11

National banks are authorized by statute to buy and sell securities upon the order. and for the
account of, their customers.
52
The Office of the Comptroller of the Currency (OCC) pennits
. national banks and their operating subsidiaries to be clearing members of securities and
commodities exchanges if their potential liability can be limited. 53 In fact, the OCC determined
that national banks may be clearing members of, and own stock in, DTC over 30 years ago, and
may be clearing members of the Options Clearing Corporation over 20 years ago.
54
The ace
has also rnnittednational banks to clear and settle trades on the NSeC and own shares of the
NSee.
5
The aee has permitted national banks to participate in loss allocation schemes that operate
similarly to securities clearing houses if the banks can limit their potentialliability.s6 The oee
also has permitted national banks to be netting members in the Loss Allocation System of the
Government Securities Division (GSD) of the Fixed Income Clearing Corporation.
S7
More
recently. the oce determined that a national bank may be a member of an Independent Systems
Operator (ISO), which operates a clearing market for electric power and related products, when
the loss allocation fonnula did not place a cap on the non-defaulting memberS' potential
liability.s8 To remain competitive in the modem economy, a federal savings association. like a
bank, requires authority to offer securities clearing services.
before a bank holding company became a member: instead, i1 would rely upon its supervision of the risk
management systems of the bank holding company. See 62 Fed. Reg. 9290,930911 (1997).
52
12 U.S.C. 24 (Seventh) (West 2001).
53 See, e.g., OCC Interpretive Letter No. 929, at 5 n.26 (Feb. 11,2002).
S<! See OCC Interpretive Letter No. 929. supra note 53. at 7(Options Clearing Corporation) citing OCC Interpretive
Letter No. 421 (March 14, 1988), reprinted in [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH)" 85,645
(citing an unpublishe41etter dated Dec. 19,1975); OCC Interpretive Letter No. 372 (Nov. 7, 1986)(Options Clearing
Corporation).
55 OCC Interpretive Letter No. 929, supra note 53, at 7 (dictum).
S6 The OCC approved an application that permitted a foreign branch of a national bank to join the London
Clearinghouse (LCH) as a SwapClear member to clear interest derivative contracts, after finding that a member's
original default fund contribution served as a theoretical cap on contingent liability of a non--defaulting member of
. LCH for the default of other members. See OCC Interpretive Letter No. 929, supra note 53. at 3.
57 See OCC Interpretive Letter No.1 014, supra note 48, at S. aSD clears, nets, settles and manages risks for its
member firms (brokers, dealers, banks and other financial institution) arising from a broad range of U.S. government
securities tranSaCtions. IfGSD mutualizes Joss allocation obligations, a netting member may either payor terminate
its membership .. If it terminates, its loss is limited to its required fund deposit, Id.
S8 OCC Interpretive I.etter No. 1071 (Sept. 6, 2006). The OCC's conclusion rested largely upon consideration of
steps to mitigate the risk of a default allocation assessment. [d. at 4-12.
789
12
Whether the authority to engage in activities as a clearing member of a securities exchange
derives from express or inci4ental power, the activities present certain risks and potential
liabilities to a federal savings association. We will now discuss some of tile protections we want
to see in place to insure OpSub-LLC's ability to control risks and liabilities. We consider, for
example. that a clearing member of an exchange is subJect to two types of liabilities. incidental
and contingent. The first type is liability to the exchanges or their clearinghouses for the
performance of the trades of customers accepted for clearance ~ the clearing member. The
clearing member must make payment or deliver securities to the exchange even if its customers
do not perform. This liability is the functional equivalent of an extension of credit by the
clearing broker to its customers, and the clearing broker may seek repayIilent from defaulting
customers. The second type of liability is a partial contingent liability for the obligations of all
other clearing members to the clearinghouse. The rules of most clearinghouses provide that,
should a clearing member default and its margin and capital (including all deposits made to the
clearinghouse's back-up or guaranty funds) be insufticient to cover its obligations. the
c l e ~ u s e may reach the guaranty fund deposits of all other clearing members. on a pro rata
basis.
5
The clearing member may then become liable for an additional contribution. A limit on
this' second type of liability is a concern. 60'
Offering securines clearing services as a clearing member of an exchange presents the risk
that, for a customer trade that it has accepted, OpSub-LLC must make payment or deliver
securities to the clearinghouse even if its customer does not perform. OpSub-LLC would .
monitor the financial condition of its customers as part of its procedures to measure and monitor
risk, and the introducing brokers would institute procedures to ensure that the customers fulfill
their obligations.
61
Key to its ability to mitigate its risk, however, is the right of OpSub-LLC
under its agreements with its introducing brokers to refuse prospectively t ~ accept a trade for any
reason. These agreements also authorize OpSub-LLC to reimburse itself for a loss on a margin
loan to a customer through an escrow account that it requires tbe introducing broker to maintain
with OpSub-LLC or through a deduction from money that OpSub-LLC owes the introducing
broker for commissions. Without a time limit, its affiliated introducing brokers have ~ to
. indemnify OpSub-LLC for losses on margin loans made to their respective customers. We
conclude that OpSub-LLC would have ample means to control the risk that its clearing customers
do not perform.
The authority to offer clearing services presents the risk that OpSub-LLC may be
partially liable if another clearing member of the NSCC, DTC. or Options Clearing Corporation
St See OCC Interpretive Letter No. 1071, supra note 58, at 4.
60 See oce Interpretive Letter No. 929. supra note 53. at 4 &: n.19.
61 The introducing brokers 'rOuld require most customers to have sufficient fUnds in their brokerage accounts to pay
for securities prior to placing the order with OpSub-LLC. In addition, the introducing brokers would require most
customers to pay for securities purchased prior to delivery or deliver securities to be sold prior to payment.
62 OpSub-LLC would not clear securities transactions for broker-dealers trading for their own accounts.
790
..
13
defaults on its obligations to these cJearinghouses.
63
Multiple factors mitigate OpSub-LLC's
exposme to liability in the event of the default of another clearing member. The SEC and self-
regulatory organizations regulate these clearinghouses, which, in tum, regulate their members.
They would also act as functional regulators of OpSub-LLC.
