EXHIBIT 99.2
OPERATING AGREEMENT
Direct Merchants Credit Card Bank, N.A.;
Metris Companies Inc.;
and
the Office of the Comptroller of the Currency
WHEREAS, on or about January 23, 2003, Direct Merchants Credit Card
Bank, N.A., Scottsdale, Arizona ("DMCCB" or "Bank"), submitted a request to the
Comptroller of the Currency of the United States of America ("Comptroller,"
"OCC," or "agency") for approval to pay a dividend to its ultimate parent
company, Metris Companies Inc. ("Parent" or "Metris"); and
WHEREAS, the Bank's request for approval to pay a dividend to Metris
was submitted to the Comptroller as required by 12 U.S.C. ss. 60(b); 12 C.F.R.
ss. 5.64(b); and the Formal Agreement entered into by and between the Bank and
the OCC on April 16, 2002; and
WHEREAS, on March 18, 2003, the OCC granted conditional approval of
the payment of the dividend, subject to compliance with certain requirements and
conditions imposed in writing ("Conditional Approval"), including the execution
of this Operating Agreement ("Agreement"); and
WHEREAS, the Bank, Metris, and the Comptroller seek to ensure that the
Bank will continue to operate safely and soundly and in accordance with this
Agreement that has been approved by the OCC;
NOW, THEREFORE, the Bank, by and through its duly elected Board of
Directors ("Board"), Metris, by and through its duly elected Board, and the
Comptroller, by his authorized representative, agree as follows:
ARTICLE I
JURISDICTION
(1) This Agreement shall be construed to be a "written agreement
entered into with the agency" within the meaning of 12 U.S.C. ▇▇.▇▇. 1818(b)(1)
and 1818(e).
(2) This Agreement shall be construed to be a "written agreement
between such depository institution and such agency" within the meaning of 12
U.S.C. ss. 1818(i)(2) and becomes effective immediately upon its execution by
all parties ("Effective Date").
(3) All correspondence related to this Agreement, and any information,
documentation, reports, plans and/or other written submissions which the Bank or
its Board have agreed to submit pursuant to this Agreement shall be forwarded,
by overnight mail, to:
Director for Special Supervision
Office of the Comptroller of the Currency
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with a copy sent by overnight mail to:
Assistant Deputy Comptroller for Credit Card Banks
Office of the Comptroller of the Currency
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Examiner-in-Charge of Direct Merchants Credit Card Bank, N.A.
Office of the Comptroller of the Currency
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ARTICLE II
APPROVAL REQUIREMENTS
(1) The Bank acknowledges that it is obligated to comply with the
conditions and requirements detailed in this Agreement and in the Conditional
Approval, hereinafter collectively referred to as "Approval Requirements."
ARTICLE III
CORPORATE STRUCTURE AND GOVERNANCE
(1) The Board of the Bank shall at all times ensure that its management
and officers have the knowledge and skills necessary to execute the Bank's
strategic plan and manage the Bank's risk.
(2) The Board of the Bank shall maintain and ensure Bank adherence to
policies and procedures that preserve the Bank's separate corporate identity,
including without limitation, the maintenance of books and records that are
separate and apart from Metris, under the control of the Bank, and readily
available to OCC personnel upon request.
(3) Within thirty (30) days of the Effective Date, the Bank's Board
shall be comprised of a majority of directors who are independent of the Bank
and any affiliate of the Bank. In addition, the Bank's Audit Committee shall be
comprised entirely of directors who are independent of the Bank and any
affiliate of the Bank.
(4) The Bank shall continue to comply with the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") annual financial audit
requirements of 12 C.F.R. ss. 363 until its asset size is reduced to $500
million or less. Once the Bank's asset size is $500 million or less, the Bank
shall, on an annual basis, obtain an independent external audit that is separate
from the audit of Metris and that is sufficient to render an opinion on the
financial statements of the Bank.
