trust and the Equity Trust
Companies had balances of $934 MM representing more than 100,000 individual
accounts. UW Trust fmanced a portion ofthe purchase price and the financing was
secured by a first priority lien on substantially all of the assets of EtC and the Equity
Trust Companies, including the rights to the custodial accounts.
In conjunction with the sale, Bank, ETC and the Equity Trust Companies entered
into an Amended and Restated Subaccounting Agreement dated June 27,2009 whereby,
among other things: (i) ETC and the Equity Trust Companies maintain all accounts at
Bank in which ETC acts as custodian for the benefit of its custodial account holders; (ii)
the Equity Trust Companies will act as agent for Bank to provide the custodial account
holders with record keeping and certain other services with respect to the account activity
and (iii) Bank will pay a monthly fee to the Equity Trust Companies based upon the
services the Equity Trust Companies provide, such services including, but not limited to,
providing custodial account holders with quarterly statements reflecting the amount of
assets in the custodial accounts, including the amount of cash held at the Bank, providing
other record keeping services to Bank and providing correspondence and
communications to the IRA holders.
Both the Subaccounting Agreement and the ETC Account Application and
Individual Retirement Custodial Account Agreement (see copy . attached hereto as an
Exhibit C) entered into between ETC and. its customers provide that ETC will perform
subaccounting and record-keeping, administrative or other services related to the
custodial account holders' accounts and that ETC may be receive fees for such services.
The Subaccounting Agreement provides that Bank shall pay the Equity Trust Companies
a monthly fee for services equal to $40.00 multiplied by the number of custodial accounts
at Bank; however, in no event shall the aggregate monthly fee exceed a percentage yield
with respect to the accounts equal to the rate set forth in the Subaccounting Agreement
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United Western Bank:. COnI Deposit Management
Strategic Planning and Regulawry Issues
March 8, 2010
As of the date of this report, Bank paid the Equity Trust Companies 2.61% of the
aggregate monthly balance of the custodial. accounts at Bank. The custodial account
holders receive a customer deposit rate of .10%.
Bank also serves as the primary and sole depository for all operating and custodial
accounts of ETC and the Equity Trust Companies. The Equity TrustCompanies maintain
eight omnibus accounts that hold deposits for others and twelve operating accounts for
corporate purposes.
Bank provides customized services for ETC and the Equity Trust that
have evolved over the 10 year relationship between the two organizations. On an annual
basis, ETC and the Equity Trust Companies have the following activity:
Checks paidlDebits
Deposits/Credits
Stop Payments
Domestic Wires Incoming
Domestic Wires Outgoing
ACH Originations
Deposited Items
184,212
89,160
1,668
14,268
28,992
55,176
310,896
The Equity Trust Companies utilize Remote Deposit Capture and Remote Print
for cashier's checks. The latter service is invaluable to the Equity Trust Companies given
the nature of its business. As a self directed IRA plan administrator, the Equity Trust
Companies must pay insurance and taxes on a recurring basis for those clients that hold
real estate in their JRAs. Many municipalities across the country require certified funds
for tax payments and the Equity Trust Companies, utilizing the Bank, provide this service
for them in an efficient and cost effective The Equity Trust Companies print
more than 1,500 cashier's checks monthly from their offices. The Remote Deposit
Capture service allows the Equity Trust Companies to deposit more than $40 MM
monthly from the convenience of their offices.
- 26-
741
United western BBDk. Core Deposit Management
Strategic Planning and RegulatOJy Issues
March 8, 2010
On a daily basis, Bank provides the Equity Trust Companies with electronic "all
items" files that are formatted to interface directly with the Equity Trust Companies trust
system. This program has been developed over time and is transmitted via a secure FTP
server. The Equity Trust Companies rely heavily on Bank's intemet banking solution
(Bm). Eighty-four individual employees of the Equity Trust Companies have access to
Bm and utilize this service throughout the month to perform transactions such as account
inquires, balance transfers, wire requests, ACH originations and general research.
Bank also provides the Equity Trust Companies with access to Bank's suite of
products. Bank's rate sheet for CD's and money markets accounts is available to all of
the Equity Trust Companies underlying custodial account holders. This is a new'service
provided to the Equity Trust Companies, but thus far 125 individuals have opened
Certificates of Deposits directly with Bank. Bank did not pay the Equity Trust Companies
a fee for these Certificates of Deposits.
ETC has maintained it relationship with Bank because of Bank's extensive
experience as a settling bank having state of the art business electronic banking, ACH,
wire, remote deposit capture and remote deposit print features and services. As
demonstrated herein, the deposits emanating from the relationship between the parties
should not be deemed to be broketed deposits-ETC's primary purpose is not the
placement of funds with depository institutions; in fact ETC's primary purpose is to
provide administrative and managerial services for individual retirement accounts.
The Matrix Settlement & Clearance Services, Inc. Omnibus Account
We have briefly summarized Matrix Settlement & Clearance Services, LLC.
("MSCS',) above, but to refresh, MSCS is engaged in providing mutual fund settlettlent
and clearing services to 146 third party administrators (e.g., Fifth Third Bank) ("TPA")
representing approximately 41,000 tax exempt retirement plans with over
$26;000,000,000 in retirement funds that are invested in a wide ~ a y of assets including
mutual funds. MG Colorado Holdings, Inc. through is subsidiaries, MSCS and MG
-27 -
742
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
Colorado Trust MG Colorado Holdings, Inc., (MSCS and MG Colorado Trust
collectively referred to herein as "MSCS") comprise one of the nation's largest providers
of back-office, trust, custody, trading and mutual fund settlement services for financial
institutions, including banks, trust companies, registered investment advisors and record-
keepers/third-party administrators (TP As).
The Bank has had a deposit relationship with MSCS since 1999 and MSCS is and
has been headquartered in the Bank's headquarters building since 2002. It is important to
note that the Bank's relationship with MSCS developed from the point that the Company
owned a 45% interest in MSCS. MSCS was once identified and treated as Regulation W
affiliate of Bank.
Due to the sophisticated data processing interface developed by MSCS, in large
part connected to the Bank, those 146 TP As are able to contribute and withdraw funds in
the thousands of mutual fund families investing in United States stocks and bonds on a
highly efficient basis. MSCS's primary business is the management of mutual fund
execution and clearing services and providing other trust services to the TPAs on behalf
of their clients.
Every trading day, after settlement with the NSCC
I7
, some cash is incidentally
idled over night as it transits the MSCS network. Those and other trust deposits managed
by MSCS are placed in an omnibus deposit account for the benefit of the underlying
retirement account and trust account beneficiaries as an accommodation to those
beneficiaries.
17 National Securities Clearing Corporation, a division of the Depository Trust Company, Inc,
established in 1976, provides clearing, settlement, risk management, central counterparty services and a
guarantee of completion for certain transactions for virtually aU broker-to-broker trades involving equities,
corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment
trusts.
- 28-
743
"
+::0
+::0
United Western Bank. Core Deposit Management
Strategic Planning and Regulatol)' Issues
March 8, 2010
The schematic below represents the key relationships by and between MSCS's clients, MSCS and the Bank:
Y J I . ~ ~
-29
Schematic Description of Matrix Settlement
& Oearance Services. LLC
Prepared by: United Western Bank
Preparation date: March 5, 2010
......
..j:::o.
U'I
United Westem Bank. Core Deposit Management
Strategic Plamring and Regulatory Issues
March 8, 2010
The" following chart demonstrates the growth in MSCS clients' deposits on deposit with the Bank and the interest rate paid on such
deposits to such clients.
