0789-0854 [tab c exs. 25(f)-(k)] (public)

8/3/2019 0789-0854 [Tab C Exs. 25(f)-(k)] (PUBLIC)

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11

National banks are authorized by statute to buy and sell securities upon the order. and for theaccount of, their customers.52 The Office of he Comptroller of the Currency (OCC) pennits. national banks and their operating subsidiaries to be clearing members of securities andcommodities exchanges if their potential liability can be limited.53 In fact, the OCC determinedthat national banks may be clearing members of, and own stock in, DTC over 30 years ago, andmay be clearing members of the Options Clearing Corporation over 20 years ago.54 The acehas also rnnittednational banks to clear and settle trades on the NSeC and own shares of theNSee.5

The aee has permitted national banks to participate in loss allocation schemes that operatesimilarly to securities clearing houses i f he banks can limit their potentialliability.s6 The oeealso has permitted national banks to be netting members in the Loss Allocation System of theGovernment Securities Division (GSD) of the Fixed Income Clearing Corporation.S7 Morerecently. the oce determined that a national bank may be a member of an Independent SystemsOperator (ISO), which operates a clearing market for electric power and related products, whenthe loss allocation fonnula did not place a cap on the non-defaulting memberS' potentialliability.s8 To remain competitive in the modem economy, a federal savings association.like abank, requires authority to offer securities clearing services.

before a bank holding company became a member: instead, i1 would rely upon its supervision of the riskmanagement systems of he 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


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12Whether the authority to engage in activities as a clearing member ofa securities exchangederives from express or inci4ental power, the activities present certain risks and potentialliabilities to a federal savings association. We will now discuss some of ile protections we wantto see in place to insure OpSub-LLC's ability to control risks and liabilities. We consider, forexample. that a clearing member of an exchange is subJect to two types of liabilities. incidentaland contingent. The first type is liability to the exchanges or their clearinghouses for theperformanceof he trades ofcustomers accepted for clearance the clearing member. Theclearing member must make payment or deliver securities to the exchange even i f ts customersdo not perform. This liability is the functional equivalent of an extensionof credit by theclearing broker to its customers, and the clearing broker may seek repayIilent from defaultingcustomers. The second type of iability is a partial contingent liability for the obligations of allother clearing members to the clearinghouse. The rules ofmost clearinghouses provide that,should a clearing member default and its margin and capital (including all deposits made to theclearinghouse's back-up or guaranty funds) be insufticient to cover its obligations. thec l e ~ u s e may reach the guaranty fund deposits ofall other clearing members. on a pro ratabasis.5 The clearing member may then become liable for an additional contribution. A limit onthis'second type of liability is a concern.60'

Offering securines clearing services as a clearing member of an exchange presents the riskthat, for a customer trade that it has accepted, OpSub-LLC must make payment or deliversecurities to the clearinghouse even if ts customer does not perform. OpSub-LLC would .monitor the financial condition of its customers as partof its procedures to measure and monitorrisk, and the introducing brokers would institute procedures to ensure that the customers fulfilltheir obligations.61 Key to its ability to mitigate its risk, however, is the right ofOpSub-LLCunder its agreements with its introducing brokers to refuse prospectively accept a trade for anyreason. These agreements also authorize OpSub-LLC to reimburse itselffor a loss on a marginloan to a customer through an escrow account that it requires tbe introducing broker to maintainwith OpSub-LLC or through a deduction from money that OpSub-LLC owes the introducingbroker 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. Weconclude that OpSub-LLC would have ample means to control the risk that its clearing customersdo not perform.

The authority to offer clearing services presents the risk that OpSub-LLC may bepartially liable i f another clearing member of he NSCC, DTC. or Options Clearing CorporationSt 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 payfor securities prior to placing the order with OpSub-LLC. In addition, the introducing brokers would require mostcustomers 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.

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13defaults on its obligations to these cJearinghouses.63 Multiple factors mitigate OpSub-LLC'sexposme to liability in the event of he default ofanother clearing member. The SEC and selfregulatory 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 amemberofonly three clearinghouses ofwhich LLC is currently a member. You have alsoreviewed the rules of hese clearinghouses and provided an analysis of he potential liability ofOpSub-LLC and factors that would limit this liability. Your analysis concludes that theprobability is low that any of these clearinghouses would assess OpSub-LLC for the default ofanother member and thereby threaten the financial stability of he Association. Standard andPoors has accorded all three clearinghouses "AAA" ratings. To date, you have discovered noinstanceS in which any of hese clearinghouses assessed clearing members for the default ofaclearing member rather than satisfY the liability from assets of he .defaulting member or itsreserve funds. Furthermore, these clearinghouses are parties to a multi-collateral cross-sharingagreement, which provides that if an individual m e m ~ ofmultiple clearinghouses defaults on orotherwise fails to meet its obligations, all collateral maintainedby that individual member atmultiple clearinghouses would be applied to mitigate the loss caused by that member's default orfailure to satisfY its obligations.In addition, the three clearinghouses would require OpSub-LLC to maintain deposits inreserve funds in amounts that are relatively small compared to the total amount ofdeposits frommembers that they hold. These relatively small amounts are a reflection that. ifan assessmentwere necessary, OpSub-LLC's share ofany liability would be r e l ~ v e l y small.Furthermore, the proposal does not expose the Association to potential liability to theclearinghoU$es. The Association's separately incorporated operating subsidiary would be aclearing member, and neither the Association nor any of its affiliates would guarantee theobligations ofOpSub-LLC to the clearinghouses.Despite numerous factors that mitigate the likelihood that a clearinghouse would assessOpSub-:LLC for the default ofanother member, or that the Association would thereby suffer aloss, we must consider the possibility. however unlikely, of catastrophic losses due to ~ g e ornumerous defaults. To that end, we have reviewed your amlysis of he rules of he threeclearinghouses and detennined that OpSub-LLC may limit its liability for the default ofanotherclearing member through terminationof ts memberships in the clearinghouses.Within ten business days after an assessmentby the NSCC, a member may notify theNSCC of ts decision to terminate its membership and thus limit its liability to the. lesser of hepro rata assessment or its required deposit in the reserve fund. I f nstead it pays the pro rataassessment and replenishes its required deposit, it may be Hable for one or more subsequent prorata assessments relating to the same loss or liability. The m ~ m b e r may then limit its liability for

61 Neither the Association nor any other affiliate of OpSub-LLC has guaranteed the obligations of LLC to anyclearinghouse or exchange and do not contemplate providing a guarantee for OpSub-LLC's obligations.