(5) The Board of the Bank shall at all times ensure an adequate system
of internal controls appropriate to the Bank's size, scope of operations, and
risks of its activities, in accordance with a written action plan adopted by the
Board of the Bank and submitted to the Comptroller for review. On at least an
annual basis, as appropriate, management shall review with the Board of the Bank
the goals and objectives of the written action plan, and the Bank shall make
changes, as warranted, to address any deficiencies noted during this review. The
Bank shall provide a copy of any such changes to the Comptroller for
determination of supervisory non-objection.
(6) The Board of the Bank shall ensure adherence to an independent,
internal audit program sufficient to support the Bank's risk profile, size, and
complexity. The Board of the Bank shall ensure compliance with the internal
audit program approved by the Board.
(7) The Board of the Bank shall ensure adherence to the Compliance and
Operational Risk Management Program as approved by the Board of the Bank and to
which the Comptroller has provided a determination of non-objection. On at least
an annual basis, as appropriate, management shall review with the Board of the
Bank the goals and objectives of the Compliance and Operational Risk Management
Program, and the Bank shall make changes, as warranted, to address any
deficiencies noted during this review. The Bank shall provide a copy of any such
changes to the Comptroller for determination of supervisory non-objection.
(8) The Board of the Bank shall ensure that control functions,
including compliance, quality assurance, and internal audit, are adequately
staffed with respect to both the experience level and number of individuals
employed.
ARTICLE IV
ASSET AND LIABILITY STRUCTURE
(1) The Bank shall reduce its on-balance sheet Credit Card Receivables
in accordance with the following schedule: (i) no more than $550 million in
Credit Card Receivables on the Bank's books by December 31, 2003; and (ii) $0 in
Credit Card Receivables on the Bank's books by December 31, 2004. While the Bank
is reducing its Credit Card Receivables in accordance with this paragraph, the
mix of Subprime Credit Card Receivables on the Bank's books shall not exceed
sixty percent (60%) of Credit Card Receivables measured in both dollars and
accounts, unless the OCC poses no objection.
(2) The Bank shall immediately notify the OCC in writing if it cannot
meet the target amounts by the target dates as set forth in paragraph (1) of
this Article. Within ten (10) days following this notification, the Bank shall
submit a plan to the OCC for its prior supervisory non-objection, which plan
shall set forth the Bank's strategy to cure this default within thirty (30) days
of receiving a determination of supervisory non-objection from the OCC. The cure
period provided by Article XIII shall not apply to this paragraph.
(3) The Bank shall continue to sell on a daily basis all Credit Card
Receivables tied to accounts whose receivables are designated for sale to Metris
under the Second Amended and Restated Bank Receivables Purchase Agreement, dated
as of January 22, 2002, by and between Metris and the Bank ("Bank Receivables
Purchase Agreement"), and any other bank receivables purchase agreements.
(4) The Bank shall include with its daily liquidity report required by
Article VI, paragraph (1), a written confirmation that all Credit Card
Receivables required to be sold pursuant to the terms of paragraph (3) of this
Article and of the Bank Receivables Purchase Agreement, or any other bank
receivables purchase agreements, have been sold in accordance with the terms
thereof. Such confirmation shall include the dollar volume of Credit Card
Receivables sold each day, including any receivables sold pursuant to paragraph
(1) of this Article.
(5) In the event the daily sale of Credit Card Receivables required by
paragraph (3) of this Article does not occur on any day or transaction
receivables are not pre-funded as required by First Data Resources, the Bank
shall immediately notify the OCC and Metris. In the event Metris fails, after
the notice required by this paragraph has been given, to comply with the
liquidity provisions of the Capital Assurances and Liquidity Maintenance
Agreement ("CALMA") as required, the Bank shall, at the direction and sole
discretion of the OCC, cease (i) granting additional extensions of credit or
approval of any authorizations on credit cards issued by the Bank; and (ii)
issuing additional credit cards. The cure period provided by Article XIII shall
not apply to this paragraph.
(6) Prior to revising the existing Bank Receivables Purchase Agreement,
or entering into any new bank receivables purchase agreements, the Bank shall
certify to the OCC that the new bank receivables purchase agreement or revised
Bank Receivables Purchase Agreement comply with 12 U.S.C. ▇▇.▇▇. 371c and
371c-1.