_ Deposit balances
MSCS Deposit Balance and Customer Rate History
__ UWB Custom .... Daposlt Rata
$3DO,OOO I 100.00%
BO.OD%
$250,000
BO.OD%
70.00%
S:lOII,ODO
6D.DO%
(
I $15D,DDO
t
50.00% 1
I
I
40.00%
SlDO,OOO
3D.DO'I'
2D.DO'I'
SSO,DOD
10.00%
$- UU I Lllln.1 1101111111111111 11,1111111111 11,111111'1" II I .. .nUIIi II I nil II I II un I nl II ...... ' 0.00%
///////////////////////////////
- 30-
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
Bank and MSCS entered into a Third Amended and Restated Administrative
Services Agreement dated July 5. 2007 (the ''MSCS'' Agreement") whereby customers of
financial institutions such as third-party record keepers, banks and registered investment
advisors transfer funds consisting of qualified employee benefit plan funds held in a
fiduciary capacity by a custodian or third party administrator to Bank for the purpose of
settlement of trades conducted by MSCS. The MSCS Agreement provides that these
customers require services of both MSCS and the Bank with respect to the transfer of
funds for settlement purposes-:-such services including the automated transmission of
data, the creation of data interfaces, the automation of funds movement from customer's
financial institution to the Bank, and the ongoing maintenance and support required for
such services to facilitate the transfer of funds (the "Administrative Services"). The Bank
could provide the Administrative Services to the customers, however, the Bank
determined to have MSCS provide these Administrative Services for which the Bank
pays MSCS a fee for providing such services. In consideration of the Administrative
Services that M ~ C S provides to Bank, Bank pays MSCS a monthly servicing fee
consisting of an amount equal to the product of the average daily balance of MSCS
deposits at the Bank (subject to the exclusion of some accounts identified in Exhibit A of
the MSCS Agreement) and the Cap Rate as provided on Schedule A-I of the MSCS
Agreement. Bank does not pay any rate on the balances at Bank to MSCS' customers.
Currently, the Cap Rate in effect is 1.50%. The Cap Rate is based on the Average Daily
Fed Funds Target of interest as described on Schedule A-1.The MSCS Agreement has a
term of three years, terminating on July 5, 2010, however. the MSCS Agreement
automatically renews for two .successive one-year terms unless MSCS notifies Bank in
writing at least 90 days before the expiration of the term of its intent not to solicit bids
from other depository institutions. Bank has the option to match a Bid from another
depository institution. Bank expects to renew the MSCS Agreement since Bank and
MSCS have an excellent working relationship providing customized services to MSCS as
described more fully below. In addition, both parties have invested significant time and
dollars in interfaces with TP As and customers, thereby making Ii move by MSCS to
- 31 -
746
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
another depository institution unlikely. As shown from the chart below, the MSCS
deposits have grown steadily over the last nine years.
At lleI:emIJer 31st
S balance Q.OOOs)
S 268,000 $ 203,000 S 238,000 S 195,000 S 173,000, 118,000 S 179,000' 117,000' 54,000
Bank provides many customized services for MSCS. The list of services is
extensive thereby making it very difficult for MSCS to terminate its relationship with
Bank:
Bank provides MSCS with one computer rack on the 3rd floor secured data
center at Bank's location in Denver, Colorado.
Bank subleases the 2nd floor (11,864 sq ft) of office space located at it Denver
downtown location to MSCS. The lease expires in September 2016.
MSCS utilizes Bank's parent company's telephony infrastructure. This
includes: Avaya phone switch, T1 's, DIDs, Trunks, local telephone service,
and Long Distance service.
Bank's parent company provides certain mail room services and postage
services for MSCS.
Bank's parent company provides certain shredding services for MSCS.
Bank provides support for the current web based Workflow Management
System Process. This includes processes for automated communication of
Stop payments, manual check and wire requests, 1099R corrections and
access to Check Deposit Images.
Bank and MSCS operations' teams conduct monthly meetings to discuss
operational issues and other matters with respect to the services provided by
each party.
Bank is the primary bank for MSCS whereby Bank acts as the Settling Bank only
Member in connection with the settlement services described in the MSCS Agreement
-32 -
747
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 20 I 0
All of MSCS' operating accounts and its custodial accounts are held at Bank. On an
annual basis, MSCS has the following activity:
Checks paid/Debits
Deposits/Credits
Stop Payments
Domestic Wires Incoming
Domestic Wires Outgoing
ACH Originations
Deposited Items
Lockbox processing
180,960
5,059
6,288
22,587
44,400
669,655
236,616
194,275
On a daily basis, Bank generates six customized files that are formatted to feed
directly into MSCS's Innovest Trust Accounting System. These formats were originally
created when MSCS was a subsidiary of the Bank's parent company and would be
difficult to recreate for another bank. The files contain all of the previous day's
information including: inbound and outbound ACH transactions, alliockbox processing,
inbound and outbound wire processing and all checks paid. The concept is similar to an
individual client downloading information from a bank directly to Quick Books. The
customized solution gives the individual TP As the ability to view and research any
activity on their account at Bank.
In addition, MSCS introduced a client, CPI, which has banked with Bank for
more than 10 years. Bank did not pay a fee to MSCS for MSCS introducing CPI to Bank.
CPI is the country's largest retirement plan administration firm. Because of the unique
nature of its business, CPI is required to open individual accounts for each and every plan
for which it conducts business. CPI currently maintains more than 3,400 individual
business checking accounts with Bank. All of these accounts are non-interest bearing
checking accounts and reside on Bank's core operating system. Bank produces
customized files on a daily basis that are integrated and formatted in such a way to allow
CPI to receive a direct feed from a secure FTP server that facilitates daily balancing
functions for CPI.
- 33 -
748
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
Annual transaction volumes for CPI are significant:
Total Accounts 3,408
Checks Paid 285,672
Stop Payments 2,220
Wire incoming 360
Wires Outgoing 4,572
ACH originations 321,600
The Legent Clearing Omnibus Account
As described below, the Legent Group omnibus account for the benefit of the
Legent Clearing clients was established during the time that Legent Clearing was owned
and controlled by Mr. Gibson, in 2003. As further described above, Legent Clearing is in
."
the business of providing securities clearing and settlement services to over 1 00 FINRA
member firms ("correspondents") and their associated clients.
The Bank's relationship with Legent Clearing was created directly between the
Bank and Legent Clearing. From time to time, Legent Clearing may employ third parties
to provide ministerial services to Legent Clearing with respect to the omnibus account at
the Bank, but those services are ministerial in nature only and do not impact the nature of
the Legent Clearing-Bank relationship, nor do they impact the analysis as to whether or
not Legent Clearing should be considered a "deposit broker" for the purposes of this
paper.
As a "clearing finn," Legent Clearing is in direct contractual priity with over
200,000 customers who are "introduced" to Legent Clearing by the correspondents. On
behalf of those clients, Legent Clearing takes custody of the clients' securities, cash and
other assets and provides extensive trade, execution, settlement, delivery and other
services to such clients on a daily basis.
Legent Clearing clients have more or less cash resident in their trading accounts
for the purpose of accommodating investments. Any individual account may rise or fall
- 34-
749
United Westem Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
depending on trading -activity or the client's perception of the current securities markets
. or the future economic conditions of the world markets of for other reasons.
As an accommodation to its clients, Legent Clearing allows its clients to place
idle cash in an omnibus account with the Bank. Legent Clearing clients may also elect to
place their idle cash in a money market mutual fund or to provide credits to Legent
Clearing to allow Legent Clearing to execute margin loans to other Legent Clearing
clients.
It is clear from the above that Legent Clearing's principal business is providing
securities settlement and clearing services and that the creation of the omnibus account
for the benefit of its clients is incidental only to its primary business activity. As a
consequence, it is clear that Legent Clearing is not a "deposit broker" for our purposes.
