BOARD OF GOVERNORS

OF'THE:

FEDERAL RESERVE SYSTEM

WASHINGTON, O. Co 20S51

ADDRESS OFFICIAL CORRESPONDENCE

TO THE BOARD

March 25, 2008

Karen Grandstrand, Esq.

Fredrikson & Byron, P.A.

200 South Sixth Street, Suite 4000

Minneapolis, Minnesota 55402

Dear Ms. Grandstrand:

This is in response to the request by Minnwest Corporation,

Minnetonka, on behalf ofits wholly owned subsidiary banks, Minnwest Bank

Metro, ("Metro Bank"), Rochester, and Minnwest Bank, M.V. ("Minnwest Bank"),

Redwood Falls, all in Minnesota, for an exemption from section 23A ofthe Federal

Reserve Act and the Board's Regulation W. 1 The requested exemption would

permit (1) Metro Bank to acquire all the shares ofits affiliate, Minnwest Capital

Corporation ("MCC"), also in Minnetonka, and (2) Minnwest Bank to purchase

from Metro Bank $5.6 million in lease participations originated by MCC

immediately after the transfer ofMCC to Metro Bank.

Section 23A and Regulation W limit the amount of "covered

transactions" between a bank and any single affiliate to 10 percent ofthe bank's

capital stock and surplus and limit the amount of covered transactions between a

bank and all its affiliates to 20 percent ofthe bank's capital stock and surplus.

"Covered transactions" include a bank's purchase of assets from an affiliate and a

bank's extension of credit to an affiliate. The statute and regulation also require a

bank to secure its extensions of credit to, and certain other covered transactions

with, affiliates with prescribed amounts of collateral. In addition, section 23A and

Regulation W prohibit a bank from purchasing low-quality assets from an affiliate.

Regulation W provides that a bank's acquisition of a security issued

by a company that was an affiliate ofthe bank before the acquisition is treated as a

I 12 U.S.C. § 371c; 12 CFR part 223.
- 2 -

purchase of assets by the bank from an affiliate if(i) the company becomes an

operating subsidiary ofthe bank as a result ofthe transaction and (ii) the company

has liabilities at the time ofthe acquisition.2 MCC is currently an affiliate ofMetro

Bank and would become an operating subsidiary ofMetro Bank immediately after

the reorganization. When the reorganization occurs, MCC will have outstanding

liabilities. Accordingly, Minnwest Corporation's transfer of all the capital stock of

MCC to Metro Bank would be an asset purchase subject to the quantitative and

qualitative limitations ofsection 23A and Regulation W. The Regulation W value

ofthe covered transaction would be approximately $16.4 million - the total

liabilities ofMCC at the time ofthe reorganization.3 Because the capital stock and

surplus ofMetro Bank at the time ofthe contribution would be approximately

$15.9 million, the proposed covered transaction would exceed Metro Bank's

quantitative limits under section 23A and Regulation W. Accordingly, Metro Bank

has requested an exemption to permit it to accomplish the reorganization.

In addition, Metro Bank plans to sell participations in MCC-originated

leases to its affiliated banks, including $5.6 million in lease participations to

Minnwest Bank. Because the capital stock and surplus ofMinnwest Bank is

approximately $46.1 million, the proposed covered transaction would exceed

Minnwest Bank's quantitative limits under section 23A and Regulation W.

Accordingly, Minnwest Bank has requested an exemption to permit it to purchase

these lease participations in connection with the reorganization.4

2 See 12 CFR 223.31(a).

3 See 12 CFR 223.31(b).

4 As noted, Metro Bank and Minnwest Bank are wholly owned subsidiaries of

Minnwest Corporation. Covered transactions between the banks generally would

be exempt from the quantitative limits ofsection 23A under the "sister bank"

exemption, which exempts covered transactions between insured depository

institutions where 80 percent or more ofthe voting shares ofthe institutions are

controlled by the same company. See 12 U.S.C. § 371c(d)(1)(C). In this case,

however, staffbe1ieves that where Bank A purchases assets from an affiliate and

Bank B immediately purchases those assets from Bank A, it is the functional

equivalent ofBank B purchasing the assets from the affiliate directly. This

interpretation prevents banks from using the "sister bank" exemption to circumvent

the quantitative limitations by using a larger bank to purchase assets from an

affiliate and then having those assets purchase by a smaller bank in quantities that

the smaller bank could not buy directly from the affiliate.
- 3 -

Section 23A and Regulation W specifically authorize the Board to

exempt, in its discretion, transactions or relationships from the requirements ofthe

statute and rule ifthe Board finds such exemptions to be in the public interest and

consistent with the purposes ofsection 23A. 5 The Board has approved _exemptions

under section 23A for one-time asset transfers that are part of a corporate

reorganization and that are structured to ensure the quality ofthe transferred assets.