(7) Within fifteen (15) days from the Effective Date, the Bank shall
develop and submit to the Comptroller a plan to reduce the Bank's reliance upon
deposits to fund its operations. The plan required by this paragraph shall be
consistent with the strategic plan required by Article VIII, and prior to being
implemented, shall receive the Comptroller's determination of supervisory
non-objection.
ARTICLE V
CAPITAL
(1) The Bank shall establish and at all times thereafter maintain
minimum capital in the aggregate amount of: (i) the Liquidity Reserve Deposit
("LRD") Requirement described in Article VI; (ii) the result of the two-hundred
percent (200%) risk-weight applied to on-book Subprime Credit Card Receivables;
and (iii) the minimum capital required pursuant to 12 C.F.R. Part 3, Appendix A,
for well-capitalized institutions for all remaining assets owned by the Bank
(collectively, the "Required Capital"). The Bank shall calculate the Required
Capital as of month-end no later than the twentieth (20th) day of the following
month, and shall submit to the OCC a written certification showing this
calculation and signed by the Chief Financial Officer and one director of the
Bank. In any month that the calculation shows that the Bank's capital level is
below the Required Capital, the Bank shall notify the OCC by 5:00 P.M. PST (or
PDT) of the next business day after making the calculation, and make written
demand upon Metris for contribution of capital, in accordance with the terms of
the CALMA required by paragraph (3) of this Article. As long as the Bank is in
compliance with this Agreement and with applicable statutory and regulatory
requirements, including 12 U.S.C. ▇▇.▇▇. 56 and 60(a), the Bank may declare and
pay dividends to Metris.
(2) If the Bank's capital falls below the Required Capital set forth in
paragraph (1) of this Article and the deficiency is not corrected within three
(3) business days after the Bank provides notice to the OCC and Metris as
required by paragraph (1) of this Article, the Bank will be deemed to be
"undercapitalized" for purposes of the Prompt Corrective Action ("PCA") statute
and implementing regulations (12 U.S.C. ss. 1831o and 12 C.F.R. Part 6) and the
OCC may take whatever action it deems appropriate as if the Bank were
undercapitalized under PCA. The cure period provided by Article XIII shall not
apply to this paragraph.
(3) On or before the Effective Date, the Bank and Metris shall execute
a CALMA in a form to which the Comptroller has provided a determination of
supervisory non-objection.
(4) On or before the Effective Date, the Bank shall provide the OCC
with: (i) the fully executed CALMA entered into by and between the Bank and
Metris; and (ii) the resolutions adopted by the Boards of the Bank and Metris
evidencing the respective Boards' approvals and authorizations to enter into and
be bound by the CALMA.
(5) The Bank shall take all actions to enforce the terms of the CALMA.
The Bank shall not modify, amend or terminate, or agree or consent to modify,
amend or terminate the CALMA without the prior written determination of
supervisory non-objection of the OCC. Furthermore, the Bank shall not assign, or
agree or consent to assign the CALMA without the prior written determination of
supervisory non-objection of the OCC.
ARTICLE VI
LIQUIDITY
(1) The Bank shall at all times maintain sufficient Liquid Assets, as
defined in Article XII, to meet the daily liquidity needs of the Bank.
Commencing on the Effective Date, the Bank shall prepare a daily liquidity
report reflecting the amount of deposits and other liabilities, including
settlement obligations owed to MasterCard International Incorporated
("MasterCard(R)") maturing in the next thirty (30) days, together with
forecasted on-book and off-book Credit Card Receivables growth (including
expected credit card usage and collections); the level of Liquid Assets; and
other available committed financing facilities available for payment of these
deposits, other liabilities, and funding of forecasted growth (daily liquidity
needs), as well as the confirmation required by Article IV, paragraph (4), that
Credit Card Receivables have been sold. This daily liquidity report shall be
provided to the OCC by 5:00 P.M. PST (or PDT) of the next business day. On a
daily basis, the Bank shall maintain, at a minimum, Liquid Assets of not less
than one-hundred percent (100%) of the deposits and other liabilities coming due
in the next thirty (30) days. If at any time the Bank possesses insufficient
Liquid Assets necessary to meet the daily liquidity requirement, the Bank shall,
on the day the liquidity requirement is not met, notify the OCC and make a
written demand upon Metris to provide the necessary liquidity under the terms of
the CALMA.