In November 2008, Legent Clearing and Bank entered into a Program Bank Fee
Agreement whereby Bank would establish accounts at Bank for customers of broker-
dealers in which Legent Clearing provides clearing services. The accounts at Bank would
be entitled "Legent Clearing LLC as agent and custodian for the exclusive benefit of
customers of its Introducing Broker-Dealers." Under this arrangement, Deutsche Bank
Trust Company of Americas (''DBTCA'') provides certain record-keeping services to
Legent Clearing and Bank. DBTCA's services include providing recording the beneficial
interest held by each Customer in the custodial account maintained at Bank. Legent
also provides services with respect to the customer accounts at Bank. For
example, Legent Clearing will carry out each customers directions with respect to a
customer account, provide back up withholding and for sending IRS Form 1099 interest
information to each customer.
The monthly fees payable to DBTCA and Legent Clearing are for services
rendered. The monthly servicing fee that Bank pays Legent Clearing and DBTCA is
- 35-
750
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
Lack of Volatility of Deposits
The deposit balance rates charts provided for herein demonstrate the stability of
the deposit relationships by and between these parties and the Bank. Even a casual glance
will demonstrate that these relationships have been developed and enlarged over a long
period of time and are not volatile. We include charts for these four entities as they are
the most significant deposit relationships for the Bank at this time.
. While the individual deposit charts provided for herein speak loudly to the
stability of these deposit relationships, further explication of the Bank's relationship to
the indirect consumer deposits involved in these relationships is in order:
UW Trust Company. This company has been the wholly owned
subsidiary of the Company since 1997; during the pendency of the Company's
ownership, the Bank had exclusive access to the IRA holder cash deposits related
to UW Trust. UW Trust continues to maintain an omnibus deposit account with
the Bank for the benefit of certain escrow clients, but this account holds an
immaterial amount of deposits, relatively speaking, at this time. Given the control
of UW Trust by the Company, there is no threat that these deposits will leave the
Bank for any reason other than- the dictates of the some 3,000 underlying escrow
account holders. The escrow accounts arise as a part of UW Trust's escrow
processing business for the life settlement industry. As a part of this service
business, UW Trust escrows life insurance premiums and pays them in
accordance with the terms of the underlying policies. UW Trust has been in this
business since 1993.
Equity Trust. The Equity Trust relationship began in 2000 and the
deposit balances come from the idle cash awaiting investment or distribution held
by Equity Trust's IRA clients has grown consistently as Equity Trust has
increased the aggregate number of IRA holders for whom it performs
- 41-
756
United Western Bank. Core Deposit Management
Strategic P1anning and Regulatory Issues
Marcll8,2010
administrative services as an IRC custodian. As discussed herein in 2009, UW
Trust sold the majority of its custodial rights to manage IRA holder assets to
Equity Trust increasing the amount of assets under management at Equity Trust.
At the same time, the Bank was able to secure a long term agreement with Equity
Trust to have the former UW Trust client and the Equity Trust client cash deposits
remain at the Bank. The minimum term is five years from June 2009 and is
subject to extension.
Equity Trust ~ committed to maintaining its clients' deposit relationship
with the Bank as evidenced by the recent amendments to the subaccounting
agreement between Equity Trust and the Bank. In the amendment, Equity Trust
agreed that it would be contractually bound to maintain its IRA holders' cash
balances at the Bank unless the Bank fell below the level of adequately
capitalized as defmed in the applicable OTS regulations. Clearly, the underlying
IRA holders may direct the transfer of their cash to alternative positions such as
Treasuries or money market mutual funds, but the eight year history reflected in
the above charts does not suggest that this should be of concern as the balances on
deposit in respect of Equity Trust's clients has grown consistently.
Matrix Settlement & Clearance Services, LLC. As noted above, the
Company was one of the founders of this company and has developed a l,11ajor
level of services to MSCS that MSCS relies on to execute its business. We believe
that replicating the level of services provided to MSCS by the Bank would be
cumbersome and require extensive time to allow a replacement bank to assume
the Bank's current position (see also the services provided to MSCS as discussed
above). We believe that so long as the Bank continues to provide the level and
quality of services that it currently provides to MSCS, MSCS will continue to
execute its NSCC settlements through the Bank which will bring the idle cash
balances ofMSCS's clients to the Bank.
-42-
757
United Western Bank. Core Deposit Management
Strategic PllIIIIIing and Regulatmy Issues
March 8, 2010
In addition, the Bank continues a very favorable relationship with Mr.
McInerney and the . MSCS management which suggests that this relationship is
steady and liable to continue for the foreseeable future.
Legent Clearing. This relationship with the Bank commenced in 2003
and has been a steady relationship for the Bank since that date. As previously
described, Mr. Gibson controlled Legent Clearing when the deposit relationship
was commenced. In 2005, there was a period when Legent Clearing's client
deposits were removed from the Bank. This was due to an industry wide .
regulatory objection from FINRA which has since been resolved favorably.
As earlier described, the Bank has entered into a non-binding letter of
intent to acquire Legent Clearing. This is subject to the completion of due
diligence and regulatory approval. In the interim, it is currently contemplated that
the Bank will assume the processing of a majority of the Legent Clearing client
cash balances on a contractual basis with Legent Clearing; thereby removing
DBTCA and other program banks as a party to the current relationship. This will
provide the Bank with access to over $500,000,000 of Legent Clearing client
balances on a daily basis.
We have not included a separate discussion of Lincoln Trust
Company since it is the same type of relationship presented by Equity
Trust Company.
Managing Deposit Concentrations
The Liquidity Contingency Funding Plan which will be provided at the Dallas
meeting on Thursday, March 11,2010.
- 43-
758
United Western Bank. Core Deposit Management
Stmtegic Planning and RegulatOIy Issues
March 8, 2010
Conclusions
The deposits attributable to UW Trust, Equity Trust, Lincoln Trust, MSCS and
Legent Clearing allow the Bank to manage the preponderance of its deposit liabilities in a
safe and sound manner. These deposits are not "brokered deposits" since none of the
named companies are deposit brokers as defmed in applicable FDIC regulations.
I8
We conclude these parties are not deposit brokers since they are not engaged in
the business of placing deposits and they are either:
a. persons in the discharge of their substantial duties as IRC custodians for
IRAs acting as plan administrators perfonning managerial functions
with respect to IRAs; or
b. agents or nominees for the IRA holders whose primary purpose is not
. the placement of funds with depository institutions.
The policy issue relating to brokered deposits, namely that there is reason to be
well concerned regarding customers who focus exclusively on rates and are rate-sensitive
since they have no loyalty to any bank, is not at hand in our case. As demonstrated above:
a. these deposit relationships are of lengthy vintage;
b. the interest rates paid on these deposits have been very low relative to other
market rates;
c. the pro-active involvement of the institutions (e.g., Equity Trust and MSCS)
in amending the applicable agreements in favor of the Bank demonstrate the
intent and ability of these institutions to continue their relationship with the
Bank;
18 See also the attached legal opinions ofLuse Gorman Pomerenk & Schick, P.C. and BucldeySandler
LLP attached here to as Exhibit D.
-44-
759
United Western Bank. Core Deposit Management
Strategic Planning and Regulatory Issues
March 8, 2010
d. the deposit balance growth curves, coupled with the interest rate paid, provide
convincing evidence that the deposits in question are not being placed by rate
sensitive clients; and
e. none of these deposits are to wholesale investors nor do they exhibit the
characteristics ofwholesaIe investors.
As a consequence, no policy issue articulated by any of the Bank's regulators is at
hand in this discussion.
Following from the above, we conclude that the Bank should be allowed to
maintain the subject relationships as non-brokered deposit relationShips; provided that the
Bank will, within the strictures of its pQlicy and procedures, manage deposit levels from
each such relationship.
