Regulators usually bristle at the idea of a holding company siphoning capital from a banking unit, but their stance may be softening, if two recent decisions are any indication.
Last week, two banks in Washington state Anchor Bank and First Savings Bank Northwest said that they had been given regulatory approval to make so-called upstream capital transfers. These are special dividends paid from a bank to its holding company, which are often used to service the parent company's debt or pay its expenses.
Regulators have generally been hesitant to approve such payments in the years since the financial crisis, preferring that capital remain at the bank level rather than being used to support the parent company. The approvals announced last week could suggest that regulators are starting to soften their stance.
"It's still difficult to get approval, but the regulators are getting a little more comfortable with capital levels," said Joel Rappoport, a banking attorney at Kilpatrick Townsend & Stockton.
The two payments approved last week are for very different purposes and of very different sizes. Anchor Bank will pay $350,000 to cover routine expenses at its holding company, Anchor Bancorp. And First Savings Bank Northwest will pay $70 million to its parent, First Financial Northwest, to be used for a stock buyback and to fund growth.
Bankers are uncertain how much they should read into those decisions.
"It's really difficult to tell how much is, in fact, an attitudinal change on the part of the regulators and how much is a reaction to improvements both in the economic environment and our internal economic condition," said Jerald Shaw, the president and chief executive of Anchor Bank and its holding company.
Moreover, it is unclear whether, on the aggregate, regulators have begun to approve more upstream payments than in years past. Reliable numbers on these kinds of cash transfers are scarce, because, depending on a bank's charter type and recent performance, many are permitted to send cash upstream without asking the regulators for approval.
The Federal Deposit Insurance Corp. was the lead agency in the Anchor and First Savings Bank Northwest decisions. An FDIC spokesman said the agency cannot provide information on upstream payments by banks it regulates.
However, banking lawyers say that they have detected the beginnings of a thaw.
"There is more willingness now to approve a dividend payment to the holding company for a specific reason if the bank is improving," said David Baris of Buckley Sandler.
Both Anchor and First Savings Bank Northwest have given regulators reason for optimism, having freed themselves from regulatory orders after suffering heavy losses in the downturn. They've also benefited from the economic vitality, relative to the rest of the United States, of Washington's Puget Sound region, where both banks are located.
The $389 million-asset Anchor Bank held a Tier 1 capital ratio of 13.78% at the end of the September. At the time of the approval, Anchor was under a supervisory directive with the Washington Department of Financial Institutions. That order was lifted just days after the upstream payment was approved. It had been freed from a 2009 cease-and-desist order with the FDIC in 2012.
"The economy is getting better, and there is a significant reduction in nonperforming assets far and wide, which is certainly the case with us," Anchor Bank's Lacey said. "Those of us who have succeeded in weathering the storm are seeing the results."
The $909 million-asset First Savings Bank Northwest had more capital than Anchor, with a Tier 1 ratio of almost 19%, and no regulatory orders.
Despite First Savings' health and excess of capital, getting approval for the payment took months, and the regulators scrutinized the bank's finances very closely, CEO Joseph Kiley said.
"Our situation was unique because we had substantial capital at all levels," he said. "Having said that, the regulators, particularly the FDIC, were very thorough. They asked a lot of good questions... to get to the point where they would let us transfer bank capital to the holding company."
It remains very unusual for banks under regulatory orders as Anchor was at the time of its approval to get permission to transfer cash to their holding companies, industry observers say. Regulatory orders generally forbid upstream payments without approval.
Rejections can put troubled banks in a bind. It can be difficult to get approval for an upstream payment even when a holding company faces default on trust-preferred securities or other debts. More than a dozen holding companies in this situation have been forced to declare bankruptcy.
Regulators' reluctance to approve these payments is long-standing. They are much more concerned with the health of the bank than the holding company, despite griping from the parent company's creditors or investors.
"Banking law is geared toward the holding company being the source of strength to the bank, not the other way around," Baris said. "But at the same time, what happens to the holding company also happens to the bank."
Though plenty of questions remain about regulators' thinking, observers say regulators appear to have eased up slightly from their stance in the immediate post-recession period, when the economy was worse and capital levels lower.
"It's not so much a change in policy as much as a change in circumstance," Rappoport said. "It's a good sign that regulators are feeling more confident in the industry."