(2) At all times, the Bank shall maintain Marketable Assets, as defined
in Article XII, in an amount equal to or in excess of the Bank's insured
deposits. The Bank shall submit to the OCC an explanation of the valuation
method used to determine the market value of the Marketable Assets for prior
determination of supervisory non-objection. On or before the fifteenth (15th)
day of each month, the Bank shall submit to the OCC a written certification
signed by the Chief Financial Officer and one director of the Bank that the Bank
was in compliance with this paragraph for each day during the prior month.
(3) Within thirty (30) days from the Effective Date, the Bank shall
enter into a Liquidity Reserve Deposit Agreement ("LRD Agreement") with a
third-party insured depository institution ("Depository Bank") and the OCC,
whereby the Bank will maintain Liquid Assets, as defined in Article XII, in an
amount and type acceptable to the Comptroller, in the Depository Bank ("LRD
Account"), to be used to support the Bank's Credit Card Receivables funding
needs (including settlement obligations owed to MasterCard(R)), and requirements
in the event Metris or its affiliates fail to purchase Credit Card Receivables
in accordance with the Bank Receivables Purchase Agreement as required by
Article IV. The terms of the LRD Agreement and the Depository Bank shall be
acceptable to the Comptroller. The amount of Liquid Assets required under this
paragraph, which may be used in calculating the Bank's capital level required by
this Agreement, shall be maintained, at a minimum, in an amount as described in
Exhibit A, which is incorporated by reference herein, ("LRD Requirement"). The
Bank shall determine the amount of Liquid Assets on a prospective basis, and
make adjustments on or before the first (1st) day of the month to ensure that
sufficient Liquid Assets are maintained for that month. In the event the balance
of the LRD Account exceeds the LRD Requirement, the Bank may reduce the balance
in the LRD Account in accordance with paragraph (4) of this Article and the
terms of the LRD Agreement.
(4) On or before the fifteenth (15th) day of each month, the Bank shall
submit a written certification to the OCC which contains: (i) the LRD
Requirement for that month; (ii) the supporting documentation used in
calculating the LRD Requirement; (iii) the value of the Liquid Assets currently
in the LRD Account; and (iv) the necessary documentation for the Comptroller's
concurrence of any reduction to be made to the LRD Account, and signed by the
Chief Financial Officer and one director of the Bank. All changes to the LRD
Account shall be made pursuant to the terms of the LRD Agreement.
(5) As part of the Bank's liquidity risk management process, the Board
of the Bank shall ensure that a written Contingency Funding Plan ("CFP") is
completed and approved by the Board of the Bank each quarter, or when a change
occurs which has a material impact on the Bank or the Parent's liquidity funding
positions. The Bank shall provide a copy of any such changes of the CFP to the
Comptroller for determination of supervisory non-objection.
ARTICLE VII
BOOKS AND RECORDS
(1) The Bank shall provide the OCC with all information and reports as
requested by the OCC within the time specified by the OCC so that the OCC is
able to evaluate the Bank's and Metris' overall financial condition, significant
trends, and relations between affiliates that may influence the Bank's risk
profile, including documentation relating to the CALMA.
(2) The Bank and Metris shall provide all OCC personnel with prompt and
unrestricted access to the books, records and staff of the Bank and its
affiliates, including Metris, and shall provide full and complete details and
purposes of the transactions by and between the Bank and its affiliates,
including Metris, to OCC personnel upon inquiry.