Exhibits
Exhibit A
ExhibitB
Exhibit C
ExhibitD
White Paper on Legent Clearing Transaction
BSAlAML Policy from UW Trust Company
Equity Trust Company Account Application
Legal O p i n i o ~
- 4S-
760
TabC
Exhibit 25 A (d)
761
TabC
Exhibit 25 B
763
I ExhihitB I
764
FDII'
Federal Deposit Insurance Corporation
Dallas Regional OffIce '
1601 Bryan Street, Dallas, Texas 75201
(214) 754-0098 FAX (972) 7612082
Mr. James R. Peoples
Chairman of the Board
CEO and PresideIi.t
United western Bank
700 17
th
. Street, Suite 100
Denver, CO 80202
Subject: Brokered De;posit Waiver
Dear Mr. Peoples:
r
Division of Supervision and Consumer Protection
Memphis Area omce
5100 Poplar Avenue, Suite MerJ1lllis, Tennessee 38137
(901) 6851603 FAX (901)
" July 8, 2010
UtIleDWESlERI"
lJUL J3.:2010
Your letter application dated June 10,2010, is acknowledged. The application 8.ppears to be
incomplete and is not acce,pted. Following our discussion with your institution and the
FDIC Washington Office on June 30, 20 I 0, it was determined that the following information
and answers to the listed questions are needed for the application to be considered accepted.:
1) Provide additional background infonnation as to why bJ.e potential acquisition of
Legent Clearing LLC as an operati:itg subsidiary should not be considered a bromed
deposit relationship;
2) Provide additional background infonnation as to why UW Trust Company an
affiliated company should not'be considered a brok:ered deposit relationship;
3) Provide additional infolllljltion to demonstrate that the combined sub-accounting fees
and interest rates paid on the inStitutional deposits listed under Exhibit D of your
applicatiOn are in compliance with the with interest rate restrictions outlined within
FDIC Rules and Regulation 337.6 Brokered Deposits;
4) On any accounts that do not comply with the rate restrictions, provide a plan to
reduce the sub-accounting fees and or rates 10 ensure .
5) Provide additional documentation to support' that the individual sub-accounting fees
are arm's length transactions between two equally advantaged parties (The March 18.
2010, Trust Company Profitability analysis prepared by Thomas J. Kientz does not
differentiate why the sub-accounting fees provided to Equity Trust Company are
substantially different than UW Trust Company. when the majority of accounts now
managed by ETC were acquired from UW Company in June 2009);
6) Provide a breakdown of the sub-accounting expenses associated with the institutional
deposits outlined within Exhibit D o:(your which are either applicable to
interest expense or nonMinterest expense (differentiate between each deposit and
explain why one relationship may be higher or lower than another);
765
Mr. Peoples
2 July 8, 2010
7) Provide additional infonnation to support the need to allow 25 percent aggregate
growth in the institutional deposits during the requested waiver period (Le., account
histories);
'8) Provide a copy of the bank's Liquidity/Contingency Plan;
9) Provide a copy 9fthe bank's June 30,2010, balance sheet and income statements.
Please furnish the requested infonnation to ibis office by July 30, 2010. Failure supply
this office with the requested information by this date will cause the application to be
returned and deemed abandoned. '
.. It is our llIlderstanding from our meeting on June 30,2010, that separate from this request
you will provide additional information to support your position in regards to the legal
,opiriion outlined within our May 24,,2010, FDIC Letter Demosi! Agreements, deteimining
the institutional deposits were brokered deposits.
"
If you have any questions, please call Case Manager Thomas L. (972) 761-
2255. Correspondence may be addressed to Kristie K.. Elmquist, Acting Regional'
Director, Dallas Office, 1601 Bryan Street, Dallas, Texas 75201.
Cc: Office of Thrift Supervision
766
K. E1mquist
Acting Regional Director '
TabC
Exhibit 25 C
767
Exhibit C
768
Office of Thrift Supervision
Department of the Treasury
Pacific Plaza. 2001 Junipero Serra Boulevard, Suite 650, Daly City, CA 94014-3897
P.O. Box 7165, San Francisco, CA 94120-7165 Telephone: (650) 746-7000 Fax: (650) 746-7001
June 22, 2010
Board of Directors
United Western Bank
700 17
th
Street, Suite 2100
Denver, CO 80202
Dear Directors:
Western Region
Daly City Area Office
In a letter dated May 24, 2010, the FDIC informed UnitedWestem Bank that the agency had determined
that the Bank's deposits from seven institutional deposit relationships are brokered deposits. The letter
further indicated that the FDIC deemed the maturity dates of the deposits to be those of the underlying.
deposit instruments rather than those of the contracts between the institutional depositors and the Bank.
The FDIC also infonned the institution that its current "Adequately Capitalized" status under PCA
standards precludes United Western from accepting. renewing, or rolling over any brokered deposit
without a waiver from the FDIC.
United Western Bank has not demonstrated to us that it haS the ability to replace these funds in the near
future. While we acknowledge that United Western filed a request for a brokered deposit waiver on June
10,2010, it is uncertain whether United Western will be able to reach agreement with the FDIC on a plan
for the orderly reduction of the institutional deposits that would provide the basis for approval of a
waiver. The duration of any such waiver, if approved, is also uncertain.
In view of this situation, we believe that there is a possibility that United Western could face a severe
liquidity crisis in the near future that would threaten the viability of the institution. We, therefore, are
downgrading the L i q ~ d i t y component rating to "S."
If you have comments or questions, please contact me at (6S0) 746 .. 7025 or Office Examiner Steve Harris
at (650) 746-7048.
Sincerely,
#J...'" T -5);:-
Nicholas J. Dyer
Assistant Director
cc:t:;: Trujillo, FDIC-Dallas
769
TabC
Exhibit 25 D
770
ExhibitD
771
1.111.JI =RN
July 19, 2010
VIA e-mail and Overnight Delivery
Kristie K. Elmquist
Acting Regional Director
Federal Deposit Insurance Corporation
1601 BlY-an
Dal1as, Texas 75201
James R. Peoples
Chairmati, President &. ChiefExecuti,ve Officer
United Western Bank:
720.956.6576
.ipeopJes@l,!wbank.com
RE: United Western Bank ... Brokered Deposit Waiver and Pending FDIC
Administrative Appeal of a May 24, 2010 FDIC Determination
Dear Ms. Elmquist:.
This letter is in response to a conversation between Joseph Assistant Regional
Director and myself on Friday July 16, 2010; As you are aware, by letter dated May 24,. 2010,
the Dallas Regional Office of the Federal Deposit Insurance Corporation ("FDIC") issued a letter
to United Western Bank (the "Bank") addressing various deposit relationships with certam
institutional depositors, and concluded that such relationships involve' the Bank accepting
"broketed deposits" under Section 29 of the F*ral Deposit Insurance Act and, Section 331..6 of
the rules and, regulations of the FDIC (the "Determination',). As you are also aware, the Bank
strongly di,sagrees with the Determination and is pursuing all necessary steps to initially mitigate
the. effect of the Determination and ultimately have the Determination reversed. For example, on
June 2010, the Bank filed a brokered. deposit waiver (the Request") seeking
immediate relief from the conseqUences of the Determination and on June 30, 2010,
representatives of the Bank met with FDIC staff in Washington, D.C. to discuss the proprietY of
the Determination.
At such. meeting, we. discussed the FDIC's admjnistrative appeals process of the
Determination, including an appeal to the FDIC'.s Supervisory Appeals Review Committee (the
"SARe"). FDIC guidance on filings with the SARC require that seeking review of
a material supervisory determination must. file their request witbin6Q days following the receipt
of the written communication of the determination. As the Bank received the Determination on
June 2, 2010, the deadline for the Bank to file It request for SARC review is Monday, August 2,
2010. However, by letter dated July 8, 2010 'that was received by the Bank on July 12, 2010,. the
FDIC requested additional information concerning the Waiver Request, and imposed a response
deadline of Friday JUly 30, 2010. As a result, the Bank bas a requirement to provide the FDIC
with certain clarifying information. on July 3Q, 2010 and must file an appeal to the SARC on the
next business day.