As in previous cases reviewed by the Board, the proposed transaction in this case is

a by-product of a one-time corporate reorganization. Minnwest is consolidating its

equipment leasing activities into Metro Bank as part of a larger reorganization.

According to Minnwest Corporation, this exemption is in the public interest

because the reorganization is expected to enhance the efficiency ofits lending

programs, to streamline its management, and to reduce its operating expenses.

In addition, Minnwest Corporation has made the following

commitments as part ofthe exemption request:

1. Minnwest Corporation commits for a two-year period following the

contribution ofMCC to make a cash payment to Metro Bank equal to

the book value at the end of each calendar quarter plus write-downs

during that quarter by Metro Bank of any transferred assets that were

low-quality assets at the end ofthat quarter. For any assets associated

with the reorganization that are transferred to another subsidiary

insured depository institution ofMinnwest Corporation and

subsequently become low-quality assets during this two-year period,

Minnwest Corporation will make a cash payment to that subsidiary

depository institution that is equal to the book value at the end of each

calendar quarter plus write-downs during that quarter by that

subsidiary insured depository institution of any transferred assets that

were low-quality assets at the end ofthat quarter. Minnwest

Corporation will make the cash payment within 30 days after the end

of each calendar quarter.

2. Minnwest Corporation also commits that Metro Bank, or any other

subsidiary insured depository institution ofMinnwest Corporation to

which the above noted assets are transferred, will hold an amount of

risk-based capital equal to the book value of any transferred assets

5 12 U.S.C. § 371c(f)(2); 12 CFR 223.43(a).
- 4 -

that become low-quality so long as the bank retains ownership or

control ofthe transferred assets. For example, under this dollar-fordollar capital requirement, the risk-based capital charge for each

transferred low-quality loan asset would be 100 percent (equivalent to

a 1250 percent risk weight), rather than the 8 percent requirement

(equivalent to a 100 percent risk weight) that would apply to a similar

defaulted loan asset that is not a part ofthe transferred asset pool.

3. Before the purchase of assets is consummated, a majority ofMetro

Bank's and Minnwest Bank's directors will review and approve the

transaction.

As a condition ofthis exemption, Metro Bank or any other subsidiary

insured depository institution ofMinnwest Corporation to which the assets

associated with this transaction are transferred must remain well capitalized, based

on the Federal Deposit Insurance Corporation's risk-based capital guidelines and

the modifications to those guidelines described in the commitments above. These

commitments are similar to commitments relied on by the Board in previous

cases.6 These commitments have been modified, however, to clarify that any funds

transferred by Minnwest Corporation to its subsidiary banks to support any lowquality assets will provide a cushion of additional capital in excess ofthe banks'

required regulatory capital. The commitments ensure that such funds will remain

available to the banks and will not be returned to Minnwest Corporation through a

dividend or a return of capital.

The Federal Deposit Insurance Corporation has also informed the

Board that it has no objection to the proposal. In light ofthese considerations and

all the facts you have presented, the reorganization transaction appears to be

consistent with safe and sound banking practices and on terms that would ensure

the quality ofthe assets transferred. Accordingly, the transaction appears to be

consistent with the purposes ofsection 23A, and the Director ofthe Division of

Banking Supervision and Regulation, pursuant to authority delegated by the Board,

and with the concurrence ofthe General Counsel, hereby grants the requested

exemption.

6 See Board letter dated December 21,2007, to Andres L. Navarette, Esq. (Capital

One Financial Corporation).
- 5 -

This detennination is specifically conditioned on compliance by

Minnwest Corporation, Metro Bank, Minnwest Bank, and MCC with all the

commitments and representations made to the Board in connection with the

exemption request. These commitments and representations are deemed to be

conditions imposed in writing in connection with granting the request and, as such,

may be enforced in proceedings under applicable law. This determination is based

on the specific facts and circumstances surrounding the proposed transaction and

may be revoked in the event of a material change in those facts and circumstances

or failure by Minnwest Corporation, Metro Bank, Minnwest Bank, or MCC to

observe its commitments or representations. Granting this exemption does not

represent a determination concerning the pennissibility of any other transactions in

which Minnwest Corporation, Metro Bank, Minnwest Bank, or MCC engages that

are subject to section 23A or Regulation W.

Sincerely yours,

Robert deY. Frierson

Deputy Secretary ofthe Board

cc: Federal Reserve Bank ofMinneapolis

Federal Deposit Insurance Corporation