ARTICLE VIII
STRATEGIC PLAN
(1) Within sixty (60) days from the Effective Date, the Board shall
approve and the Bank shall submit to the OCC its written strategic plan,
consistent with the Metris strategic plan, covering at least a three (3) year
period. The strategic plan shall establish objectives for the Bank's overall
risk profile, earnings performance, growth, balance sheet mix, off-balance sheet
activities, liability structure, capital adequacy, product line development and
marketing segments, together with strategies to achieve those objectives and, at
a minimum include:
(a) a mission statement that forms the framework for the establishment of
strategic goals and objectives;
(b) an explanation of how the Bank's strategic goals and objectives
interrelate with those of Metris;
(c) an assessment of the Bank's present and future operating environment;
(d) the development of strategic goals and objectives to be accomplished
over the short and long term, including, but not limited to,
strategies for reducing on-book Credit Card Receivables to a level
equal to zero in accordance with this Agreement. These strategic goals
and objectives shall include interim target dates and target amounts;
(e) the development of a defined funding strategy;
(f) an identification of the Bank's present and future product lines and
market segments, including the Bank-related activities of Metris, that
will be utilized to accomplish the strategic goals and objectives;
(g) an evaluation of the Bank's internal operations, staffing
requirements, Board and management information systems, and policies
and procedures for their adequacy and contribution to the
accomplishment of the goals and objectives;
(h) specific plans to outsource functions and responsibilities to third
parties or affiliates;
(i) specific plans to accomplish identified strategic goals and
objectives, including individual responsibilities, accountability and
specific time frames;
(j) a financial forecast to include projections for major balance sheet
and income statement accounts and desired financial ratios over the
period covered by the strategic plan;
(k) control systems to mitigate risks associated with planned new
products, growth, or any proposed changes in the Bank's operating
environment;
(l) specific plans to establish responsibilities and accountability for
the strategic planning process, new products, growth goals, or
proposed changes in the Bank's operating environment; and
(m) systems to monitor the Bank's progress in meeting the plan's goals and
objectives.
(2) Prior to implementation of the strategic plan, a copy of the plan
shall be forwarded to the OCC for review and determination of supervisory
non-objection. Upon receipt of the OCC's supervisory non-objection, the Board of
the Bank shall implement and ensure adherence to the strategic plan.
(3) The Board of the Bank shall ensure that the Bank has processes,
personnel, and control systems to ensure implementation of and adherence to the
strategic plan developed pursuant to this Article and ensure that the plan is
updated on an annual basis to cover the next three (3) years.
(4) Prior to making any changes that may have a material impact on the
strategic plan adopted pursuant to this Article, the Bank shall provide the OCC
with fifteen (15) days advance written notice of such changes and shall not
implement such changes without first receiving a determination of supervisory
non-objection from the OCC. For purposes of this paragraph, changes that may
have a material impact on the strategic plan include, but are not limited to,
any significant deviations from or material changes to: (i) marketing
strategies, marketing partners, or acquisition channels; (ii) underwriting
practices and standards for account and/or portfolio acquisitions; (iii) account
management strategies and test programs; (iv) collection strategies, partners,
or operations; (v) fee structure or fee application methods; (vi) accounting
processes and practices; (vii) funding strategies and capital maintenance;
(viii) current business focus, for example, entrance into or exiting from a
business segment; and (ix) any other changes in personnel, operations or
external factors that may have a material impact on the Bank's operations or
financial performance. The prior notice shall cover proposed deviations or
changes at the Parent or other affiliates if such deviations or changes have the
potential to affect transactions involving the Bank or other relations with the
Bank, or to result in reportable changes to the Bank's business plan or
operations.
ARTICLE IX
AFFILIATE TRANSACTIONS
(1) The Bank shall ensure that all contracts and agreements between
the Bank and any affiliate are in compliance with 12 U.S.C. ▇▇.▇▇. 371c and
371c-1, and 12 C.F.R. Part 223 ("Regulation W"). The Bank shall maintain records
and documentation showing that all contracts and agreements with affiliates are
in compliance with 12 U.S.C. ss. ss. 371c and 371c-1, and OCC personnel shall
have prompt and unrestricted access to these records and documentation.
(2) The Bank shall not enter into any new contract or agreement, or
modify, revise or renew any existing contract or agreement, with any of its
affiliates unless the contract or agreement provides that the affiliate agrees
to comply with the terms of the contract or agreement, and to provide for
reasonable time for transition to a successor to the affiliate, if requested by
the Bank or any successor to the Bank's rights under the contract or agreement.