772
Ms. Elmquist
FDIC
July 19,2010
Page 2 oi2
Given the timing of these two material filings, Assistant Regional Director Joseph
Meade, suggested that if the Bank. requested an extension from the deadline for the SARC
appeal, the FDIC would be inclined to grant a reasonable extension of time so that the FDIC first
had the opportunity to review the additional information to be filed by the Bank by July 30,
2010.
Therefore, in accordance with Mr. Meade's suggestion, we respectfully request an
extension of the requirement that the Bank. file an appeal with SARC for at least ninety (90) days
or UIltil at least October 31, 2010 .. Moreover, as the SARC review of the Determination is
critical to the Bank's ongoing operations, we respectfully request that the FDIC's approval of the
extension be issued in writing from an FDIC official authorized to grant such an extension, as
public FDIC guidance regarding appeals to the SARC is silent with respect to a formal extension
process.
issue.
We appreciate the FDIC's willingness to work with the Bank. to appropriately resolve this
Sincerely,
/-
.
--:? //
w r
'.. .... .........- !. .. ___ ..
James R.Peoples
Chairman of the Board. CEO and President
United Western Bank
cc: Boards of Directors of United Western Bank: and United Western Bancorp, hlC.
Theodore Abariotes, General Counsel, United Western Bank.
Joseph A. Meade, Assistant Regional Director, FDIC
Serena L. Owens, Associate Director, FDIC
Thomas L. Trujillo, Case Manager
Phillip A. Gerbick, Regional Director, Office of Thrift Supervision
Nicholas J. Dyer, Assistant Regional Director,. Office of Thrift Supervision
Andrew L. Sandler, BuckelySandler, LLP
Jeremiah B. Buckley, Esq., BuckleySandler, LLP
Lawrence D. Kaplan, Esq., Paul Hastings Janofsky & Walker, LLP
773
TabC,
Exhibit 25 E
774
I Exhibit E I
775
FDII
Federal Deposit Insurance Corporation
550 17th Street NW. Washington. D.C. 204299990
Mr. James R. Peoples
Chairman, President and Chief Executive Officer
United Western Bank
700 17
th
Street, Suite 100
Denver, Colorado 80202
Division of Supervision and Consumer Protection
July 27, 2010
Re: Request for Extension of the Deadline to Submit a Request for Review of a Material
Supervisory Determination - United Western Bank, Denver, Colorado
Dear Mr. Peoples:
I am writing in response to your July 19,2010 letter requesting an extension ofthe
deadline by which United Western Bank may request a review of the material-supervisory
determination contained in the FDIC's May 24, 2010 Brokered Deposit Detennination
(Determination). The Bank received the Determination on June 2, 2010, and the deadline for the
Bank to file a request for review is August 2. 2010. As reflected in your letter, the Bank is in the
process of providing additional information related to the Determination, and this information is
due to the FDIC no later than July 30, 2010. In light of the Bank's ongoing efforts to resolve
outstanding issues outside of the appeals process, we are granting a 60-day extension of the filing
deadline until October 2, 2010.
Please be advised that matters relating to the review and appeal of material supervisory
determinations should be referred directly to the FDIC's Division of Supervision and Consumer
Protection in Washington. D.C . to my attention. Should you have any questions regarding this
matter, please contact Associate Director Serena L. Owens at (202) 898-8996.
Sincerely,
? ) ~
Director
cc: Board of Directors. United Western Bank and United Western Bancorp
Mr. Lawrence D. Kaplan, Esq., Paul Hastings Janofsky & Walker LLP
Mr. Phillip A. Gerbick, Regional Director, office of Thrift Supervision
Ms. Kristie K. Elmquist, Dallas Acting Regional Director. FDIC
776
TabC
Exhibit 25 F
777
Exhibit F
778
,
Dear
Office of Thrift Supervision
Department of the Treasury
1700 G Street, N.W., Washington, DC 20551 (202) 906-6372
,November 28, 2006 '
Re: Permissibility of Securities Clearing Activities and Paying
Interest oil Free Credit Balances
John E. Bowman
Chief COllns,1
This responds to your request in connection with the application and notice to establish an
operating subsidiary filed by , :' . {Association) with the Office
of Thrift Supervision (OTS). The operating subsidiary would be a registered broker-dealer, and
would not be a depository institution. You request legal determinations conceming two
First, you seek OTS's concurrence that certain secmities clearing and related activities are
permissible activities for a federal savings association and, therefore, would also be permissible
for the Association's operating subsidiary. Second, you seek a determination. based on the facts
you have that a provision of federal law prohibiting federal savings associations from
paying interest on demand accounts would not bar the Association's operating subsidiary from
paying interest on its customers' free credit balances.
"
We conclude that the securities clearing and related activities described in your request are
permissible activities for a federal savings association and, therefore, the,Association's operating
subsidiarY would be able to engage in the same permissible activities. We also conclude that the
law federal savings' associations 'from paying interest on demand accounts would not
preclude the Association's operating subsidiary from paying interest on its customers' free credit
balances.
I. Background
You have provided the following information. The Association is a subsidiary of
, ' , . (Holding Company). ' , (LLC), a
whoUy owned, indirect subsidiary of Holding Company, is a securities clearing fmn. LLC'is a
broker-dealer registered with the Securities and Exchange Commission (SEC) and is a member
of the National Association of Securities Dealers, the New York Stock Exchange, and several
exchanges. I LLC is a clearing member of the National Securities Clearing Corporation (NSCC),
I These include the NASDAQ Stock Exchange. the National Stock Exchange, the IntematiomiJ Securities Exchange,
the Pacific Stock Exchange, and the Philadelphia StoCk Exchange. .
779
2
Depository Trust Company (DTC), and the Options Clearing Corporation. As a clearing broker-
dealer, LLC provides a variety of securities clearing and related services to affiliated and non-
affiliated:.introducing broker-dealers and their brokerage customers. These services include:
(i) cleanuice and settlement services as agent for broker-dealer customers, and not as principal;2
(ii) custodial services, such as receipt. custody, and delivery of brokerage customers' securities
and funds; (iii) margin lending. i.e., making loans to brokerage customers to fmance,their
securities purchases; (iv) order flow, i.e., at the direction of introducing broker-dealers. delivery
of trade orders to specific market centers for execution; and (v) recordkeeping. LLC also
engages in activities related to the foregoing that clearing broker-dealers often perform, including
securities lending to 'fund brokerage customers' margin loans,3 stock borrowing,4 and. conduit
.. lending 5
sectulues
You represent that LLC does not engage in securities dealing, market making, or
lDlderwriting activities, and does not purchase or sell securities when acting in a principal
capacity, exeept for certain securities purchases that are incidental to its s ~ u r i t i e s clearing
activities.
6
You also represent that LLC neither provides investment advice to its customers,
nor is it a registered investment adviser under the Investment Advisers Act of 1940.
7
LLC's primary sources of revenue are clearing revenue derived from transaction charges
to introducing broker-dealers to compensate LLC for its clearance, settlement, custodial, and
routing services; interest revenue from margin lending; and activity-based fees charged by LLC
to its introducing broker-dealers for services provided to their customers. B Approximately 98%
2 The specific clearing services consist of comparing and conflnning with counterparties the identity and quantity of
securities traded, the transaction price and date. and the identity of the buyer and seller. The settlement services
involve LLC, as a member ofa clearinghouse, fulfilling trade obligations by paying for securities. purchased or
delivering securities sold. .
S According to your request. In a typical transaction, LLC lends shares to another financial institution, receives cash
as collateral for those shares, and pays interest on the funds received.
4 In stock borrowing. LLC borroWs stock from another broker-dealer. provides cash collateral for those shares, and
receives iilterest 9n the cash it provides. LLC "typically borrows stock to fund a customer's shOrt sale and uses the
proceeds oCthe short sale as cash collateral for the stock borrow."
S In conduit securities lending, LLC "acts as an intermedialy. typically between two other broker-dealers. one
wishing to borrow securities, and the other willing to lend" and UC "typical1y captUres a spread in the transaction,
representing the difference in rebate rates paid on each side of the transaction."