You have represented that pursuant to the reorganization. OpSub-LLC would become a
member of only three clearinghouses of which LLC is currently a member. You have also
reviewed the rules of these clearinghouses and provided an analysis of the potential liability of
OpSub-LLC and factors that would limit this liability. Your analysis concludes that the
probability is low that any of these clearinghouses would assess OpSub-LLC for the default of
another member and thereby threaten the financial stability of the Association. Standard and
Poors has accorded all three clearinghouses "AAA" ratings. To date, you have discovered no
instanceS in which any of these clearinghouses assessed clearing members for the default ofa
clearing member rather than satisfY the liability from assets of the . defaulting member or its
reserve funds. Furthermore, these clearinghouses are parties to a multi-collateral cross-sharing
agreement, which provides that if an individual of multiple clearinghouses defaults on or
otherwise fails to meet its obligations, all collateral 'maintained by that individual member at
multiple clearinghouses would be applied to mitigate the loss caused by that member's default or
failure to satisfY its obligations.
In addition, the three clearinghouses would require OpSub-LLC to maintain deposits in
reserve funds in amounts that are relatively small compared to the total amount of deposits from
members that they hold. These relatively small amounts are a reflection that. if an assessment
were necessary, OpSub-LLC's share of any liability would be small.
Furthermore, the proposal does not expose the Association to potential liability to the
clearinghoU$es. The Association's separately incorporated operating subsidiary would be a
clearing member, and neither the Association nor any of its affiliates would guarantee the
obligations ofOpSub-LLC to the clearinghouses.
Despite numerous factors that mitigate the likelihood that a clearinghouse would assess
OpSub-:LLC for the default of another member, or that the Association would thereby suffer a
loss, we must consider the possibility. however unlikely, of catastrophic losses due to or
numerous defaults. To that end, we have reviewed your amlysis of the rules of the three
clearinghouses and detennined that OpSub-LLC may limit its liability for the default of another
clearing member through termination of its memberships in the clearinghouses.
Within ten business days after an assessment by the NSCC, a member may notify the
NSCC of its decision to terminate its membership and thus limit its liability to the. lesser of the
pro rata assessment or its required deposit in the reserve fund. If instead it pays the pro rata
assessment and replenishes its required deposit, it may be Hable for one or more subsequent pro
rata assessments relating to the same loss or liability. The may then limit its liability for
61 Neither the Association nor any other affiliate of OpSub-LLC has guaranteed the obligations of LLC to any
clearinghouse or exchange and do not contemplate providing a guarantee for OpSub-LLC's obligations.
791
14
future assessments by providing notice of its termiDation of membership. but its liability would
be the greater of the required deposit in the reserve fund or all the pro rata assessments made '
prior to its notification to the NSCC of termination of its membership.64 The NSCC also has an
addendum to its rules that sets forth its intention to apply at least 2S percent of its retained
earnings to cover any loss prior to imposing a pro rata assessment on nondefaulting members.
6S
This policy reduces OpSub-LLC's potential liability.
As a member ofDTC, OpSub-LLC similarly could limit its obligations to DTC based on
the default of another clearing member by providing notice of termination of membership within
ten business days of a pro rata assessment. The rules of the DTC differ from those of the NSCC,
in part because the DTC requires its members to pay into a reserve fund and purchase its
preferred stock. However, by giving notice within the ten-day period, the nondefaulting member
of DTC may limit its liability arising from the default of another member to the amount of its
required deposits and investment in stock ofDTC plus 100 percent of these amounts.
66
The Options Clearing Corporation, like the NSCC and the DTC. permits a member to
limit its liability for losses of another defaulting member through termination of its membership
in the clearinghouse . The member can limit its liability to the amount of its required contribution
to a reserve fimd plus 100 percent of that amount by providing notice of termination within five
business days of an assessment. 67 .
As the foregoing discussion demonstrates, the proposed clearing activities for a wide
range of securities and ~ proposed clearing memberships in securities clearinghouses meet all
of the factors commonly considered in the incidental powers analysis. Accordingly, we conclude
that under the incidental powers doctrine a federal savings association may (i) provide securities
clearing and related services, including transactions involving securities beyond those in which
the association is authorized to investby section S(c) of the HOLA, and (il) serve as a clearing
member of the NSCC, DTC, and Options Clearing Corporation. Based on the representations
64 See NSCC Rule 4. is, available aI http://www.nscc.comllegallnsccrulesrlldf(Nov. 1,2006).
55 See Addendum E toNSCC Rules, supra note 64.
66 Like the NSCC rules, the DTC Nles provide that if the nondefaulting member, instead of giving notice of
termination of membership within the ten-day period, pays the pro rata assessment and replenishes its required
deposit to the reserve fund, it would be liable for subsequent pro rata assessments relating to the same loss or liability
unless and until it provided notice of termination of membership. The member's maximum liability would then be
the greater of I} its required deposit to the reserve fund, plus 100 percent, or 2) all pro rata assessments made prior
to its notice of termination of membership. See DTC Rule 4, QVailable at
https:lllogin.dtcc.comldtcorg/bimuy/l9021 PTC%20RULESmO-%206-S-06%20-%20Current.pdf (Nov. 8, 2(06).
67 See Options Clearing Corporation By-Laws, Article VJIf, 6, available aI
hnp:Uwww.optionsclearing.com/publications/rules bylaws pdf/oce bylaws.pdf(Nov. 8,2006). After providing
notice ofwitbdrawal, the member also may not submit any more transactions for clearance through the Options
Clearing Corporation and must close out or transfer all open positions that it has with the Options Clearing
Corporation. Id
792
IS
and information you have provided, it appears that there are acceptable controls on any rl$ks
associated with clearing memberships in securities clearinghouses.
B. PermissiblUty of Paying Iaterest on Free Credit BalaDeeI
OTS regulations governing subordinate organizations provide that all federal statutes and
regulations apply to operating subsidiaries in the same manner as they apply to federal savings
associations, unless otherwise specifically provided by statute, regulation, or OTS policy.68
Section 5(b){1)(B)(i) of the HOLA, a provision pertaining to accounts, prohibits a federal
savings association from paying interest on a demand account. Pursuant to this provision, the
Association may not pay interest on a demand account. You inquire whether this prohibition
would apply to LLC after it becomes OpSub-LLC, a .registered broker-dealer operating subsidiary
of the Association, or whether OpSub-LLC would be able to continue LLC's current practice of
paying interest on customers' free credit balances. You indicate that under SEC Rule 15c3.2,70
customers' free credit balances are required to be payable by LLC on demand.71 For the reasons
set forth below, we conclude that the probibition against paying interest on a demand accoUl'lt;
although applicable to the Association, would not be to LLC after it becomes OpSub-
LLC, an operating subsidiary of the Association.