In addition, within thirty (30) days from the Effective Date, the Bank shall
revise the Credit Card, Modeling, Servicing, Customer Service, Collections and
Administration Agreement entered into by and between the Bank and Metris Direct,
Inc. to include this provision.
(3) The Bank shall submit to the OCC, for a determination of
supervisory non-objection, (i) any new contract or agreement with any of its
affiliates, and (ii) any modifications, revisions or renewals of any existing
contract or agreement with any of its affiliates.
ARTICLE X
CREDIT RISK MANAGEMENT
(1) The Board of the Bank shall continue to maintain a Credit Policy
Committee that is comprised of at least five (5) executive officers from key
functional areas (e.g. marketing, operations, compliance, legal, etc), which
shall be responsible for ensuring Bank adherence to the Bank's credit policy
("Credit Policy Committee").
(a) The Credit Policy Committee shall meet at least monthly and review and
approve:
(i) new account acquisition solicitations and marketing campaigns;
(ii) account management strategies;
(iii) collection strategies; and
(iv) key credit portfolio indicators and performance results.
(b) The Credit Policy Committee shall maintain complete written minutes of
each meeting, and present a monthly report of its actions to the Board
of the Bank for the Board's review and approval at its next regularly
scheduled meeting.
(2) The Board of the Bank shall ensure credit risk management maintains a
disciplined test and control environment in adherence to the Board-approved Test
and Control Policies.
(3) The Board of the Bank shall ensure credit risk management personnel,
policies, processes and control functions are adequate for the Bank's size,
complexity, and risk profile, in accordance with a written action plan adopted
by the Board of the Bank and submitted to the Comptroller for review. On at
least an annual basis, as appropriate, management shall review with the Board of
the Bank the goals and objectives of the written action plan, and the Bank shall
make changes, as warranted, to address any deficiencies noted during this
review. The Bank shall provide a copy of any such changes to the Comptroller for
determination of supervisory non-objection.
(4) The Board of the Bank shall ensure that risks identified in the
evaluation of issues that impact borrowers' ability to make progress on reducing
debt and possible causes for negative amortization are resolved in accordance
with a written action plan adopted by the Board of the Bank and submitted to the
Comptroller for review. On at least an annual basis, as appropriate, management
shall review with the Board of the Bank the goals and objectives of the written
action plan, and the Bank shall make changes, as warranted, to address any
deficiencies noted during this review. The Bank shall provide a copy of any such
changes to the Comptroller for determination of supervisory non-objection.
(5) The Board of the Bank shall ensure credit lines are managed
appropriately and in conformance with the Federal Financial Institutions
Examination Council's Interagency Account Management and Loss Allowance
Guidance, OCC Bulletin 2003-1, dated January 8, 2003, using proven credit
criteria and a sound process that includes testing, analysis, and controls, in
accordance with a written action plan adopted by the Board of the Bank and to
which the Comptroller has provided a determination of supervisory non-objection.
On at least an annual basis, as appropriate, management shall review with the
Board of the Bank the goals and objectives of the written action plan, and the
Bank shall make changes, as warranted, to address any deficiencies noted during
this review. The Bank shall provide a copy of any such changes to the
Comptroller for determination of supervisory non-objection.
(6) The Board of the Bank shall ensure debt management/workout and reage
programs are properly managed, analyzed, and controlled, in accordance with a
written action plan adopted by the Board of the Bank and to which the
Comptroller has provided a determination of supervisory non-objection. On at
least an annual basis, as appropriate, management shall review with the Board of
the Bank the goals and objectives of the written action plan, and the Bank shall
make changes, as warranted, to address any deficiencies noted during the review.
The Bank shall provide a copy of any such changes to the Comptroller for
determination of supervisory non-objection.
(7) The Board of the Bank shall ensure that the Bank's Allowance for Loan
and Lease Losses ("ALLL") is adequate at all times for on-balance sheet assets,
in accordance with the ALLL methodology and policy as adopted by the Board of
the Bank and which the Comptroller has provided a determination of supervisory
non-objection.