6 As described in your request, these incidental purchases include purc.s to make customers whole in flUled
trades: correction of error and fraud; purchases of essentially worthless securities in customer accounts to reduce
third-patty custodial charges; liquidation of margin accountS; and purchases or sales in certain securities lending
transactions.
1 IS U.S.C. SOb et seq. (West 1997 & Supp.2006) .
. 8 These services include confmnations; statements; wire processing; margin calls; check writing; account transfers;
account maintenance; new account processing; and broker-assisted trades.
780
3
of LLC's clearing, interest, and other revenue is from its affiliated broker-dealers and their
customers.
For a variety of business reasons. the AssociatioD. wishes to establish LLCas an operating
subsidiary (OpSub-LLC) of the Association. You indicate that the Association and its patent
companies have identified several financial benefits for the AssociatioD., and potentially for
LLC's brokerage customers . that would result from reorganizing and having LLC . become an
operating subsidiary of the Association.
9
However. because an operating subsidiary may only
engage in activities that are permissible for a federal savings association. you ask whether LLC
may continue its current activities, as descriQed above, if it becomes OpSub-LLC, an operatiD.g
subsidiary of the Association. In other words" may a federal savings association engage directly
in the activities that LLC currently conducts, including serving as a member of a clearing
exchange?
You also seek our concurrence that following the proposed reorganization, S(b)( 1 )(B)(i)
of the Home Owners t Loan Act (HOLA).IO which prohibits a federal savings association from
paying interest on a demand account, would not apply to OpSub-LLC or to feee credit balances
held by OpSub-LLC. so that it may continue LLC's current practice ofpayiD.g interest on
customers' free credit balances.
ll
n. Discussion
A. Permissibility of Clearial and Settlement Activities
Under OTS regulations, an operating subsidiary may engage in any activity that its parent
federal savings association may conduet directly.ll Accordingly. the relevant inquiry here is
whether the activities proposed for OpSub-LLC. and that are currently being conducted by LLC
as described above. are permissible for a federal savings association. Federal savings
associations have authority to engage in a broad range of securities activities, based on either
express authority uncler the HOLA or the well-established doctrine of incidental powers.
Most of the brokerage activities are customary for a federal savings association that
provides securities brokerage or similarserviees.
13
We have not consideied whether serving as a
9 You indicate that some of theses benefits include reduced operating expenses, reduced cost offilnds to the
Association, and improved customer service. You also suggest that the, Association may have an improved capital
positiola and increasedeamings when the Association and OpSub-LLC are consolidated for financial reponing
purposes .
10 12U.S.C. 1464(b)(1)(B)(j)(West2001).
II You define the term "free credit balances" to mean "funds in . customers' brokerage accounts
that are not swept into [Association1 sweep deposit accounts or money market mutual funds that are held by [LLC]."
12 12 C.F.R. 559.3(1')(1)(2006).
13 See, e.g., NASD Rule 3230, which lists the responsibilities of introducing and clearing brokers.
781
4
clearing broker with membership in a clearinghouse is permissible for a federal savings
association, however.
The activities proposed for OpSub-LLC are customary for a clearing broker. Clearing
and introducing brokers that work together dIvide the responsibilities of a broker between them.
While a clearing broker performs "back office functions" with respect to securities transactions,
the introducing broker performs the "front office functions." The introducing broker opens,
approves, and monitors customer accounts and later accepts orders and executes transactions.
The back office functions of the clearing broker include credit extension; recordkeeping; receipt
and deliverr, of funds and securities; safeguarding of funds and securities; and confirmations and
statements. 4 A clearing broker extends credit when it substitutes its credit for that of its
. customers and becomes liable to a clearinghouse for performance of contracts that it submits. It
assumes the risk of default with respect to the exchange, clearinghouse, and counterparties to the
trades. IS
Express Powers
Section 5(c) of the HOLA expressly authorizes a federal savings association to "invest in,
sell,. or otherwise deal in" a wide range of securities, such as government securities and
mortgage.backed securities.
16
The OTS's implementing regulation
l7
clarifies that section 5(c)
authorizes a federal savings association to provide brokerage or warehousing services for all
loans and investments' allowed under Section 5(C).18 This express authority includes the power to
sell and deal in asset-backed securities where the underlying assets are those in which federal
savings associations are authorized to originate, purchase, or invest.
19
In addition, we addressed
some aspects of retail securities brokerage by operating subsidiaries of federal savings
14 SEC Release No. 34-49879, at n.289 (Regulation B: Proposed Rule), 69 Fed. Register 39,682, 39712 n.289
(2004), citing National Association of Securities Dealers Rule 3230, "Clearing Agreements," and New York Stock
Exchange Rule 382, "Carrying Agreements" (another term for "clearing agreements"). .
15 See, e.g., NA8D Rule 3230; Henry R. Minnerop, Clearing A"ongements, 58 Bus. Law. 917 (May 2003).
16 12 U.S.C. 1464(c)(West 2001 & Supp. 2006). Other types of securities include securities issued or fully
guaranteed by the Federal National Mortgage Association. the Student Loan Marketing Association. the Government
National Mortgage Association, or any agency of the United States, Federal Home Loan Bank: securities. state and
municipal securities, small business-related securities, and corporate debt securities. 12 U.S.C. 1464(c)I)(D),
(E), (F), (H), (8). & (2)(D).
I' In 1996 OTS removed flom its implementing regulation a prohibition against savings associations contracting
with third parties for brokerage activities. OTS thus has permitted a federal savings association to engage in third
party brokerage (networking) arrangements that make securities brokerage services available to the association'S
customers by a broker-dealer that leases space on the association's premises. See 61 Fed. Reg. 66,561,66,568 and
66,570 (Dec. 18, 1996) (preamble).
18 See 12 C.F.R. 560.30 (2006). Like other insured depository institutions, a federa1 savings association may use
asset securitization to sell any type of loan that it originates or purchases. OTS Op. Chief Counsel P-2004-5, at 3
and n.l0 (Sept. 14,2004). citing Interagency Guidance on Asset Securitization AClivities (Dec. 13, 1999).
19 See OTS Op. Chief Counsel P-2004-5 (September ]4,2004).
782
5
associations in the Interagency Statement on Retail Sales o/Nondeposit Investment ,roducts
(Interagency Statement) issued in 1994.
20
The authority of federal savings associations to
provide securities brokerage and related services to customers is not of recent vintage.
21
Most of the proposed related services are expressly permissible when provided outside
the context of securities brokerage, as well as when provided in connection with securities
brokerage. In fact. Congress has recognized that these services, in some circumstances, are core
banking services that both banks and savings associations provide to customers.
22
OTS fiduciary
regulations authorize federal savings associations to act in a variety of capacities that involve
securities, such as registrar of stocks and bonds and transfer agent. 13 Federal savings
associations have broad authority under Section S(c) of the HOLA to make a wide variety of
loans,24 and to borrow, subject to regulatory Iimitations.
2S
Margin lending, securities conduit
lending, and lending and borrowing securities 81C permissible pursuant to this authority.26
Moreover, federal savings associations have express authority to provide order flow and
20. See Thrift Bulletin 23-2 (Feb. 22, 1994). The Board ofGovemors of the Federal Reserve System (FRS), Federal
Deposit Insurance Corporation (FDIC), the Office of thO' Comptroller of the Currency (OCC), and OTS issued this
statement on February 15, 1994. The Interagency Statement requires disclosure to retail customers that securities
sold are not Insured by the FDIC; are not deposits or other obligations of, or guaranteed by, a depository institution;
and are subject to investment See also Joint Interpretations a/the Interagency Statement, OTS Thrift Bulletin
23-3 (Oct. 13, 1995).