Our conclusion that S(b)(I){B)(i) of the HOLA would prohibit OpSub-li.C from
. paying interest on the free credit balances of customers is based on several factors. First, by its
tetms, S(b)(I){B) applies to "federal savings associations," which are federally insured,
depository institutions. The HOLA defines the term "savings association" to mean "a savings
association, as defined in Section 1813 of [TItle 12 U.S.C.1, the deposits of which are insured by
the [Federal Deposit Insurance] COrpOration" and the term "federal savings association" meanS
"a Federal savings association or a Federal savings bank chartered under section [S oftbe
. HOLA].71 Section 1813(b)(1) of Title 12 U.S.C. defines "savings association" to include "any
Federal savings association and any state savings association, and defines "Federal savings
association" to mean any Federal savings association or Federal savings bank chartered under S
of the HOLA. There is no reference in any of these definitions to subsidiaries. Thus, it is only
by reason of the OTS's subordinate organizations regulations that a question even arises about
&I 12 C.P.R. SS9.3(h) (2006).
&9 Section S(bXI XB) oCthe HOLA, 12 U.S.c. 1464(b)(1 )(B), provides "[a] Federal savings association may not -
(i) pay interest on a demand account; ... tt .
10 17 C.F.R. 240.1 Sc32 (2006).
71 You also represent that staff of the SEC "has infonnally advised [LLC] and the [Association1 that the reservation
of the right to require prior notice ofwithdrawaJ or trarl!;fer, which is necessary in order for a bank account to qualitY
as a NOW or similar interest-bearing transaction account, is inconsistent with SEC Rule ISc3-2.'
72 12 U.S.C. 1462(4) and (5). See also 12 C.F.R. S61.43 (2006), the OTS regulation that defines "savings
association" to mean"a savings association as defined in section 3 of the Federal Deposit Insurance Act, the deposits
of which are insured by the [Federal Deposit Insurance1 Corporation."
793
16
. the applicability of the 5(B)(1)(b )(i) prohibition to an operating subsidiary of a federal savings
association.
Second, a customer's free credit balance held by OpSub-LLC would not be a "demand
account" within the meaning of HOLA and OTS regulations. Under the HOLA. a
"demand account" is a "demand deposit acCOWlt.,,7 Under OTS regulations. a demand account
isdefmed as a non-interest bearing "demand deposit.,,74 OTS regulations define "account" to
mean a savings account, demand account, certificate account, or several other types of accounts,
whether in the form of a deposit or a share, held by an "accountholder" in a savings
association. ,,75 The term "accountholder" is defined as "the holder of an account or accounts in a
savings association insured by the Deposit Insurance Fund' (DIF).'6 (Emphasis added.)
Previously, we have determined that, despite the prohibition on payment of interest on
commercial demand df(posits" federal savings associations may sweep excess funds from their
deposit accounts into investments outside the association, such as government securities
repurchase agreements and mutual funds.
77
Based on your description, LLC is not, and OpSub-LLC will not be, a savings association
insured by the DIF. A customer ofOpSub-LLC, introduced by an introducing broker, would not
be the holder of an account or accounts in a savings association insured by the DIF. Therefore.
such a customer would not be an "accountholder" under eTS regulations. Similarly, after
OpSub-LLC is established as an operating subsidiaty ofllie Association, OpSub-LLC would not
be a DIF-insured savings association and would not have accountbolders, i.e., the holders of
accounts in a DIF -insured Savings association, within the meaning of eTS regulations. A
customer's free credit balance held by LLC-OpSub therefore would not be a "demand account"
within the meaning ofHOLA 5(b)(l)(B). In our view, the statutoty prohibition was not
intended to reach funds that are held by an entity that is not a DIF-insured, depository institution.
Third, a free credit balance is not an insured deposit The Federal Deposit Insurance Act
(FDIAf8 defines an "insured deposit" as a ''net amount due to any depositor for deposits in an
7) Section 5(bXIXA) provides that "ts]ubject to the tenns of its charter and regulations oftbe Director. a Federal
savings association may - (i) raise funds through such deposit. share, or other accounts. including demand deposit
account (hereafter in this section referred to as "accounts''); ... " 12 U.S.C. 1464(b)(I)(A).
74 12 C.F.R. 561.16 (2006).
75 12 C.F.R. 561.2 (2006). The HOLA does not define the term account" as i1 is used in 5(b)(IXB). See 12
U.S.C. 1461 et seq.
16 12 C.F.R. 561.3 (2006) as amended by 11 Fed. Reg. 19810-11 (April18, 2(06).
71 OTS 01'. ChiefCounseJ P-98-J (March 2. 1998)(repurchase agreements); OTS Op. CbiefCounsel P-2000-10
(August I, 2000)(murual funds). A sweep arrangement from a deposit account to another account in a depository
institution is impermissible if the accounts are commercial demand accounts, however. See OTS Op. Chief Counsel
P-98-1 (March 2, 1998).
7S 12 U.S.C. 1811 el seq.
794
17
insured depository institution .... ,,79 Because OpSub-LLC would not be an insured depository
institution, the free credit balances that it holds would not be insured deposits under the FDIA.
Therefore, to the extent the prohibition on payment of interest on demand accounts is related to
federal deposit insurance, the HOLA 5(b)(1)(B)(i) prohibition is inapposite.
We also note that. like LLC. after the proposed reorganization OpSub-LLC would be a
registered broker-dealer. Although it would be an operating subsidiary of the Association,
OpSub-LLC would be a functionally regulated entity. subject to the supervision, examination,
and enforcement authority of the Securities and Exchange Commission (SEC) as its primary
80 .
regulator, as well as OTS. Thus, SEC Rule 15c3-2 would apply to OpSub-LLC. This rule,
which requires that funds arising out of any free credit balances be payable on demand,81 is
predicated upon the assumption that earnings on a free credit balance belong to the customer. If
these earnings are considered interest on a demand deposit, Rule 15c3-2 .conflicts with HOLA's
prohibition on payment of interest on demand deposits.