ARTICLE XI
DEBT WAIVER ADMINISTRATION
(1) The Board of the Bank shall ensure that the Bank's "Account Protection
Plus" and "Account Benefit Plan" (collectively, "Debt Waiver Products") are
managed properly and prudently, in accordance with a written action plan adopted
by the Board of the Bank and to which the Comptroller has provided a
determination of supervisory non-objection. On at least an annual basis, as
appropriate, management shall review with the Board of the Bank the goals and
objectives of the written action plan, and the Bank shall make changes, as
warranted, to address any deficiencies noted during this review. The Bank shall
provide a copy of any such changes to the Comptroller for determination of
supervisory non-objection.
ARTICLE XII DEFINITIONS
(1) For purposes of this Agreement, the following terms shall have the
below-described meanings:
(a) The term "Credit Card Receivables" will have the same meaning as
receivables required to be reported as loans on line 6-a of schedule
RC-C of the Consolidated Reports of Condition and Income. For purposes
of this Agreement, "Credit Card Receivables" will not be netted
against unearned income, any applicable allocated transfer risk
reserve, deposits accumulated for the payment of personal loans, or
credit balances.
(b) The term "Capital Assurances and Liquidity Maintenance Agreement"
shall mean that certain agreement entered into between Metris and the
Bank pursuant to the terms of this Agreement.
(c) The term "Liquidity Reserve Deposit Agreement" shall mean that certain
agreement entered into between the Comptroller, the Bank, and a third
party insured depository institution pursuant to the terms of this
Agreement.
(d) The term "Subprime" is defined using the same borrower characteristics
listed in the interagency Expanded Guidance for Subprime Lending
Programs, released in January 2001. For purposes of this Agreement,
"Subprime" is defined as a credit card account having a FICO score of
660 or less.
(e) The term "Liquid Assets" shall include only: (i) cash deposits; (ii)
investment securities listed in 12 C.F.R. ss. 1.2 to which the OCC has
provided a prior determination of supervisory non-objection; (iii)
federal funds sold; (iv) and such other assets to which the OCC has
provided a prior supervisory non-objection. The term Liquid Assets
shall not include encumbered or pledged assets by lien, right of set
off, preference or otherwise; any credit card receivable due and owing
to the Bank; nor any other asset pledged as security in any financial
transaction with the Bank or any subsidiary, affiliate, related party,
or institution- affiliated party of the Bank.
(f) The term "Marketable Assets" shall include only: (i) Liquid Assets as
defined in paragraph (1)(e) of this Article; and (ii) Credit Card
Receivables valued at the lower of net book value (calculated monthly)
or fair market value (calculated quarterly). The net book value is the
result of gross Credit Card Receivables less the ALLL associated with
the principal, fees, and finance charges. For the purpose of
calculating Marketable Assets, Liquid Assets as defined in paragraph
(1)(e) of this Article shall, at all times, equal or exceed forty six
percent (46%) of total certificates of deposit.
(g) The term "affiliate" shall be defined as set forth in 12 U.S.C.
ss."371c(b)(1).
(h) The terms "significant deviation" and "material impact" shall mean a
material variance from the Bank's strategic plan submitted pursuant to
this Agreement, as the term "significant deviation" is further
described in PPM ▇▇▇▇-▇, ▇▇▇▇▇▇▇▇ B.
(i) The term "Comptroller" shall include any duly authorized officers of
the OCC.
ARTICLE XIII
FAILURE TO COMPLY WITH APPROVAL REQUIREMENTS
If the OCC determines that the Bank has materially failed to meet any
of the Approval Requirements identified in Articles II through XII of this
Agreement, then the OCC will provide the Bank with written notice of any such
failure to comply with the foregoing requirements and will allow the Bank thirty
(30) days to cure the default. If the Bank fails to cure the default, in the
sole discretion of the OCC, the Bank shall, upon the direction of the OCC,
submit a voluntary liquidation plan that is consistent with 12 U.S.C. ss. 181
et. seq. and the Comptroller's Licensing Manual, and shall provide for the
Bank's liquidation at no cost or loss to the Bank Insurance Fund of the FDIC.