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14future assessments by providing notice of ts termiDation ofmembership. but its liability wouldbe 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 ermination of its membership.64 The NSCC also has anaddendum to its rules that sets forth its intention to apply at least 2S percent of ts retainedearnings to cover any loss prior to imposing a pro rata assessment on nondefaulting members.6SThis policy reduces OpSub-LLC's potential liability.As a member ofDTC, OpSub-LLC similarly could limit its obligations to DTC based onthe default ofanother clearing member by providing notice of ermination ofmembership withinten business days ofa pro rata assessment. The rules of he DTC differ from those of he NSCC,in part because the DTC requires its members to pay into a reserve fund and purchase itspreferred 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 itsrequired deposits and investment in stock ofDTC plus 100 percent of hese amounts.66The Options Clearing Corporation, like the NSCC and the DTC. permits a member tolimit its liability for lossesof another defaulting member through termination of its membershipin the clearinghouse . The member can limit its liability to the amount of ts required contribution

to a reserve fimd plus 100 percentof hat amount by providing notice of termination within fivebusiness days of an assessment.67 .As the foregoing discussion demonstrates, the proposed clearing activities for a widerange of securities and proposed clearing memberships in securities clearinghouses meet all

of he factors comm only considered in the incidental powers analysis. Accordingly, we concludethat under the incidental powers doctrine a federal savings association may (i) provide securitiesclearing and related services, including transactions involving securities beyond those in whichthe association is authorized to investby section S(c) of he HOLA, and (il) serve as a clearingmemberof he NSCC, DTC, and Options Clearing Corporation. Based on the representations64 See NSCC Rule 4. i s , 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 he nondefaulting member, instead ofgiving notice oftermination of membership within the ten-day period, pays the pro rata assessment and replenishes its requireddeposit to the reserve fund, it would be liable for subsequent pro rata assessments relating to the same loss or liabilityunless and until it provided notice of ermination ofmembership. The member's maximum liabilitywould then bethe greater of I} its required deposit to the reserve fund, plus 100 percent, or 2) all pro rata assessments made priorto its notice of ermination ofmembership. See DTC Rule 4, QVailable athttps:lllogin.dtcc.comldtcorg/bimuy/l9021PTC%20RULESmO-%206-S-06%20-%20Current.pdf(Nov. 8, 2(06).67 See Options Clearing Corporation By-Laws, Article VJIf, 6, available aIhnp:Uwww.optionsclearing.com/publications/rules bylaws pdf/oce bylaws.pdf(Nov. 8,2006). After providingnotice ofwitbdrawal, the member also may not submit any more transactions for clearance through the OptionsClearing Corporation and must close out or transfer all open positions that it has with the Options ClearingCorporation. Id

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ISand information you have provided, it appears that there are acceptable controls on any rl$ksassociated with clearing memberships in securities clearinghouses.B. PermissiblUty of Paying Iaterest on Free Credit BalaDeeIOTS regulations governing subordinate organizations provide that all federal statutes andregulations apply to operating subsidiaries in the same manner as they apply to federal savingsassociations, unless otherwise specifically provided by statute, regulation, or OTS policy.68Section 5(b){1)(B)(i) of he HOLA, a provision pertaining to d ~ s i t accounts, prohibits a federalsavings association from paying interest on a demand account. Pursuant to this provision, theAssociation may not pay interest on a demand account. You inquire whether this prohibitionwould apply to LLC after it becomes OpSub-LLC, a .registered broker-dealer operating subsidiary

of he Association, or whether OpSub-LLC would be able to continue LLC's current practice ofpaying interest on customers' free creditbalances. You indicate that under SEC Rule 15c3.2,70customers' free credit balances are required to be payableby LLC on demand.71 For the reasonsset forth below, we conclude that the probibition against paying interest on a demand accoUl'lt;although applicable to the Association, would not be a p p l i ~ l e to LLC after it becomes OpSubLLC, an operating subsidiary of he Association.Our conclusion that S(b)(I){B)(i) of he HOLA would prohibit OpSub-li.C from.paying interest on the free credit balances ofcustomers is based on several factors. First, by itstetms, 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 savingsassociation, as defined in Section 1813 of [TItle 12 U.S.C.1, the deposits ofwhich are insured bythe [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)ofTitle 12 U.S.C. defines "savings association" to include "anyFederal savings association and any state savings association, and defines "Federal savingsassociation" to mean any Federal savings association or Federal savings bank chartered under Sof he HOLA. There is no reference in anyof hese definitions to subsidiaries. Thus, it is onlyby reason of he 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; ... t .10 17 C.F.R. 240.1Sc32 (2006).71 You also represent that staffof he SEC "has infonnally advised [LLC] and the [Association1 that the reservationof he right to require prior notice ofwithdrawaJ or trarl!;fer, which is necessary in order for a bank account to qualitYas 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 "savingsassociation" to mean"a savings association as defined in section 3 of he Federal Deposit Insurance Act, the depositsofwhich are insured by the [Federal Deposit Insurance1 Corporation."

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16. the applicability of the 5(B)(1)(b (i) prohibition to an operating subsidiary of a federal savingsassociation.

Second, a customer's free credit balance held by OpSub-LLC would not be a "demandaccount" within the meaning ofHOLA 5 ( b X l ) ( B ~ and OTS regulations. Under the HOLA. a"demand account" is a "demand deposit acCOWlt.,,7 Under OTS regulations. a demand accountisdefmed as a non-interest bearing "demand deposit.,,74 OTS regulations define "account" tomean 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 savingsassociation. ,75 The term "accountholder" is defined as "the holderofan account or accounts in asavings association insured by the Deposit Insurance Fund' (DIF).'6 (Emphasis added.)Previously, we have determined that, despite the prohibition onpayment of interest oncommercial demand df(posits" federal savings associations may sweep excess funds from theirdeposit accounts into investments outside the association, such as government securitiesrepurchase agreements and mutual funds.77

Based on your description, LLC is not, and OpSub-LLC will not be, a savings associationinsured by the DIF. A customer ofOpSub-LLC, introduced by an introducing broker, would notbe 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, afterOpSub-LLC is established as an operating subsidiaty ofllie Association, OpSub-LLC would notbe a DIF-insured savings association and would not have accountbolders, i.e., the holders ofaccounts in a DIF -insured Savings association, within the meaning of eTS regulations. Acustomer'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 notintended 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 ts charter and regulations oftbe Director. a Federalsavings association may - (i) raise funds through such deposit. share, or other accounts. including demand depositaccount (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 12U.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 depositoryinstitution is impermissible if the accounts are commercial demand accounts, however. See OTS Op. ChiefCounselP-98-1 (March 2, 1998).7S 12 U.S.C. 1811 el seq.

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17insured depository institution .... ,79 Because OpSub-LLC would not be an insured depositoryinstitution, 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 tofederal 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 aregistered broker-dealer. Although it would be an operating subsidiary of he 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 primary80 .regulator, as well as OTS. Thus, SEC Rule 15c3-2 would apply to OpSub-LLC. This rule,which requires that funds arising out ofany free credit balances be payable on demand,81 ispredicated upon the assumption that earnings on a free credit balance belong to the customer. I fthese earnings are considered interest on a demand deposit, Rule 15c3-2 .conflicts with HOLA'sprohibition on paymentof interest on demand deposits.