Generally. OTS regulation 559.3(h)(1) would require that a provision inHOLA apply to
OpSub-LLC in the same manner as it applies to federal savings associations unless otherwise
provided by statute, policy. or regulation. In this instance, even ifHOLA's prohibition on
payment of interest on demand deposits applies to a broker-dealer operating subsidiary, the
SEC's conflicting Rule 15c3-2 would provide that the HOLA prohibition would not apply.
We note that similar prohibitions against paying interest on demand accounts exist with
respect to other types of depository institutions and that other federal banking regulators have
construed such prohibitions in a manner that would not preclude the payment of interest on free
credit balances in accounts with affiliated broker-dealers.
82
OTS previously has followed
interpretations of the FRB and the FDIC regarding the prohibition of payment of interest on
demand accounts.
83
Section 19(i) of the Federal Reserve Act prohibits member banks from
7 ~ 12 U.S.C. 1813(1) and (m).
80 See.OTS Holding Companies Handbook Section 200. at 200.2 - 200.4. The Handbook. for example. identifies
registered broker-dea1ers as being regulated by the SEC and the NASD and establishes procedures for purposes of
regulatory coordination and communication when a functionally regulated entity is a subsidiary of a thrift.
Sl See 17 C.F.R. 240.1 Sc3-2 (2006). This rule provides that a broker-dealer may not use earnings on its
customer's free credit balance to operate its business unless, at least once every three months, it provides the
customer a written notice stating that the funds are not segregated and may be used to operate the brokerage
business. The written notice must also advise the customer that the funds are available upon demand. The rule
applies unless the broker or dealer is a banking institution supervised and examined by state or federal authority
having supervision over banks. Here OpSubLLC would not be a "banking institution," however.
82 Prohibitions that apply to banks are similar, but not identical, to the prohibition on payment ofinterest on demand
deposits by federal savings associations. In this regard, we note that other insured depository institutions may pay
interest on retail demand deposits. See 12 U.S.C. 371a (member banks); 12 U.S.C. 182S(g)(insured nonmember
banks and insured branches offoreign banks).
8] See OTS Op. Chief Counsel. at 3 (May 29, 2003)(federal savings associations may provide reward points to
customers who use Visa U.S.A. Inc. debit cards to access demand deposit accounts); Memo. OTS Chief Counsel p_
795
18
paying interest on demand deposits except for those held by individuals. 84 The FRB has defined
"interest" as "any payment to or for the account of any depositor as compensation for the use of
funds constituting a deposit" 8S For purposes of section 19(i). the FRB has adopted the
definition of "deposit" used in its Regulation D, Reserve Requirements of Depository
Institutions.
86
A "deposit," in pertinent part, therefore means:
The unpaid balance of money or its equivalent received or
held by a depository institution in the usual course of business and
for which it has given or is obligated to give credit, either
conditionally or unconditionally, to an account, including interest
credited, or whichis evidenced by an instrument on which the
depository institution is primarily liable.
(emphasis By regulation, the FRB has limited the prohibition on payment of interest on
commercial demand deposits to accounts held it) depository institutions. 88
The FRB's limitation of the prohibition to accounts in depository institutions is in
its orders that permit nonbank subsidiaries of bank holding companies that are securities broker-
dealers to pay interest on credit balances. Without discussion of the prohibition of payment of
interest, the FRB determined that carrying customer credit balances awaiting investment and
paying interest on them are activities incidental to permissible securities brokerage and thus
permissible for a broker..dealer subsidiary of a bank holding company.89
The oce filed a comment letter that strongly supported the FRB's initial approval of
paying interest on credit balances of customers of a brokerage subsidiary of a bank holding
98-1 (March 2, I 998)(reviewing types of sweep accounts.that federal banking agencies determined did not violate
the prohibition on payment of interest on demand accounts).
84 See 12 U.S.C. 371a. See also 12 C.F.R. 217.3 (2006).
as See 12 C.F.R. 2J7.2(d) (2006)(ReguJation Q) (2006). The definition also provides that "[aJ member bank's
absorption of expenses incident to providing a normal banking function or its forbearance from charging a fee in
connection with such a service is not considered a payment of interest." Id Section 19(a) aCthe Federal Reserve
Act, 12 U.S.C. 461(a). authorizes the FRB to define tenns and prescribe regulations to implement section 19(i).
86 12 C.F.R. 217.2(b) (2006XRegulation Q).
S7 12 C.F.R. 204.2(a)(I) (2006)(ReguJation D).
S8 See 12 C.F.R. 204.2(a) and 2172(b) (2006).
89 See, e.g., United Jersey Banks. 69 Federal Reserve Bulletin 565 n.6 (1983)(acquisition of discount broker Richard
Blackman &. Co., which would pay interest on Some credit balances awaiting investment); BankAmericQ Corp., 69
Federal Reserve Bulletin 105, n.1 I (1983)(acquisition of discount broker Charles Schwab Corp .. which would pay
interest on idle credit balances to be swept into an unaffiliated money market mutual fund or unaffiliated commercial
bank). The U.S. Supreme Court upheld the FRB's approval of BankAmerica's acquisition of Charles Schwab
without discussion of tile permissibility of payment of interest on credit balances. See Securities Industry Ass 'n v.
Board of Governors of the Federal Reserve System, 468 U.S. 207 (1984),
796
19
company. The oce advised that paying interest on balances arising from brokerage
transactions is incidental to permissible securities brokerage activities and "obviously a banking
function'" that is "currently performed by commercial banks." The oce therefore urged the FRB
to determine that paymfo interest on these credit balances is closely related to banking and a
proper incident thereto.
Several months after filing its comment letter urging the FRB's approval of a bank
holding company's acquisition ofa broker-dealer, the OCC approved a national bank's
establishment of an operating subsidiary that would conduct discount securities brokerage
activities. The ace concludeds' albeit in a context other than section 19(i), that credit balances
arising in cotmeetion with securities brokerage transactions are not deposits, and that a national
bank's discount brokerage operating subsidiary that maintains and pays interest on customer
credit balances would not be receiving deposits.