%1 Guidance on securities lending has an even longer history. The FFIEC Supervisory Policy on Securities Lending,
Issued in 1985, explained that our predecessor, the Federal Home Loan Bank Board. had already developed rules .
and regulations (now obso!ete) addressing securities lending for institutions that it supervised. See FFIEC
Supervl80ry Policy: Securities Lent!ing 8, attached to OCC Banking Issuance BC196 (May 1, 1985), citing 12
C.F.R. 545.49 and.memorandaR48 andT 34-5. One ofour current regulations, 12 C.F.R. 560.30 n.12 (2006).
supersedes the Federal Home Loan Bank Board regulations and governs securities lending bY federal savings
associations.
12 Congress recently enacted legislation that applies to savings associations the same exceptions as to banks ttom the
definitions of "broker" and "dealer" under the Securities Exchange Act of 1934. See Financial Services Regulatory
Relief Act of2006, 401(a). Pub. L. No. 109-351, to be codified at IS U.S.C. 78c(a)(6) (defining "bani(' to
include savings association); IS U.S.C. 18c(a)( 4) & (5)(definitions and "dealer"). These excepted
services include, among others, effecting securities transactions in a trust department. proViding safekeeping and
custody services. and serVing as custodian to pension and other benefit plans. 15 U.S.C. 7Bc(a}(4).
23 12 C.P.R. 550.30 (2006). A federal savings association may also provide investment advice through a trust
department and exercise inveStment discretion over customer accounts. ld. OpSubLLC would not provide such
se-rvices, however.
24 See, e.g., 12 U.S.C. 1464(c)(2)(A)(commercialloans). (c)(2)(B)(nonresideDtial real property loans);
(cX2XDXconsumer loans); (c)(l)(1') and (U)(eredit card and educational loans, respectively); and
(c)(3)(C)(coDS1nJction loans for primary residences).
:IS See 12 C.F.R. 563.&0.(2006). .
26 Margin and securities lending would be permissible as either commercial or consumer lending. See 12
U.S.C. 1464(c)(2)(A)(commerciallending) and (c)(2)(D)(consumer lending). See also 12 C.F.R. 563.80
(2006)(borrowing authority).
783
"
6
recordkeeping services to both fiduciary and brokerage customers,27 and to act as custodian of
residential mortgage loans documents as part of mortgage servicing.
28
In addition. federal
savings associations have express statutory authority to issue passbooks, certificates, or other
evidence of deposit accounts, 29 all of which involve recordkeeping activities. Thus, many of the
activities proposed for OpSub-LLC are customary and permissible activities for a federal savings
association and, therefore, its operating subsidiary.
We therefore conclude that a federal savings association has express authority to provide:
(1) clearance and settlement services as agent for broker-dealer customers, and not as principal;
(2) custodial services. such as receipt, custody, and delivery of brokerage customers' securities
and funds; (3) margin lending, i.e., making loans to brokerage customers to finance their
securities purchases; (4) order flow, i.e., at the direction of introducing brokeralers, delivery
of trade orders to specific market for execution; and (5) recordkeeping, with respect to
any type of securities in which a federal savings association may invest pursuant to section 5( c)
of the HOJ.,A. A federal savings association also bas express authority to provide services related
to the foregoing that clearing broker-dealers often perform, including securities lending to fund
brokerage customers' margin loans, stock borrowing, and conduit securities lending.
We have not previously explicitly addressed the authority of a federal savings association
to provide, as agent, brokerage and clearing services with respect to types of securities that
federal savings associations are not expressly authorized to invest in pursuant to section 5(c) of
the HOLA. Moreover. neither the HOLA nor our regulations provide express authority for a
federal savings association or its operating subsidiary to serve as a clearing member of a
clearinghouse or similar organization. However, our inquiry does not end here.
Incidental Powers
In addition to express statutory and regulatory authorizations, this Office has recognized
that federal savings associations possess extensive powers that are incidental to the express
powers to federal savings associations by the HOLA.
30
These incidental powers provide
27 See 12 C.F.R. SSI.20(a) (2006). See also 12 C.F.R. 551.30 (requiring maintenance of effective systems of
records and controls regarding customers' securities transactions); SSl.SO (specific recordkeeping requirements);
551.60 (how records must be maintained). See also 12 C.F.R. Part 5S I, Subpart B "Content and Timing of Notice,"
including confirmations, Subpart C "Settlement of Securities Transactions." and Subpart D "Securities Trading
Policies and Procedures" (2006). Section 5(n) of the RotA, 12 U.S.C. 1464(n). provides express authority to
federal savings associations to act as a fiduciary.
28 OTS Op. Chief Counsel (Jan. 31. 1994) (concluding that a federal savings association has express authority
pursuant to 5(c)(J)(B) afthe HOLA to act as custodian ofJoan documents for third parties).
29 12 V.S.C. 1464(b)(l)(ii).
30 OTS Op. Chief Counsel P-2004-S (Sept. 14, 2004); OTS Op. Chief Counsel (Oct. 29,2001).
784
7
a basis for our conclusions concerning providing clearing and related services in connection with
other types of securities, and service as a member of a clearinghouse.
We consider' four factors to determine whether a particular activity lies within the scope
of an express power under section 5 of the HOLA. These include:
(1) is the activity consistent with Congressional purpose for federal
savings associations; (2) is the activity similar to, or does it
facilitate the conduct of, an activity already expressly authorized by
Congress; (3) does the activity relate to the financial intermediary
role that federal savings associations were intended to fulfill; and
(4) is the activity necessary for the federal savings association to
remain competitive and relevant in the modem economy?31
OTS has determined that federal savings associations have incidental power to conduct
diverse securities and securities-related activities. These incidental powers include, for example.
conducting certain sweep arrangements,32 acting' as principal in certain interest rate hedges,33 '
providing ministerial support services as agent for a trust company.34 and purchasing Farmer Mac
common stock.
35
A federal savings association has incidental power to offer escrow accounts
that do not relate to loans that it made.
36
,
OTS also has permitted a federal savings association to establish a foreign agency to
perform clearinghouse functions that would facilitate trust services provided by the federal
savings association to U.S.-based institutional trust customers. OTS permitted the agency to
provide global custody services, securities lending services solely on an agency basis,
safekeeping, custody, recordkeeping and other ministerial services while acting as a paying agent,
and custodial services for securities certificates.
37
These services are substantially similar to the
services that OpSub-LLC would provide, except that the agency did not become a member of a
clearinghouse.
31 See, e.g., OTS Op. Chief Counsel P-2004-S, supra note 30, at 4.
Jl OTSOp. Chief Counsel (Aug. I, 2000); OTS Op. Chief Counsel (March 2, 1998).
33 OTS Op. CbiefCounsel (Dec. 30, 1999).
J ~ OTS Op. CbiefCounsel (Oct. 17, 1995).
35 OTS Op. CbiefCounsel (Oct. 14, 1997).
36 See, e.g., OTS Op. Chief Counsel (Aug. 19, 1998) (commercial escrowacwunts). Moreover, we have recognized
that certain activities and services, such as- serving as document custodian or providing escrow or recordkeeping
services, do not require OTS-conferred trust powers. See. e.g . id; OTS Op. Chief Counsel (Jan. 3), 1994)( escrow,
safekeeping, custodial, and similar services). See also 12 C.F.R. Part 550 (2006).
31 The agency acted as custodian of certificates of CEDEL, a depository organization located in Europe that allowed
its members to effect transfers of securities in book entry form. The agency also provided related services. such as
785
:\
~ :
"
::
8
In addition, ministerial, non-discretionary support services "are permissible under a long
line of precedent recognizing that federal savings associations have incidental authority to
provide such services.,,38 These correspondent services are services that the federal savings
association "provides to others that the institution is authorized to generate in-house for itself in
the regular course ofbusiness.,,39 They typically include clearing checks, collecting debts,
participating in large loans, providing legal advice, assisting in building securities portfolios,
counseling as to personnel policies, training staff. helping with site selection. auditing, and
providing electronic data processing.