Generally. OTS regulation 559.3(h)(1) would require that a provision inHOLA apply toOpSub-LLC in the same manner as it applies to federal savings associations unless otherwiseprovided by statute, policy. or regulation. In this instance, even ifHOLA's prohibition onpayment of interest on demand deposits applies to a broker-dealer operating subsidiary, theSEC'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 withrespect to other types of depository institutions and that other federal banking regulators haveconstrued such prohibitions in a manner that would not preclude the payment of interest on freecredit balances in accounts with affiliated broker-dealers.82 OTS previously has followedinterpretations of he FRB and the FDIC regarding the prohibition ofpaymentof interest ondemand accounts.83 Section 19(i) of he Federal Reserve Act prohibits member banks from

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. identifiesregistered broker-dea1ers as being regulated by the SEC and the NASD and establishes procedures for purposes ofregulatory coordination and communicationwhen a functionally regulated entity is a subsidiary ofa thrift.Sl See 17 C.F.R. 240.1 Sc3-2 (2006). This rule provides that a broker-dealer may not use earnings on itscustomer's free credit balance to operate its business unless, at least once every three months, it provides thecustomer a written notice stating that the funds are not segregated and may be used to operate the brokeragebusiness. The written notice must also advise the customer that the funds are available upon demand. The ruleapplies unless the broker or dealer is a banking institution supervised and examined by state or federal authorityhaving 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 demanddeposits by federal savings associations. In this regard, we note that other insured depository institutions may payinterest on retail demand deposits. See 12 U.S.C. 371a (member banks); 12 U.S.C. 182S(g)(insured nonmemberbanks and insured branches offoreign banks).8] See OTS Op. Chief Counsel. at 3 (May 29, 2003)(federal savings associations may provide reward points tocustomers who use Visa U.S.A. Inc. debit cards to access demand deposit accounts); Memo. OTS ChiefCounsel p_

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18paying 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 offunds constituting a deposit" 8S For purposes of section 19(i). the FRB has adopted thedefinition of "deposit" used in its Regulation D, Reserve Requirements ofDepositoryInstitutions. 86 A "deposit," in pertinent part, therefore means:

The unpaid balance of money or its equivalent received orheld by a depository institution in the usual course of business andfor which it has given or is obligated to give credit, eitherconditionally or unconditionally, to an account, including interestcredited, or whichis evidenced by an instrument on which thedepository institution is primarily liable.(emphasis a d d e d ) ~ S 7 By regulation, the FRB has limited the prohibition on payment of interest oncommercial demand deposits to accounts held it) depository institutions.88

The FRB's limitation of he prohibition to accounts in depository institutions is ~ v i d e n t inits 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 ofinterest, the FRB determined that carrying customer credit balances awaiting investment andpaying interest on them are activities incidental to permissible securities brokerage and thuspermissible for a broker..dealer subsidiary of a bank holding company.89The oce filed a comment letter that strongly supported the FRB's initial approval ofpaying interest on credit balances of customers of a brokerage subsidiary of a bank holding

98-1 (March 2, I998)(reviewing types of sweep accounts.that federal banking agencies determined did not violatethe prohibition on payment of nterest 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'sabsorption of expenses incident to providing a normal banking function or its forbearance from charging a fee inconnection with such a service is not considered a payment of interest." Id Section 19(a) aCthe Federal ReserveAct, 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 ofdiscount broker RichardBlackman &. Co., which would pay interest on Some credit balances awaiting investment); BankAmericQ Corp., 69Federal Reserve Bulletin 105, n.1 I (1983)(acquisition ofdiscount broker Charles Schwab Corp . which would payinterest on idle credit balances to be swept into an unaffiliated money market mutual fund or unaffiliated commercialbank). The U.S. Supreme Court upheld the FRB's approval of BankAmerica's acquisition ofCharles Schwabwithout discussion of ile permissibility of payment of interest on credit balances. See Securities Industry Ass 'n v.Board ofGovernors of he Federal Reserve System, 468 U.S. 207 (1984),

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19company. The oce advised that paying interest on c u s t o ~ e r balances arising from brokeragetransactions is incidental to permissible securities brokerage activities and "obviously a bankingfunction'" that is "currently performed by commercial banks." The oce therefore urged the FRBto determine that paymfo nterest on these credit balances is closely related to banking and aproper incident thereto.

Several months after filing its comment letter urging the FRB's approval ofa bankholding company's acquisition ofa broker-dealer, the OCC approved a national bank'sestablishment ofan operating subsidiary that would conduct discount securities brokerageactivities. The ace concludeds' albeit ina context other than section 19(i), that credit balancesarising in cotmeetion with securities brokerage transactions are not deposits, and that a nationalbank 's discount brokerage operating subsidiary that maintains and pays interest on customercredit balances would not be receiving deposits.91 The ace distinguished credit balances arisingincidentally to brokerage activities on fimctional and legal grounds from bank deposits, notingthat [blank deposits are. generally funds placed with a depositoryinstitution for the primary purpose of safekeeping, eaming areturn in the form of nterest, or facilitating payments to thirdparties. They maybe withdrawn at the discretion of the depositorunder the tenus and conditions of he account The receipt ofdeposits is a principal function ofbanks. which publicly solicitdeposits to provide funds to be used in the banks' lending business.Credit balances maintainedby brokers, on the other hand, arise inconnection with securities transactions ofcustomers and, as such.are not directly solicited from the public. Indeeds the SecuritiesInvestor Protection Act, . . . operates to restrict the advertising.

promotional and selling practices ofbrokers regarding interestbearing free credit balances. . . . Further, there are specific regulatoryrestrictions regarding the use ofcredit balances by brokers.Finally, the OCC noted that the meaning of he term "deposit" may be different, depending uponthe statutory or regulatory context 9190 Su oce comment on BankAmerica Corp.s Proposed Acquisition ofCharles Schwab Corp., 1982 OCC QJLEXIS 1179 (June]0, 1982). Thecommen1ietter did not state whether the brokerage activities were conducteddirectly in the banks and the resulting credit b8lances held by the banks, rather than in operating subsidiaries. Id91 The oce conc::ludcd that credit balances are not deposits within the meaning of he McFadden Act, and thattherefore the offices at which the discount brokerage would offer itsservices would notconstitute "branches" underthe McFadden Actbecause none of he statutory branching functions - receiving deposits, paying checks, or lendingmoney - would be performed. Decision of he ace on the Application by Security Pacific National Bank toEstablish an Operating Subsidiary to Be KuOWD as Security Pacific Discount Brokerage Services. Inc 1982 oceQJ LEXIS 1287 (Aug. 26, 1982). .92 Theoce stated "[e]ven assuming that credit balances are treated as deposits for the narrow monetary controlpurposes of Regulation 0, however, it should be recognized that the meaning ofdeposit may be different in otherregulatory or statutory contexts, such as under the MeFadden Act." Decision of he Dec on the Application by

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20In the context of he prohibition ofpaymentof interest on commercial demand deposits,

both the acc and FRB have distinguished between free credit balances in a securities brokerageaccount and deposits in a depository institution. The acc 's comment letter and the FRB'ssubsequent approval ofan application in 1983 thus indicate that the permissibility of payment ofinterest on customer credit balances by brokerage affiliates of national banks and bank holdingcompanies is well established.

The pennissibility ofpayment of interest on customer credit balances by brokerageaffiliates ofnonmember, insured banks is also well established. Like section 19(i) of he FederalReserve Act and Regulation Q,93 the Federal Deposit Insurance Act and FDIC regulations imposea prohibition on the payment of interest on commercial demand deposits in insured nonmemberbanks. The Federal Deposit Insurance Act provides that exceptions to the prohibition shall bemade the same as exceptions to the prohibition applicable to member banks.94In responding to a bank's proposal to establish a sweep account for certain customers, theFDIC indicated that such an account would not violate the FDIC regulation prohibiting statenonmember banks from paying interest on demand deposits.9S The FDIC characterized the issueas "whether the investment account, or the sweep account arrangement as a whole, violates theprohibition on the payment of interest on demand deposits.U Concluding that neither theinvestment 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 themeaning 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 inthe investment account are not deposits under section 3(1) of the FDIA. In addition. the FDICconcluded 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 theaccount of any depositor as compensation for the use of funds constituting a deposit" and theearnings are not paid by the bank. Thus, the FDIC, like the FRB and acc , would not apply astatutory prohibition on the payment of interest on demand deposits to the paymentof interest

Security Pacific National Bank to Establish an Operating Subsidiary to Be Known as Security Pacific DiscountBrokerage 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 moneymarket 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 theprohibition of payment of interest on demand deposits: 1) in the earlier opinion tbe demand deposit account andinvestment account were both in the bank: 2) the customer could automatically transfer funds between the twoaccounts; and 3) the bank paid interest on the account that violated the prohibition. whereas in the sweeparrangement at issue in Advisory Opinion #00-2, the Money Market Fund paid the customer earnings from thefund's investments. /d. un.1.