91
The ace distinguished credit balances arising
incidentally to brokerage activities on fimctional and legal grounds from bank deposits, noting
that
[blank deposits are. generally funds placed with a depository
institution for the primary purpose of safekeeping, eaming a
return in the form of interest, or facilitating payments to third
parties. They may be withdrawn at the discretion of the depositor
under the tenus and conditions of the account The receipt of
deposits is a principal function of banks. which publicly solicit
deposits to provide funds to be used in the banks' lending business.
Credit balances maintained by brokers, on the other hand, arise in
connection with securities transactions of customers and, as such.
are not directly solicited from the public. Indeeds the Securities
Investor Protection Act, ... operates to restrict the advertising.
promotional and selling practices of brokers regarding interest-
bearing free credit balances. ... Further, there are specific regulatory
restrictions regarding the use of credit balances by brokers.
Finally, the OCC noted that the meaning of the term "deposit" may be different, depending upon
the statutory or regulatory context 91
90 Su oce comment on BankAmerica Corp.s Proposed Acquisition of Charles Schwab Corp., 1982 OCC QJ
LEXIS 1179 (June] 0, 1982). The commen1ietter did not state whether the brokerage activities were conducted
directly in the banks and the resulting credit b8lances held by the banks, rather than in operating subsidiaries. Id
91 The oce conc::ludcd that credit balances are not deposits within the meaning of the McFadden Act, and that
therefore the offices at which the discount brokerage would offer its services would not constitute "branches" under
the McFadden Act because none of the statutory branching functions - receiving deposits, paying checks, or lending
money - would be performed. Decision of the ace on the Application by Security Pacific National Bank to
Establish an Operating Subsidiary to Be KuOWD as Security Pacific Discount Brokerage Services. Inc . 1982 oce
QJ LEXIS 1287 (Aug. 26, 1982). .
92 The oce stated "[e]ven assuming that credit balances are treated as deposits for the narrow monetary control
purposes of Regulation 0, however, it should be recognized that the meaning of deposit may be different in other
regulatory or statutory contexts, such as under the MeFadden Act." Decision of the Dec on the Application by
797
20
In the context of the prohibition of payment of interest on commercial demand deposits,
both the acc and FRB have distinguished between free credit balances in a securities brokerage
account and deposits in a depository institution. The acc's comment letter and the FRB's
subsequent approval of an application in 1983 thus indicate that the permissibility of payment of
interest on customer credit balances by brokerage affiliates of national banks and bank holding
companies is well established.
The pennissibility of payment of interest on customer credit balances by brokerage
affiliates of nonmember, insured banks is also well established. Like section 19(i) of the Federal
Reserve Act and Regulation Q,93 the Federal Deposit Insurance Act and FDIC regulations impose
a prohibition on the payment of interest on commercial demand deposits in insured nonmember
banks. The Federal Deposit Insurance Act provides that exceptions to the prohibition shall be
made the same as exceptions to the prohibition applicable to member banks.94
In responding to a bank's proposal to establish a sweep account for certain customers, the
FDIC indicated that such an account would not violate the FDIC regulation prohibiting state
nonmember banks from paying interest on demand deposits.
9S
The FDIC characterized the issue
as "whether the investment account, or the sweep account arrangement as a whole, violates the
prohibition on the payment of interest on demand deposits. U Concluding that neither the
investment account nor the sweep arrangement violates the prohibition, the FDIC reasoned,
citing 1831 (1). that funds in the investment account do not constitute a demand deposit within the
meaning of FDIC regulation 329.1 because "deposit" refers to money or its equivalent
"received or held by a bank or a savings association." Since a'mutual fund is not a bank, funds in
the investment account are not deposits under section 3(1) of the FDIA. In addition. the FDIC
concluded that earnings on the funds in the investment account are not "interest" within the
meaning of FDIC regulation 329. 1 (c) because the earnings are not "payment to or for the
account of any depositor as compensation for the use of funds constituting a deposit" and the
earnings are not paid by the bank. Thus, the FDIC, like the FRB and acc, would not apply a
statutory prohibition on the payment of interest on demand deposits to the payment of interest
Security Pacific National Bank to Establish an Operating Subsidiary to Be Known as Security Pacific Discount
Brokerage Services, Inc., 1982 OCC QJ LEXIS 1281 (Aug. 26. 1982).
93 12 U.S.C. 371a; 12 C.F.R.. Part 217 (2006).
94 12 U.S.C. 1828(g). See a/so 12 C.F.R 329.2 (2006)(FDIC implementing regulation).
95 FDIC Advisory Opinion #00-2 (April 4.2002). available at http://www.fdic.gov/regulationsllaws/rulesl4000-
I 0040.html (July 28, 2006). The sweep account would be linked with an investment account maintained at a money
market mutual fund operated by unaffiliated third parties; the bank would not own or operate the money market fund.
The FDIC distinguished its Advisory Opinion #92-27, in which it concluded that a sweep account violated the
prohibition of payment of interest on demand deposits: 1) in the earlier opinion tbe demand deposit account and
investment account were both in the bank: 2) the customer could automatically transfer funds between the two
accounts; and 3) the bank paid interest on the account that violated the prohibition. whereas in the sweep
arrangement at issue in Advisory Opinion #00-2, the Money Market Fund paid the customer earnings from the
fund's investments. /d. un.1.
798

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21
from earnings on customers' free credit balances held in a broker-dealer subsidiary of an insured
depository institution.
Conclusion
We conclude that federal savings associations may conduct the clearing activities
currently being conducted by LLC. as described in the Background section hereof. Accordingly.
after the reorganization, when LLC becomes OpSulrLLC. an operating subsidiary of the
Association. OpSulrLLC may continue to conduct such clearing activities subject to supervisory
conditions established by the OTS's Southeast Regional Office. Further, we conclude that the
payment of interest on customers' free credit balances by OpSub-LLC would not violate the
HOLA 5(B)(1)(b)(i) prohibition against paying interest on demand accounts.
In reaching the foregoing conclusions, we have relied on the factual information and
representations contained in the materials you submitted to us and in subsequent discussions with
OTS staff. Our necessarily depend upon the accuracy and completeness of such
information and representations. Any material difference in facts or circumstances from those
described herein could result in different conclusions.