40
OTS has not limited permissible correspondent services
to those on this list, but, for example, has pennitted a federal savings association to provide
management and consulting services to foreign financial institutions.
41
Some of the services that OpSub-LLC would provide for customers are the types of
services that OpSub-LLC could perform for itself if it were engaging in the permissible activity
of buying and selling certain types of securities for its own account, subject to statutory and
regulatory limitations.
42
These include custody, order flow, and recordkeeping services. They are
authentication of certificates and clipping and presentation of coupons to the fiscal/paying agency for payment. OTS
Op. Chief Counsel 94-CC-09. at 4 (June 13.1994).
The global custody services that OTS permitted the agency to provide to broker/dealers. investment managers,
private institutions, and other members afthe public included:
reporting to customers regarding their holdings of different types of currencies,
analyzing and tracking of claims made to foreign nations for tax refunds; settling
customer instructions to purchase and sell securities; collecting dividend interest
and other sources of income on behalf of customers, and related processing
services; assisting customers in foreign exchange transactions; and providing
related recordkeeping. reporting and bookkeeping services.
Id at 2. OTS also pennitted the agency at times to provide settlement and intra-day and ovemight overdrafts relating
to settlement of customer security transactions and to provide safekeeping of securities certificates for customers. Id
As agent for its customers, the agency loaned U.S. and foreign securities collateralized by U.S. dollars. letters of
credit, or U.S. government securities and assist with related recordkeeping and reporting. Id at 3.
38 See, e.g., OTS Op. Chief Counsel, supra note 34, at 3.
39 OTS Op. Chief Counsel. supra note 34, at 3 (citations omitted).
40 OTS Op. Chief Counsel. supra note 34, at 3, citing United States v. Citizens & Southern National Danle, 422 U.S.
86. lIS (1975).
41 See OTS Op. Chief Counsel. at 9 (May 10, 1995) (advice regarding the internal procedures required to originate
pools of loans supporting residential mortgage-backed securities).
42 See, e.g., 12 U.S.C. 1 464(c)(I)(C)(U.S. govemmentsecurities). I 464(c)(J)(F) and (H)(other govemment and
state securities); 12 C.F .R. Part 560 (2006). An operating subsidiary of a federal savings association may only
engage in activities that are permissible for a federal savings association. 12 C.F.R. 559.3(e)(I)(2006).
786
9
correspondent services that are permissible incidental services, in addition to expressly
permissible services.
To determine whether providing clearing services for transactions involving a wider range
ofsecurities than those referenced in section S(c) of the ROLA and whether membership as a
clearing member of a secmities exchange are permissible as incidental activities, the first factor
that we consider is whether the activity is consistent with the Congressional purpose for federal
savings associations. In recent legislation, Congress accorded Savings associations parity with
banks with respect to broker-dea1er registration requirements.
43
Congress thereby evidenced its
belief that savings associations have the power to provide such services and that such power is
consistent with the purpose and role Congress envisioned for federal savings associations.
During the last several decades. Congress bas amended the ROLA to expand the powers of
federal savings associations and enhance the ability of federal savings associations to meet the
needs of their retail and commercial customers, while strengthening the safety and soundness
framework within which associations e x ~ i s e these powers. The amendments granted or
expanded lending' or investment authority for additional consumer products, commercial loans,
commercial paper, and nonresidential real estate loans, among others. Congress intended to
. provide federal savings associations "flexibility . to improve the range of services [that] thrift
institutions may provide to their customers. ,""
Providing clearing services for a broad range of securities, beyond those merely
referenced in section S(c) of the HOLA, 45 is entirely consistent with the role envisioned for
federal savings associations. Performing clearing services would not involve holding or
underwriting securities. Thererore any associated risks would be similar to acting as agent in
performing <?ther activities. This activity therefore would be consistent with the Congressional
purpose offederal savings associations, as reflected in the recently enacted legislation. Similarly,
the authority to clear and settle securities transactions as a member of a clearinghouse is
consistent with the Congressional purpose to permit a federal savings association to remain
competitive and relevant. To do s o ~ a' federal savings associati.on must be able to provide the full
range of services expected of a clearing broker. Granting federal savings associations parity with
respect to broker-dealer registration requirements.is a clear expression of Congressional intent.
The second factor tbat we consider is whether serving as a clearing member of a
securities exchange is an activity that is similar to, or would facilitate the conduct of, an activity
already expressly authorized for federal savings associations. Section S(cXl) of the ROLA and
the OTS's implementing regulation provide that a federal savings association has authority to
43 Financial Services Regulatory Relief Act of2006, 401(b), Pub. L. No. 109-351, (Oct. 13.2006). See note 22,
supra.
44 OTS Op. Chief Counsel P-98-9, at 4 (Aug. 19. 1998), quotingS. ConI. Rep. No. 641, 9'fhCong 2nd Sess. 87
(1982).
4$ These sec:urities are descn"bed in note 16, mpra. and accompanying text.
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10
provide"brokerage services for all loans, investments, and securities allowed under Section 5(c).46
LLC's ability to clear securities transactions by virtue of being a clearing-member, and for a
wider range of securities than merely those authorized in section S(c) of the ROLA, clearly
facilitates securities brokerage, an activity expressly authc?rized for federal savings associations.
47
The third factor that we:; consider is whether the proposed clearing and settlement
services, including membership in a clearinghouse for securities transactions, would relate to the
financial intermediary role that federal savings associations were intended to fulfill. The role of a
financial intermediary is to facilitate the flow of money and credit among different parts of the
economy. It illay do so through various means, such as receiving and transmitting funds,
borrowing from savers and lending to users, providing financial support for transactions, and
participatiJ).g in the capital markets.
48
The proposed clearing and services, as a
member of a clearinghouse, and for a wide range of securities, include of credit and
receipt and delivery of:funds and securities. These services are integral to the role -of the
tin iaI
te ediary 49
ane mrm .
The- fourth and (mal factor that we consider is whether the clearing and settlement
services are necessary for a federal savings association to remain competitive and relevant in the
modem economy. We observe that the Board ofOovemors of the Federal Reserve System
(FRB) by regulation pennits bank holding companies to provide clearing services on a securities
exchange "and incidental activities (including related securities credit activities and custodial
services), uthe securities brokerage services are restricted to buying and selling securities solely
- as agent for the account of customers and do not include securities underwriting or dealing.'.so
Regulation Y also permits bank holding companies to provide clearing services for any futures
contracts and options on futures traded on exchanges subject to two
conditions: first. the activity is conducted through a separately incorporated subsidiary, which
may engage in other activities; and second, the bank holding company parent does not provide a
guarantee or otherwise become liable to the exchange or clearing association other than for trades
conducted by the subsidiary for its own account or for the account of any affiliate.
51
46 See 12 U.S.C . 1464{c); 12 C.P.R. 560.30 (2006).
47 W. note that with respect to clearing transactions involving securities not aUthorized in HOLA section S(c),
OpSub-LLC would not be making investments for itself or engaging in underwriting.
41 OTSOp. Chief Counsel at S (Aug. 19. 1998), citing AutenY. United Stales Hal 'I Bank, 174 U.S. 125,
143 Accord. OCC Interpretive Letter No. 1014, at S Jan. 10. 200SXnationai banks may become netting
members of a clearing corporation, which includes participating in its loss allocation system, and may clear, net, and
settle U.S. government securities). -
49 See OCC Interpretive Letter No. 929, 5 (Feb. II, 2002)(clearing and execution activities are consistent with role
of financial intermediaries.).
50 Regulation Y. 12 C.F.R. 22S.2&{b)(7Xi) (2006).
51 12 C.F.R. 22S.28(bX7)(iv) (2006). In a revision of its Regulation Yin 1997.tbe FRB determined that
permitting the bank holding company to guarantee proprietary trades on a commodities exchange is appropriate. It
also determined that it no longer would require review of tile rules oca commodities exchange or clearinghouse
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