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21from earnings on customers' free credit balances held in a broker-dealer subsidiary of an insureddepository institution.Conclusion

We conclude that federal savings associations may conduct the clearing activitiescurrently being conducted by LLC. as described in the Background section hereof. Accordingly.after the reorganization, when LLC becomes OpSulrLLC. an operating subsidiary of heAssociation. OpSulrLLC may continue to conduct such clearing activities subject to supervisoryconditions established by the OTS's Southeast Regional Office. Further, we conclude that thepayment of interest on customers' free credit balances by OpSub-LLC would not violate theHOLA 5(B)(1)(b)(i) prohibition against paying interest on demand accounts.In reaching the foregoing conclusions, we have relied on the factual information andrepresentations contained in the materials you submitted to us and in subsequent discussions withOTS staff. Our c o ~ c l u s i o n s necessarily depend upon the accuracy and completeness of suchinformation and representations. Any material difference in facts or circumstances from thosedescribed herein could result in different conclusions.Ifyou 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 DirectorsRegional-Counsel

799

Sincerely,

/s /John E. BowmanChief Counsel


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TabC

Exhibit 25 I

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I. Exhibit I 1

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UNITED WESTERN BANK

LIQUIDITY POLICY and CONTINGENCY FUNDINGPLAN .

Approved by Resolution of the Board ofDirectors dated

UNITED WESTERN BANKUquldity PolicyMay 7, 2010 .

May 7,2010

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I. SUMMARYThe purpose of this Liquidity Policy ("Policy") is to establish and documentBoard-approved guidelines for the management of United Western Bank's (the"Bank") liquidity considerations. The Board of Directors has ultimateresponsibility for the liquidity risk assumed by the Bank. This Policy is developedand implemented as a meaningful tool and reference for the Board InvestmentCommittee ("IC") to carry out its oversight responsibilities and for theAssetlLiability Committee ("ALCQ") and Bank management to use in its ongoingliquidity 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 maintainingBank operations in a safe and sound manner.Effective liquidity risk management requires systems and processes that arecommensurate 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 forcesincluding credit, market, operation, legal, and reputation risk. These forces canshape the Bank's liquidity risk profile and need to be considered in the assessmentof liquidity and asset/liability management.

n. AUTHORITYBoard ofDirectors

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 Policyand Contingency Funding Plan (CFP) on at least an annual basis. Monitor Bank performance and overall liquidity risk profile, ensuring thatthe level of liquidity risk is maintained at prudent levels and is supportedby adequate capital. Ensure that the Bank implements sound fundamental policies andprinciples that facilitate the identification, measurement, monitoring, andcontrol of liquidity risk. Ensure that adequate resources (personnel, budgetary and other) aredevoted to liquidity risk management. Effective risk management requiresboth teChnical and human resources .

. Board Investment Committee Monitors compliance with Board-approved limits and polices. Reviews and understands significant balance sheet and liquiditymanagement activity including, but not limited to: loan and depositactivity, investment activity, wholesale funding, off-balance-sheettransactions, including concentrations in any of he foregoing, and other

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activities that impact liquidity risk at the Bank and significant subsidiariesand affiliates as appropriate . Reviews applicable deviations from the approved policies, and providesfeedback to ALCO. Ensures the ALCO process reflects the Board's objectives; providesappropriate feedback to the Board. Ensures that adequate resources are devoted to the liquidity managementprocess.

It is the intent of the Bank Board of Directors to delegate day-to-day operationalauthority for the matters set forth in this Policy to senior executive officers of theBank. The Board directs the authority granted and requirements of this Policy tobe administered by the ALCO with periodic reports to the Investment Committee;Bank ALCO Committee (at least monthly)

Oversees the capital markets activities of he Bank.. Reviews deviations in policies and guidelines. Recommends prospectiveaction plans to Board Investment Committee. Approves AssetJLiability Strategies. Reviews Contingency Funding Plan Triggers at least monthly to assessBank's liquidity risk status. ' . Reviews effectiveness of Contingency Funding Plan and makesmodifications as necessary depending on Bank's risk profile and marketconditions. . Reviews and understands significant balance .sheet and liquiditymanagement activity including, but not litliited to loan and deposit

activity, investment activity, wholesale funding, off-balance-sheettransactions, and other activities that impact liquidity risk. Recommends liquidity risk parameters and limits for the risk positions ofthe Bank. . . Ensures an appropriate mix of existing and potential future fundingsources. Ensures adequate levels of highly liquid, unencumbered marketablesecurities, securities pledged to FHLB with appropriate collateral value, orcash that can be used to meet liquidity needs in stressful situations. Monitors compliance with all regulatory limits and benchmarks regardingcapital, brokered deposits, outstanding loans and loan commitments orother limitations on growth that may arise from time to time, including

those that may arise from the Bank becoming less than well-capitalizedpursuant to Prompt Corrective Action (PCA) provisions under FederalDeposit Insurance Corporation Improvement Act (FDICIA). This wouldinclude monitoring compliance with and developing fundingcontingencies. i f restrictions are placed on rates paid for deposits,participating in any approvals requested from FDIC to accept brokeredUNITED WESTERN BANKLiquidity PolicyNlay7,2010

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\

deposits, and partnering with Operations should the Bank be' unable toaccept brokered deposits.Management Responsibilities and OversightChairman of ALCO as appointed by Board

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compliance with and developing funding contingencies if restrictions areplaced on rates paid for deposits, if restrictions are placed on the types ofdeposits received (e.g. certain institutional deposits), participating in anyapprovals requested from FDIC to accept brokered deposits or accept awaiver of deposit restrictions on certain deposit types (e.g., institutionaldeposits), and partnering with Operations should the Bank be unable toaccept brokered deposits. Reviews periodically any material changes or proposed material changes tothe 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 ActivityThere 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 effortsand challenges. Monitors and manages intraday liquidity and capital.

Chief Credit Officer Adheres to policies Coordinates lending activity in advance with ALCO when under Stage 2or Stage 3 liquidity risk.Policy Compliance MonitoringMany compliance rules are detailed in the policies themselves. The following list setsforth responsibilities for monitoring adherence to the policies.