If you have any questions regarding this matter, please contact Martha Vestal Clarke,
Counsel, at (202) 906-6087 or Vicki Hawkins-Jones, Special Counsel, at (202) 906-7034.
cc: Regional Directors
Regional-Counsel
799
Sincerely,
/s/
John E. Bowman
Chief Counsel
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UNITED WESTERN BANK
LIQUIDITY POLICY and CONTINGENCY FUNDING
PLAN .
Approved by Resolution of the Board of Directors dated
UNITED WESTERN BANK
Uquldity Policy
May 7, 2010 .
May 7,2010
809
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
AssetlLiability Committee ("ALCQ") 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 profile, and scope of operations.
Thus, it win 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 asset/liability management.
n. 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
810
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 AssetJLiability 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 litliited 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
Nlay7,2010
811
3
j
\
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
UNITED WESTERN BANK '4
Liquidity Policy
May 7,2010
812
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 profile.
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 Activity
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 CFO, 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 ALCO 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
813
Liquidity Risk
Contingency Funding Plan Targets
Measurement of Liquidity Risk Metrics
Trade Confirmation/Entry/Reconci1iation
Credit Risk
Overall Policy Compliance and Adequacy
Determination of Brokered Deposit Designation
m. 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 trianner and cover
both expected and unexpected deviations from normal operations without
incurring unacceptable losses. This. entails ensuring sufficient funds are available
at a reasonabie 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 WESTERN BANK
Uqulclity Policy
May 7. 2010
6
814
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 e8mings 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
perfonnarice. .
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 assetlliability
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 and/or with
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
7
815
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 plarining, 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 I 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
premium 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
816
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 A TMs 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 alld investment securities
principal and/or interest payments or sales.
S. Scheduled or allticipated (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 defmed 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 and/or Trust Deposits that can be
gathered quickly based on key and longstanding relationships between the
Bank, its management, and various processing and/or trust companies.
UNITED WESTERN BANK
Uquldlly Policy
9
May 7, 2010
817
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 allowing the Bank to utilize this source
without specific FDIC approval. Alternatively, 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 of BOLl 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 timing 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.
UNITED WESTERN BANK
Liquidity Policy
May 7. 2010
10
818
LIQUIDITY RISK METRICS
NOTE: Many of the limits and guidelines listed below were adopted by the Board on
April 8, 20 I O. 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, 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. 100%
Tier 1 Liquidity to 60 day maturity of time deposits plus 5% attrition 100%
of non-maturity retail deposits. .
Tier 2 Liquidity to 120 day maturity of time deposits plus 10% 100%
attrition of non-maturity retail deposits.
Unencumbered securities and investments plus cash to 30 day 150%
maturity liabilities plus 5% attrition of non-maturity retail deposits.
MAXIMUM LIMIT
Pledged securities*ffotal investments plus cash. 65%
Avg. Total Investments plus cash to Avg. Total Assets. 15%-35%
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) I Total Deposits.
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
819
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 and/or processing accounts,
trustees, etc. with less than one year remaining to contractual
maturity. **
Percentage of deposits from anyone source including customers, 25%
deposit aggregators, individual trust and/or 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 will 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 of limits 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 defmed 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 ofless than one year for the purpose of this
calculation.
LIQUIDITY MONITORING
UNITED WESTERN BANK
Liquidity Policy
May 7, 2010
12
820
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 ALCO 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 normal conduct of business. For example:
a. Weekly Executive Staffmeeting.
b. Pricing discussions as needed between senior bank 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
Downgrades of credit rating by rating agencies
Customers are contacting relationship managers, fixed income sales
representatives, and branch employees requesting information
Other secondary market 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 Bank'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
liquidity Policy
May 7.2010
13
821
the Bank. Management will be cognizant of signs of funding deterioration to
include:
Increasesin 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 turn;.cIowns 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 atleast 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
Liquidity Policy .
May7,2010
822
14
This Policy will be 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.
vn. 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 tenns 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 spread, net
interest margin, and profitability. .
UNITED WESTERN BANK
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VBI. 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 at ALCO
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 :finn:s 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: Bank CFO, 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 FHLBank of 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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824
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 (FHLB) 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 abroad 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 instruments pledged.
Periodically at the direction of ALeO, 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 Stage2 or Stage 3 LiqUidity Risk, depending on.a11 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 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 ALCO 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 potent\al 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 fo,l' increases in collateral, and other
features that may affect the Bank's liquidity and earnings.
UNITED WESTERN BANK
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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 m a n a g e ~ e n t processes for controlling risks, including interest rate
risks arising from the borrowings and liquidity risks. Contingent funding plans
shall encompass the potential for agreement tenninations. 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. COMPLEX WHOLESALE BORROWINGS
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 featw'es over the expected life of the contract.
Completion of stress testing prior to and periodically thereafter, entering into
borrowing agreements.
UNITED WESTERN BANK
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When relying on third party testing, review underlying assumptions and test
results.
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,
especially 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 Defmitions 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 broke ring 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 determine whether or not a deposit would
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 FDICIA limits on the use of
brokered deposits, as follows:
UNITED WESTERN BANK
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D insured depository institutions may accept, renew, or roll
over brokered deposits without first obtaining a waiver from the FDIC. A
institution is one that has a total capital ratio of
10 percent or greater, a tier 1 capital ratio of 6 percent or
greater, and a leverage ratio of S percent or greater. Also, it is not subject
to any fonnal written agreement, order, capital directive, or prompt
corrective action directive to meet and maintaina specific capital level for
any capital measure.
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
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
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 capital ratio
of less than 8 percent, a tier 1 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 7S 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 capital ratio of 10 percent; Tier 1
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 basis.
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If the Bank is designated as less than well-capitalized by the regwatory 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 brokered
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 bea 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 orga.ni.za.tion'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 ofbrokered deposits .
Recent consolidated statement with balance sheet and income statements
Reasons that the board ofdirectors and management have considered the
acceptance, renewal, or roll over of brokered deposits pose no undue risk
to the Bank
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.