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Liquidity RiskContingency Funding Plan TargetsMeasurement ofLiquidity Risk Metrics

Trade Confirmation/Entry/Reconci1iationCredit RiskOverall Policy Compliance and Adequacy

DeterminationofBrokered Deposit Designationm. OBJECTIVES

ALCOController and A VP-TreasuryModelingControllerChiefCredit Officer (CCO)ALCO subject to Audit andCompliance testing of such.General Counsel and ALCO

The objective of liquidity management is to reduce the risk to bank earnings andcapital arising from the inability to meet obligations in a timely trianner and coverboth expected and unexpected deviations from normal operations withoutincurring unacceptable losses. This. entails ensuring sufficient funds are availableat a reasonabie cost to meet potential demands from both fund providers andborrowers. To achieve this objective, it is essential to be able to indentify,measure, monitor, and control liquidity risk in a timely and comprehensivemanner. Liquidity risk management needs to be fully integrated into the Bank'srisk management process. The objective of his Policy is to outline the proceduresto accomplish these tasks. .The Board of Directors should establish the association's tolerance for liquidityrisk, set liquidity limits and thresholds, and approve policies related to liquiditymanagement. The Board should also ensure senior management takes thenecessary steps to monitor and control liquidity risk. The Board shouldunderstand the nature and. level of the association's liquidity risk, andmanagement should inform the Board regularly of the liquidity position of theassociation.This Policy, along with related policies, will assist the IC, ALCO andmanagement in administering the Bank's liquidity as well as the overall asset andliability portfolios. This Policy overlaps in some respects with the Bank's InterestRate Risk Policy; however, this Policy is specific to liquidity. This Policy setsforth tolerance for liquidity risk, establishes liquidity limits and thresholds,establishes liquidity management monitoring activities, and requires preparationofappropriate contingency funding plans.

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IV. RISK MANAGEMENTIn addressing liquidity management issues, the Board of Directors and executivemanagement must be aware of the potential risks that arise related to differingtypes of liquidity risk exposures faced by the Bank. In establishing a LiquidityPolicy, the Board has evaluated various risks; these risks, and their relatedmanagement techniques, which include:Credit risk. Impacting e8mings or capital due to an obligor's failure to meet theterms of a loan or an investment, or otherwise failing to perform as agreed. Creditrisk occurs any time an institution relies on another party, issuer, or borrowerperfonnarice. .Interest rate risk. Addressing the potential adverse impact to the organization'scapital or earnings arising from movement in interest rates. Interest rate riskevaluation must take into consideration the impact of complex hedging strategiesor products which become illiquid; potential impact on loans or investments dueto earnings reduction of the actual investments per changes in interest rates; orability 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 safetyand soundness is adversely affected by an inability (or perceived inability) to meetits obligations. An institution's obligations and the funding sources used to meetthem, depend significantly on its buSiness mix, balance sheet structure, and thecash flow profiles of its on- and off-balance sheet obligations. In managing theBank's cash flows, various situations can give rise to increased liquidity risk.These include funding mismatches, market constraints on the ability to convertassets to cash or accessing sources of funds (i.e., market liquidity), and contingentliquidity events. Changes in economic conditions or exposure to credit, market,operation, legal and reputation risks can also affect the Bank's liquidity riskprofile and should be considered in the assessment of liquidity and assetlliabilitymanagementPrice risk. Measuring and supervising the risks inherent with market-making,dealing, and position-taking activities in interest rates, foreign exchange, equityand commodities markets. Price risk represents a risk to earnings or capital arisingfrom changes in the value ofportfolios offinancial instruments.Compliance risk. Maintaining legal compliance. with various appropriateregulations as well as compliance with the Bank's ALCO Policies.Reputation risk. Developing and retaining marketplace confidence in handlingcustomers' financial transactions in an appropriate manner as well as protectingthe safety and soundness of the Bank.

V. .LIQUIDITY MANAGEMENT PROCESSThe Bank will be capable ofmeeting financial obligations in a timely manner at areasonable cost without incurring unacceptable losses i f he Bank has a sufficientliquidity Management Process. Accordingly, liquidity is measured by the Bank'sability to have sufficient cash reserves on hand, at a reasonable cost and/or with


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minimum losses, as well as to meet liquidity requirements under supervisoryagency regulations. .Management shall employ general risk management strategies to ensure that theBank'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 coststructures, and set realistic limitations and business strategies.Funds management decision-making responsibilities shall be clearly defined byapplicable Bank policies, with the acceptable level of risk tolerance set forth bythe board. Sufficient due diligence procedures will be performed prior to enteringinto any business relationship with a wholesale or processing I trust depositsource. Due diligence shall be employed in.assessing the potential risk to earningsand .capital associated with various deposit relationships or other rate-sensitivedeposits and prudent strategies for their use. Management will avoid excessivereliance on funds that. may be only temporarily available, which may requirepremium rates or pose excessive operational risks to retain.Appropriate management processes will be utilized to monitor fundingconcentrations. Specific attention shall be paid to brokered funds, and other ratesensitive or credit-sensitive deposits obtained through wholesale or processingand trust sources.Management will track a t least monthly non-relationship and higher-cost fundingprograms to measure performance, manage funding gaps, and monitor compliancewith concentration and other risk limits. Reports will include a listing of fundsobtained through each significant program, rates paid on each instrument and anaverage per program, information on maturity of the instruments, andconcentration or other limit monitoring and reporting. Management will ensurethat 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, riskmanagement and communication strategy. The Bank's contingency funding planwill consider the potential for changes in market acceptance based on a variety offactors, which are discussed below.Management shall also consider the potential for triggering legal limitations thatrestrict the Bank's access to brokered deposits under PCA standards, or otherregulatory actions. and the effect that this would have on the Bank's liabilitystructure.Liquidity is often available from both asset and liability sources, however, thetiming and confidence in the availability vary with the nature of the source andthe condition of the bank. Therefore, the analysis of liquidity is measured byassigning a tier level to the sources based on management's confidence level inthe timing and probability of availability. For identification and ongoingmeasurement purposes, liquidity is segmented as follows:

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INDENTIFICATION AND MEASUREMENT OF LIQUIDITYLiquidity will be indentified as Primary (Tier 1 and Tier 2) sources and Secondarysources depending upon the assurance of its availability and the timeframenecessary to obtain.Tier 1 Sources - these sources with respect to which management has the highestlevel of confidence in the availability of funds. NOTE: In the event of a"Liquidity Event" as defined within the Bank's Contingency Funding Plan, BankManagement should evaluate and utilize these liquidity sources in the order listedbelow:

1. Cash -Excess vault cash, excess reserves at the Federal Reserve or othercorrespondent banks, excess cash in A TMs or foreign currency reserves.2. Money Market Assets - consists primarily of fed funds sold, commercialpaper and agency discount notes. Other instruments may occasionally beused, however, only those alternatives that can be converted to cash in onebusiness day are included.3. Any unencumbered Government or Government agency security, which isexpected to be relatively nominal as generally all eligible collateral ispledged to the FHLB.4. Scheduled or anticipated cash flows from loans alld investment securitiesprincipal 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 andreported in the daily liquidity report..7. Other unpledged securities that can be offered in a standard repurchaseagreement. Pledging requirements and pledged securities are tracked dailyand reported on the daily Liquidity Report, which covers all encumberedsecurities.

Tier 2 Sources - these are sources with respect to which management has a highlevel of confidence in the availability of funds but whose availability either hasnot 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: Inthe . event of a "Liquidity Event" as defmed within the Bank's ContingencyFunding Plan, Bank Management should evaluate and utilize these liquiditysources in the order listed below once Tier 1 alternatives are considered:1. CD's originated outside of the Bank branch network - Availability of thefunds may be sourced through internet deposit bulletin boards or othersources. Estimates of availability are based on dealer input and marketanalysis.2. Large (non-brokered) Processing and/or Trust Deposits that can begathered quickly based on key and longstanding relationships between theBank, its management, and various processing and/or trust companies.

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This is a subjective estimate based on feedback from relationship Officersand 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 andearnings needs to be evaluated in advance of liquidating or pledging theseassets.

4. Brokered CDs (including CDARS) - This channel assumeS retention ofa well-capitalized status, thereby allowing the Bank to utilize this sourcewithout specific FDIC approval. Alternatively, it could only be utilizedwith prior regulatory non-objection.5. Deposit promotions designed by ALCO within the constraints of anyregulatory requirements that exist at the time.

Secondary Sources - These are sources that are considered subordinate to Primarysources of liquidity. However, they consist of sources that management has alower level of confidence as to whether such sources will be available. Thedifference is whether the source will be willing to provide liquidity when neededand the timing of availability. Secondary sources could take as long as 90+ daysto implement.Examples include:

1. Unused FED fund purchase lines2. Federal Reserve Discount Window3. Loan securitizations4. Loan sales or participations5. Other asset sales (e.g., liquidation of BOLl or sale ofbranch real estate)

The Bank would also immediately limit new lending activities, outside of alreadyexisting 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 servicingportfolio.

The Bank would also consider liquidating additional assets, including branches and orlines of business, under certain circumstances. We realize the timing of these asset salesmay take in excess of 90 days.Monthly reporting and analysis of liquidity is based on current market conditions. AContingent Liquidity Plan is in place and updated quarterly or more frequently ifdetermined by the IC or the ALCO. This plan is presented to ALCO and BoardInvestment Committee quarterly. Contingency profiles are covered in the ContingentLiquidity Plan.

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LIQUIDITY RISK METRICSNOTE: Many of the limits and guidelines listed below were adopted by the Board onApril 8, 20 IO. The Board is adopting these additional limits and guidelines to move theBank towards the liquidity .management practices outlined in the March 17, 2010Interagency Policy Statement On Funding and Liquidity Risk Management. The Boardand Management recognize it will take some time to develop the tools to accuratelymeasure and report some of the limits below. It will likely take additional time for theBank to achieve compliance with some of these guidelines and limits.With the adoption of this Policy, M a n a g e m ~ t commits to having these ratios andguidelines reported at the May 2010 ALCO meeting. Variances from these limits andguidelines will be reported at each subsequent regularly scheduled ALCO and BoardInvestment Committee. ALCO will develop a plan to present at the May 2010 meeting toachieve substantial compliance with the Policy by October 31, 2010.MINIMUM LIMIT Maintain $100 Million in cash and at least $100 Million in offbalance sheet funding capacity to absorb unanticipated withdrawalsfrom depositors. including processing and trust deposit withdrawals. 100%

Tier 1 Liquidity to 60 day maturity of ime deposits plus 5% attrition 100%ofnon-maturity retail deposits. .

Tier 2 Liquidity to 120 day maturity of ime deposits plus 10% 100%attrition of non-maturity retail deposits. Unencumbered securities and investments plus cash to 30 day 150%

maturity liabilities plus 5% attritionofnon-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


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MAXIMUM LIMIT Continued Total time deposits as a percentage of otal deposits maturing in any 10%one calendar month over the next twelve months. Total term debt (including CDs) as a percentage of otal 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 bereported to ALCO, but deposit concentrations due to CD or other deposits used tocollateralize a loan will not be considered a Policy Exception.

To further diversify the risk of deposit maturity concentrations, the Bank will alsowork to stagger the contractual expirations of its trust and processing depositcontracts.Ratios which violate the limits will be highlighted and discussed at ALCO monthly.The Committee will decide i f action is warranted to manage the ratio higher or lowerand over what time period that reduction will occur. Ratios in violation of limits willalso be reported to Board Investment Committee along with ALCO'srecommendation.Averages will be evaluated on a monthly basis.* Pledged securities include all investment securities pledged or otherwise providedas committed collateral to specific debt obligations. Securities safe kept at a thirdparty (including the FHLB and FED) that are not pledged to a specific debtobligation would be considered not pledged for this calculation. This liquidityguideline ratio is defmed as total pledged securities divided by total investmentsecurities.** Non maturity deposits placed under an omnibus contract will have the contractualmaturity of the contract expiration date; otherwise non maturity deposits will beconsidered to have a contractual maturity ofless than one year for the purpose of thiscalculation.

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Liquidity is monitored in the following manner:1. Daily Liquidity Report - reviewed daily by CFO, CAO, and COO. Reported toBalance Sheet Strategy Group weekly, and ALCO and Board InvestmentCommittee monthly.2. Balance Sheet Tracker Report. Key officers receive daily statement of conditionwhere changes in the balance sheet can be observed. This is monitored by allALCO members for irregularities and changes in condition that could negativelyaffect liquidity if not corrected.3. Bank Cash Flow Analysis Report - produced and reviewed weekly by BalanceSheet Strategy Committee. Report can be produced to reflect various liquiditycontingencies as part ofContingency Funding Plan.4. Large Depositor Trend Report - produced at least monthly and reviewed byALCO.5. Key officer feedback - this comes from a variety of sources that occur as part ofthe normal conduct ofbusiness. For example:

a. Weekly Executive Staffmeeting.b. Pricing discussions as needed between senior bank officers and ALCOmembers.c. Monthly Pricing Committee meetingsd. 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 beindicators ofmore 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 salesrepresentatives, and branch employees requesting informationOther secondary market events may also be early warning signs for potentialliquidity problems. Bearish activity in the Bank's securities may signal decliningvalue. 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 marketforcing Bank management to arrange "friendly" broker/dealer supportThe Bank's funding market may also provide early information as credit supportis contracted or demanded. The funding market may also begin to ask for bettercredit terms or shorter duration lending which can lead to more costly liquidity for

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the Bank. Management will be cognizant of signs of funding deterioration toinclude: Increasesin overall funding costs Requests for collateral by counter parties Elimination or decreases in credit line availability by correspondent Bankscausing the Bank to make larger purchases in the brokered funds market Unusually large volumes of turn;.cIowns in the brokered markets forcing .theBank to deal directly with fewer willing counter parties Abandonment by rating-sensitive providers such as trust mangers, moneymanagers, and public entities An unwillingness by counter parties and brokers to deal in unsecured orlonger dated transactions Decreasing transaction sizes and counter parties that are unwilling to enter

into even short-dated transactionsADDITONAL LIQUIDITY PROCEDURESThe Bank will always have a portion of its loan and investment securities portfoliomaturing 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% oftotal 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 anannual basis. .*Excess Funding Capacity is defined to the unused federal funds lines, FedFunds Sold, cash and unencumbered investment securities available for sale.

LIQUIDITY CONTROLThe control process for liquidity policy and risk limits is as follows:1. Liquidity limits will be reviewed and revised at least annually in conjunction withthe annual review of this Policy.2. ALCO reviews the liquidity position atleast monthly and discusses trends withinthe balance sheet that affects liquidity.3. Finance and Operations report significant changes in liquidity to Balance SheetStrategy and ALCO Committees.4. Board Investment Committee reviews policy guidelines monthly along withtrends in the balance sheet.

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This Policy will be reviewed at least annually with presentations to and approval by theBoard ofDirectors, reporting of actual versus limits will be done monthly. Any variancesmust be approved by ALCO as an exception and action plan initiated to bring the Bankwithin limit. Exceptions will be reported to Board Investment Committee.vn. DEPOSITSDeposits are the largest source of the Bank's funds. Therefore, it is important theBank implement policies and procedures to generate and retain a diversifieddeposit base as well as to monitor its overall deposit structure, including rates,maturities, products and concentrations. The Bank's overall deposit process willinclude:

A clearly defined marketing strategy within the business plan that identifies thedesired market share in tenns of growth or shrinkage, market niche, and presentand potential competition. Identification of core and volatile deposits and analysis of he cost of core andvolatile deposits, including operating costs to maintain the various depositproducts 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 andcomparative. analysis of costs of deposits versus alternative sources of funds tomeet those needs. Frequent review of deposit pricing, volume, sources, volatility, and trends inrelation to overall funds management goals, interest rate risk ~ x p o s u r e , spread, netinterest margin, and profitability. .