UNITED WESTERN BANK
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May 7, 2010
829
The Chief Accounting Officer and/or 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 arid 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 fimding 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 managemeIit 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 shall 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 s1rategies 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 ins1ruments
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, ifany, 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 members to understand the severity of the Bank's
circumstances and to implement appropriate responses
UNITED WESTERN BANK
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831
The Bank's CFP will be reported and approved by the Board on at least an annual
basis to ensme it remains a practical and useful management tool. Appendix A is
the Bank's CFP.
UNITED WESTERN BANK
Uquidity Polley
May 7. 2010
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832
/
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:
I) Define the level or stages of a potential funding crisis;
2) Define 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 activitie!? a carefully designed
framework is in place to govern this activity. The framework is built on senior
management accountability and oversight, policies and procedures, segregation of
duties, limits, and risk-management culture consistent with the goals of the Board of
Directors.
1) Define 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 Course 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
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833
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
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 all approved deposit and funding sources.
Stage 2 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 c!lnsecutive months, or if the ALCO detenlunes that multiple
Contingency Funding Triggers demonstrate a deteriorating trend. If these conditions exist
and ALCO does not declare a Stage 2 event, a written summary 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
funding 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 summary of the decision will be
provided to the Board Investment Committee.
UNITED WESTERN BANK
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26
CONTINGENCY LIQUIDITY PLAN TRIGGERS
Increasing level of delinquent and non.
current loans-
% ofloans 90 days Past Dueffotal Loans
% of Non-accrual LoanslTotal Loans
Net Short-Term 30 days) Fed Funds
Bought/Sold
% Non-corelNon-relationship 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
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May 7. 2010
835
Current
Last
Month
3
Months
Ago
6
Months
Ago
27
1
mot
Aj
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. 1bis 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
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28
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 a5% 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 govemed 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 1, 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 t h ~ 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 exteri.sion 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 Bank. It is physically impossible for the trust and
UNITED WESTERN BANK
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May7,2010
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29
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
non-objection 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 calion 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
838
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 BOLI. 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 and/or 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. within 5 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 and/or
diminished revenues to accomplish the task. Upon BSS review, the Plan will be shared
with the President - CEO and/or the Executive Committee.
UNITED WESTERN BANK
liquidity Policy
May 7,2010
31
839
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. Proforma 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
and/or 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 and/or 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
asFHLB, bank line providers, FRB and institutional depositors and report weekly to BSS
Group. Plan may consider increasing cash held in branches and AIMs 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 Chairman will be the primary contact point and manager of a CFP
UNITED WESTERN BANK
Liquidity Policy
May 7,2010
32
840
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 communicatioIl! 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 Con1mittee. The President - CEO
will manage communication with Board. BnOs and Regional Presidents are
responsible for managing communicatioris 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 the CFP
Testing the CFP, done properly, can greatly increase the likelihood of effective liquidity
risk management.
The Chief Investment Officer and Assistant Treasurer will maintain a log of various third
party funding sources and report to ALCO quarterly on the 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 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
May7,2010
841
33
Step 1 Initial requests for funds will be met out of the Bank's short-term cash and
equivalent position (e.g. fed funds sold). This would provide the least
expensive source of funds.
Step 2 The Bank's membership in FHLB gives it ready access to the FHLB's
advances program utilizing qualifying collateral.
Step 3 A c q ~ 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 mortgage
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 nonna1
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
34
842
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 by ALCO.
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.
XIIT. 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
Uquidlty Policy
May 7, 2010
35
843
CONTINGENCY PLAN SUMMARY
PLAN SUMMARY AS OF: _May 7,2010, ____ _
United Westem Bank
Hypothetical Contingency 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 securitizations
4 Loan sales or participations
5 Other asset sales
UNITED WESTERN BANK
Uquldlty Policy
May 7, 2010
844
Dollars
(in thousand
333.822
-
-
45000
-
191 055
-
569877
100000
100000
-
-
5,000
205,000
20100
25000
Description
s).....-__ -;
1-__ -1 From daily liquidity
Est Cost
1--__ -1 $20 M securities, $25 million
36
ALCO Committee Composition (as of May 7.2010) :
Chainnan - Holding Company
President! CEO Bank
ChiefInvesbnent 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 Invesbnent Officer
Chief Credit Officer or designee
Chief Operations Officer or designee
Controller
Assistant Treasurer
AppendixB
Others as may be appointed by CFO/CAO or COO depending on
circumstances
UNITED WESTERN BANK
Uquidlty Policy
May 7,2010
37
845
TabC
Exhibit 25 J
846
I Exhibit J I
847
Aauts
Cash and due from banks
Interest-earnlng deposits
Total cash Bnd cash equivalents
Investment securitiell-Bvaftable for sale, at fair value
Investment securitlall-held to maturity
Loans held for sale-at lower of cost or fair value
Loans hetd for Investment
Allowance for credit losses
Loans held for nat
FHLBank stock, at cost
Mortgage servicing rights, net
Accnued Interest receivable
Other receivables
Premises and equipment, net
Bank ownecllife Insurence
Othar assets, net
Income tax receivable
Deferred Income taxes
Foredosecl real estate
Total assets
Liabilities and shareholdera' equity
Liabilities:
Deposits
Custodial escrow balances
FHLBank borrOWIngs, nat
Borrowad money
Other liabilities
Total liabilities
Shareholders' equity:
Common stock
Additional paid-In capital
Retained earnings
Accumulative other comprehensive (loss) Income
Total shareholders' equity
Total liabilities and sharaholdera' equity
Difference
United Western Bank.consolidated
Balance Sheet for SEC Reporting/BOD Summary
Balance Sheet - Current Period
Fcrthe Period from June 30, 2010 to June 30, 2010
(Amounts are in USO)
BalanCB
13,983,412.39
248,176,440.17
262,159,852.56
173,475,593.79
293,413,490.78
279,216,529.16
1,103,022,813.9
(43,424,704.63)
1,059,598,109.3
9,513,200.00
6,289,134.92
6,869,309.18
11,387,525.40
22,893,827.27
26,648,988.22
2,965,460.38
24,711,410.80
11,441,705.56
14,220,037.09
2,204,804,172.4
1,739,565,425.4
31,952,627.17
169,184,178.02
90,842,849.83
13,483,641.76
2,D45,028,720.2
112,500.00
164,960,745.59
(1,035,073.72)
(4,262,719.72)
159,775,452.15
2,204,804,172.4
848
July 30, 2010 11:28 AM
Page
Wuhl

,
Unitad West8m Bank.conaolldated
Income Statement for SEC ReportinglBOD SUmmary
Quarterly Income Statement
Forlhe Period framApril1, 2010 to June 30,2010
(AmounIIantln USO)
CUl'l'8nt
Quarter Prior Quartar Ynr-to-Datlt
Interest and dividend Income:
Community bank loan.