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VBI. PROCESSING AND TRUST DEPOSITSProcessing and trust deposits comprise a majority of the overall deposits. at theBank. The Bank has continued to capitalize on its longstanding core deposit basethrough the development of processing and trust deposit relationships (whichinclude securities clearing and settlement, custodial, trust and escrow) thatprovide a stable, long-lived and inexpensive compliment to the traditional branchbanking concept. We anticipate that management will evaluate additional sourcesto this strategy, and prospectively may consider acquiring deposits fromprocessing businesses that have significant deposit generating capacity that isincidental to their primary purpose.Management will monitor processing and trust deposits as follows:Each relationship with individual or aggregated deposits of 5 percent of totaldeposits or greater shall require the following: Regular reporting at ALCO

An assigned executive officer of he 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. BORROWINGSUse of borrowings shall be managed prudently in order to achieve the Bank'sfunding goals and assist in controlling interest rate and liquidity risks. Ensuringthat dependable borrowing facilities are in place represents an integral part of theBank's liquidity and funds management practices. The Bank may utilizeborrowings obtained from financial intermediaries including: the FHLBank ofTopeka (existing borrowings outstanding at. FHLBank of Dallas) othercommercial banks, securities firms and other financial entities. Other commercialbanks, securities :finn:s and .other financial entities must be approved as anacceptable counterparty by ALCO prior to use. Because the nature and extent ofwholesale funding activities will depend greatly on the Bank's overall balancesheet riskposition, the administration of these activities falls under ALCO.Short-term borrowings, ranging in maturities from overnight to two weeks can beexecuted with prior approval from one of the following: Bank CFO, BankPresident or CEO, Chief Accounting Officer, Chief Investment Officer, orAssistant Treasurer. Term borrowing in excess of two weeks requires priorapproval from ALCO prior to execution. Amounts borrowed are governed bypre-existing, board approved limits.As a member of the FHLBank system the Bank will generally look to obtainborrowings from the FHLBank of Topeka as its first choice. However, approvedstaffor ALCO are allowed to obtain quotes on appropriate borrowings from otherentities including commercial banks and securities firms.

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The Bank may also borrow from the FED under terms and conditions defined bythe FED,with the same required approvals as FHLB advances and other thirdparty sources.FHLBank (FHLB) Advances: The Bank is authorized to borrow from the FHLB.FHLB advances are generally advantageous due to both the dependability of theFHLB 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 theneeds 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 havecollateral that contains a mortgage or be guaranteed by the US Government or anagency 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 theFHLB depending on the nature of he instruments pledged.Periodically at the direction of ALeO, a senior member of management shalldiscuss or meet with FHLB ofTopeka to review the financial status of the Bank,assess the Bank's relationship with FHLB of Topeka, and ensure the continuedavailability of funding on a collateralized basis. Should FHLB ofTopeka indicatethat continued availability of funding will not or may not be forthcoming, thiswould constitute a Stage2 or Stage 3 LiqUidity Risk, depending on.a11 availablefacts and circumstances.Repurchase Agreements (Repo): When appropriate, the Bank may utilize reverserepurchase agreements. These agreements serve as another form of wholesaleborrowings collateralized by securities as an alternative source of funds. In thecapacity as community Bank repos will be used to c o l ~ t e r a l i z e certaincommunity Bank deposits from known customers. In the capacity as wholesalerepos, repo lines may be established with commercial banks, securities firms andother financial institutions that are ALCO approved counterparties. Repos rangefrom short- to long-term in nature (overnight to several years:) These agreementsmay be structured with various instruments, including derivatives, to assist theBank in managing its interest rate risk. The various instruments may include lockouts 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 thederivative, against certain changes in interest rates.Management understands the potent\al for increased sensitivity to market andliquidity risks associated with more complex funding instruments that mayinclude embedded options. As such, the following management techniques shallbe considered as the Bank secures wholesale borrowings: Review the Bank's borrowing contracts for embedded options or otherfeatures that may affect the Bank's liquidity and senSitivity to market risks.Management will also review collateral agreements for fees, collateralmaintenance requirements, triggers fo,l' increases in collateral, and otherfeatures that may affect the Bank's liquidity and earnings.

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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, includingpenalties and option features over the expected life of he contract. Stress testing borrowing contracts prior to entering into the agreement andperiodically thereafter. Stress testing shall not be reliant on the results and/orassumptions provided by the funds provider. Tests will cover a reasonablerange .'of contractual triggers and external events, including interest ratechanges that could result in the exercise of embedded options, i f any, or the .Bank's termination of he agreement. Prepayment penalties may result. Evaluate m a n a g e ~ e n t processes for controlling risks, including interest raterisks arising from the borrowings and liquidity risks. Contingent funding plansshall encompass the potential for agreement tenninations. Contingent fundingplans will also consider any hedges or other plans for minimizing the adverseaffects of penalties or interest rate changes and other triggers for embeddedoptions. Determining whether ALCO or the Board has been fully informed of the risksand ramifications of complex wholesale borrowing agreements prior . oengaging 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 portfolioobjectives of the Bank and the level of sophistication of the Bank's riskmanagement.Other funding sources, including overnight and term Fed -Funds are alsoauthorized with prior ALCO counterparty approval.

X. COMPLEX WHOLESALE BORROWINGSUse of complex wholesale borrowings (with "Complex" having a definitionconsistent with the FHLB's definition) shall only be utilized subsequent tomanagement conducting a thorough review of the borrowing and the Bank's risklevels. Management will maintain and develop a sound risk management processto monitor such borrowings.In assessing the Bank's wholesale borrowing practices, the following steps shallbe performed: Review of the Bank's borrowing contracts for embedded options or otherfeatures that may affect the Bank's liquidity and sensitivity to market risks. Review collateral agreements for fees, collateral maintenance requirementsincluding 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 therisks of the various terms of each borrowing contract, including penalties andoption featw'es over the expected life of he contract. Completion of stress testing prior to and periodically thereafter, entering intoborrowing agreements.


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When relying on third party testing, review underlying assumptions and testresults. 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 ofcomplex wholesale borrowing agreements prior to engaging in thetransactions as well as on an ongoing basis. Determine whether funding strategies regarding wholesale borrowings,especially those with optionality, are consistent with both the portfolioobjectives of the Bank and the level of sophistication of the Bank's riskmanagement.

XI. BROKERED DEPOSITSA. Regulatory Defmitions and Internal GuidelinesBrokered deposits are defined as all deposits directly or indirectly obtainedthrough deposit brokers. for deposit in one or more accounts under 12 CFR337.6. Deposit brokers include any individual, partnership, or corporation thatis engaged in the business ofbrokering or placing deposits from third parties.The Bank may only enter into new or renew existing brokered deposits providedthe brokering entity has been approved as a counterparty, that the Bank isdesignated as well-capitalized under PCA provisions under FDICIA and is notsubject to any other regulatory objections.The definition ofdeposit broker excludes insured depository institutions acting asintermediaries or agents for government agencies and departments placing moneyin Banks owned by women or minorities.Deposit brokers are prohibited from soliciting or placing any deposit with theBank unless the broker has provided the FDIC with written notice that it is adeposit broker. The FDIC may prescribe the form and content of the writtennotice.ALCO is responsible for thoroughly analyzing the terms, maturities, and sourcesbefore contracting with any individual third party deposit source and tocollaborate with the General Counsel to determine whether or not a deposit wouldbe determined as "brokered" under 12 CFR 337.6. All such requests forcontracts, placement, or access to such funds will be reviewed and approved priorto execution by ALCO.Dealers are restricted to recognized names in the brokerage business, and fees willnot be paid in advance of full disclosures of all terms concerning the availabilityof such funds.B. FDICIA Limits on Brokered Deposit UseIt is the policy of the Bank to comply with the FDICIA limits on the use ofbrokered deposits, as follows:


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D W e l l ~ c a p i t a l i z e d insured depository institutions may accept, renew, or rollover brokered deposits without first obtaining a waiver from the FDIC. Aw e l l ~ c a p i t a l i z e d institution is one that has a total r i s k ~ b a s e d capital ratio of10 percent or greater, a tier 1 r i s k ~ b a s e d capital ratio of 6 percent orgreater, and a leverage ratio of S percent or greater. Also, it is not subjectto any fonnal written agreement, order, capital directive, or promptcorrective action directive to meet and maintaina specific capital level forany capital measure.

D Adequately capitalized insured depository institutions are prohibited fromaccepting, renewing, or rolling over brokered deposits unless they firstobtain a waiver from the FDIC. An adequately capitalized institution isone that has a total risk-based capital ratio of 8 percent or greater, a tier 1r i s k ~ b a s e d capital ratio of 4 percent or greater, and a leverage ratio of 4percent or greater (or a leverage ratio. of 3 percent or greater if theinstitution is rated composite 1 under the CAMEL or MACRO ratingsystem in its most recent report of examination, subject to appropriatefederal Banking agency guidelines), and does not meet the definition of aw e l 1 ~ c a p i t a 1 i z e d institution.

D Undercapitalized insured depository institutions are prohibited fromaccepting, renewing, or rolling over brokered deposits. Anundercapitalized institution is one that has a total r i s k ~ b a s e d capital ratioof less than 8 percent, a tier 1 r i s k ~ b a s e d capital ratio of less than 4percent, and a leverage ratio of less than 4 percent (or a leverage ratio ofless than 3 percent if the institution is rated composite 1 under theCAMEL or MACRO rating system in its most recent report ofexamination, subject to appropriate federal Banking agency guidelines).D Adequately capitalized and undercapitalized institutions are prohibitedfrom soliciting deposits by offering rates of interest that are 7S basis pointsabove the "national rate" deposit market rates as reported weekly on theFDIC web site.D Notwithstanding any of the foregoing, if the Bank receives anycorrespondence from its regulatory agencies that affect the foregoing, thatguidance will be provided to ALCO for its immediate evaluation.

Management is responsible for monitoring the Bank's capital level and forensuring that the Bank is in compliance with any regulatory restrictions andlimitations.C. Adequately Capitalized InstitutionsIn a situation where the Bank may fall below the well-capitalized institutioncapital profiles (total r i s k ~ b a s e d capital ratio of 10 percent; Tier 1 r i s k ~ b a s e d capital ratio of 6 percent; and a leverage ratio of 5 percent), or otherwise bedesignated as less than well-capitalized, management must obtain a waiver toaccept brokered deposits. The FDIC may waive the brokered deposits prohibitionsplaced on an 'adequately capitalized' depository institution; this waiver isdetermined on a c a s e ~ b y - c a s e basis.

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I f he 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 toobtain a waiver' with the General Counsel. In addition, restrictions limiting theamount of interest that the Bank can pay on brokered or other deposits will alsoapply.Specifically, the FDIC may grant such a waiver i f the acceptance of brokereddeposits do not constitute an unsafe or unsound banking practice, and theinstitution's brokered deposit operations do not pose an undue risk to theorganization. To obtain a waiver to accept brokered deposits, the Bank must file awritten application with its FDIC regional director for supervision. The format ofthe application may bea written letter; however, it is important that the letterincludes the following:

Time period for which the waiver may be needed Policy statement for the Bank establishing corporate governance regardingthe 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 depositscurrently held and anticipated during the requested waiver period,including any internal limits placed on terms, solicitation, and use ofbrokered deposits Description of how the brokered deposits are cost-analyzed and comparedto other funding alternatives Description of the Bank's lending and investment activities will use thebrokered depOsits, with specific reference to future asset growthDescription ofprocedures and controls used to solicit brokered deposits,including identification of the principal sources of the deposits Description of the management information systems utilized to supervisethe solicitation, acceptance, and use ofbrokered deposits . Recent consolidated statement with balance sheet and income statementsReasons that the board ofdirectors and management have considered theacceptance, renewal, or roll over of brokered deposits pose no undue riskto the Bank

In addition, the waiver request should. include the net interest spread being earnedon these deposits, the need for such deposits, and the maturity ofmatched assets.D. Deposit BrokerRecords and ReportsThe FDIC may require, by regulation, that each deposit broker maintain separaterecords relating to the total amounts and maturities of the deposits placed by thebroker for each insured depository institution. The FDIC may also require each, deposit broker to file with the FDIC separate quarterly reports relating to the totalamounts and maturities of the deposits that the broker placed for each depositoryinstitution during the applicable quarter.

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The Chief Accounting Officer and/or Controller are responsible for ensuring thatthe Bank's regulatory reports filed with the FDIC are consistent with any reportsfiled by a deposit broker.ALCO shall manage Bank: use of brokered deposits to ensure those deposits arebeneficial to the Bank, within acceptable risk parameters, including pricing, andmaturity and source concentrations. Management shall develop prudent reviewsof brokered deposits to ensure risk identification and management of thesedeposits.The following elements shall be addressed by ALCO in the risk managementprocess as they relate to the Bank's usage of brokered 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 theiruse Reasonable control structures to limit funding concentrations. Limit structuresshall consider typical behavioral patterns for depositors or investors arid bedesignated to control excessive reliance on any significant sources or type offunding. Management information systems (MIS) that clearly identify non-relationshipor higher-cost funding programs and allow management to track performance,manage funding gaps, and monitor compliance with concentration and otherrisk 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 PLANManagement has a Contingency Funding Plan (CFP) as part of the Bank'sliquidity risk management process. The CFP will include cash flow projectionsand comprehensive fimding plans that forecast funding needs and funding sourcesunder various market scenarios including aggressive asset growth or rapid liabilityerosion. The Bank's CFP will be used for the following purposes: Routine liquidity management Monitoring/planning during periods ofextraordinary asset growth Contingency planning during emergency and distress environmentsThe CFP will anticipate all of the Bank's funding and liquidity needs during bothtemporary and long-term liquidity changes by: Analyzing and making quantitative projections of all significant on- and offbalance Sheet funds flows and their related effects Matching potential cash flow Sources and uses of funds

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Establishing indicators that alert managemeIit to a predetermined level ofpotential risksThe CFP shall identify, quantify, and rank all sources of funding by preferenceincluding: Reducing assets (e.g. regular sales of guaranteed portions of originated SBAloans, irregular sales ofother 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 changesManagement shall also consider asset management strategies for responding to aliquidity crisis including: Whether to liquidate surplus money market aSsets When held-to-maturity assets should be transferred' to available-for-sale,, liquidated, if need

0789-0854 [tab c exs. 25(f)-(k)] (public)

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