14,330,618 14,067,110 28,417,728
Residential loans
2,669,210 2,641,761 5,510,9111
Other loans
271,770 262,729 554,499
Inll8l1ment securHIes
4,591,655 4,272,447 8,864,102
Deposits and dividends
386,391 810,539 996,930
Totel interest and dMdend income
22,249,644 22,064,607 44,344,251
Interest expense:
Deposits
3,306,099 3,810,343 7,118,442
FHLBank bonowing
921,134 1,052,926 1,974,060
Other borTowed .money
979,454 900,128 1,879,580
ToteIlnterest expense
5,208,667 5,783,396 10,972,062
Net Interest Income before provision for credillosses
17,040,957 16,331,211 33,372,169
Provision for credillosses
4,731,428 14,222,908 18,954,336
Net Intsre&llncome after provision for credlll-
12,309,530 2,106,304 14,417,833
Nonlntsre&l income:
Loan administration
1,065,347 1,010,530 2,075,877
Gain on seIe of loans held for sale
1,544,154 595,847 2,140,000
Gain (loss) on sale of avanable for salelnll8l1ment seCil
Total oIher-than-temporary Impairment 1-
(5,861,735) (4,728,158) (10,389,891)
Portion of loss recognized In OCI (before taxes)
353,476 451,242 804,718
Net Impairment losses recognized In earnings
(5,308,258) (4,276,914) (9,585,173)
Other
465,935 452,145 916,080
Totel nonlnteresllncome
(2,232,822) (2,218,392) (4,451,215)
Nonlntsrest expense:
Compensstion and employee benellls
4,722,552 4,670,472 9,393,024
Subaccounting fees
6,028,712 7,033,980 13,062,693
Amortization of mor1gage servicing rights
552,899 574,121 1,126,820
Lower of cost or fair value adjustment on loans HFS
821,859 558,341 1,378,200
Occupancy and equipment
933,383 780,485 1,693,889
Postage and communication
142,758 142,078 264,833
Professional faes
741,395 548,781 1,290,176
Mortgage seNiclng rights subseNlclllQ faa
311,118 318,787 627,864
Other general end administrative
8,838,188 7,364,583 14,200,751
Total nonlntsresl expense
21,090,643 21,987,807 43,058,250
Income (loss) before Income taxes
(11,013,938) (22,077,695) (33,091,832)
Income tax (benelll) provision
131,480 (1,083,255) (931,775)
Nat Income (Loaa)
(11,145,41') (21,014,441) (32,1&8,8&7)
849
July 30,2010 11:29 AM
Page
Uuhl
Allocations
Net Income (I.oss) after Allocations
United Western Bank-Consolldated
Income Statement for SEC ReportinglBOD Summary
Quarterly Income Statement
For the Period from April 1, 2010 to June 30, 2010
Current
Quarter Prior Quarter Year-to-Date
(11,145,416)(21,014,441) (32,159,857)
850
July 30, 2010 11 :29 AM
Page 2
LJuhl
TabC
Exhibit 25 K
851
I Exhibit K I
852
FDII
Federal Deposit Insurance Corporation
550 17th Slreet NW. Washington, D,C, 20429-9990
LaWl'ence D.Kaplan
Paul, Hastings, and Walker LLP
875 15
m
Street, N.W.
Washington, D.C. 20005
July 27, 2010
Subject: United Western Bank - Request for Clarification
Dear Mr. Kaplan:
DivIsIon of Supervision and Consumer Protection
Thank you for meeting with me and my Washington Offiye associates on June 30, 2010,
to discuss the FDIC's May 24,2010, Broketed Deposit Detennination (Detennination). This
letter is in response to. your July 8, 2010, follow-up 'letter requesting additional clarifYing
information pertaUrlng to this Determination, which affects several of the Bank's institutional
deposit relationships. More specifically, your letter requests that the FDIC provide additional
information to clarifY its Determination that certain institutional deposit account relationships are
deemed brokered and its preliminary findings that sub-aecounting fees the Bank pays to certain
institutional depositors can be considered enhancements to the effective yield of those deposits.
In your letter. you also inquired about the applicability of FDIC Advisory Opinion OS..()2, and
whether there are other regulatory concerns related to these or any other similar types of
brokered deposit relationships.
During this meeting you brought to the FDIC's attention that there may be additiohal or
supplemental infonnation related to certain institutional deposit accounts that may not have been
available or considered during the Dallas Regional Office's (DRO) initial review. In response,
the DRO sent a letter to the Bank on July 8, 2010, requesting this infonnation, as well as other
infurmation the DRO deemed necessary. This information will be properly considered as to its
bearing upon or impact on the FDIC's Determination and the Bank's pending Brokered Deposit
Waiver Request. The FDIC will notify the Bank of its findings after our review of this
information is complete. We expect our findings win satisfactorily address any clarification you
seek and/or inquiries you have raised in your letter to me.
As a reminder, the Bank has 60 days from the date a material superv.isory determination
has been rendered to file a request for review. In this case, the Bank received the Determination
on June 2, 2010, and as reflected in Director Thompson's July 27. 201 0, letter to the Bank (in
response to its extension request); the Bank has been 'granted an extension of time until
October 2, 2010, to file a formal request for review. As stated therein, the request for review
should be referreddirectIy to Sandra Thompson, Director, FDIC's Division of Supervision and
Consumer Protection, 550 17
th
Street, N.W. Washington, D.C. 20429.
Finally, apart from the issues discussed herein, the FDIC has not identified any other
brokered deposit or'rate restriction related matters that may potentially impact the Bank.
853
Thank you again for your letter concerning these important matters. Should you have
any further questions, please contact me at (202) 898-8996.
Siner y ~
, - - , - , ~ " " a Owens
Associate Director
854