ARTICLE XIV
CONCLUDING PROVISIONS
(1) This Agreement will remain in full force and effect until the OCC, in
its sole discretion, elects to terminate said Agreement.
(2) This Agreement shall not be assigned or transferred to any successor of
the Bank or the Parent.
(3) It is expressly and clearly understood that if, at any time, the
Comptroller deems it appropriate in fulfilling the responsibilities placed upon
him by the several laws of the United States of America to undertake any action
affecting the Bank, nothing in this Agreement shall in any way inhibit, estop,
bar, or otherwise prevent the Comptroller from so doing.
(4) Any time limitations imposed by this Agreement shall begin to run from
the Effective Date. Such time requirements may be extended in writing by the
Comptroller or his duly authorized representative for good cause upon written
application by the Board of the Bank.
(5) The provisions of this Agreement shall be effective upon the Effective
Date and its provisions shall continue in full force and effect unless or until
such provisions are amended in writing by mutual consent of the parties to the
Agreement or excepted, waived, or terminated in writing by the Comptroller or
his duly authorized representative.
(6) Nothing in this Agreement shall prevent the Bank or Metris from
requesting, in writing, amendments to this Agreement as warranted by changing
conditions and circumstances at the Bank or Metris. It shall be entirely within
the OCC's discretion to grant such amendments.
(7) To the extent that any of the provisions of this Agreement conflict
with the terms found in any existing written agreement between the Comptroller
and the Bank, the provisions of this Agreement shall control.
(8) In each instance in this Agreement in which the Board of the Bank is
required to ensure adherence to, and undertake to perform certain obligations of
the Bank, it is intended to mean that the Board shall: (i) authorize and adopt
such actions on behalf of the Bank as may be necessary for the Bank to perform
its obligations and undertakings under the terms of this Agreement; (ii) require
the timely reporting by Bank management of such actions directed by the Board to
be taken under the terms of this Agreement; (iii) follow-up on any
non-compliance with such actions in a timely and appropriate manner; and (iv)
require corrective action be taken in a timely manner of any non-compliance with
such actions.
(9) This Agreement is intended, and shall be construed to be a supervisory
"written agreement entered into with the agency" as contemplated by 12 U.S.C.
ss. 1818(b)(1), and expressly does not form, and may not be construed to form, a
contract binding on the OCC or the United States of America. Notwithstanding the
absence of mutuality of obligation, or of consideration, or of a contract, the
OCC may enforce any of the commitments or obligations herein undertaken by the
Bank under its supervisory powers, including 12 U.S.C. ss. 1818(b)(1), and not
as a matter of contract law. The Bank expressly acknowledges that neither the
Bank nor the OCC has any intention to enter into a contract. The Bank also
expressly acknowledges that no OCC officer or employee has statutory or other
authority to bind the United States of America, the United States Treasury
Department, the OCC, or any other federal bank regulatory agency or entity, or
any officer or employee of any of those entities to a contract affecting the
OCC's exercise of its supervisory responsibilities. The terms of this Agreement,
including this paragraph, are not subject to amendment or modification by any
extraneous expression, prior agreements or arrangements, or negotiations between
the parties, whether oral or written.
IN TESTIMONY WHEREOF, the undersigned, authorized by the Comptroller,
has hereunto set his hand on behalf of the Comptroller.
/s/▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Date
Deputy Comptroller For Special Supervision
IN TESTIMONY WHEREOF, the undersigned, as the duly elected and acting
Board of Directors of the Bank, have hereunto set their hands on behalf of the
Bank.
/s/▇▇▇▇▇ ▇▇▇▇▇ March 18, 2003
▇▇▇▇▇ ▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Director Date
/s/▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇, ▇▇▇▇
▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, ▇▇., Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Director Date
/s/▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, Director Date
IN TESTIMONY WHEREOF, the undersigned, as the duly elected and acting
Board of Directors of Metris, have hereunto set their hands on behalf of Metris.
/s/▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, Chairman Date
/s/▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇. March 18, 2003
▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇., Director Date
/s/▇. ▇▇▇▇▇▇ ▇▇▇▇ March 18, 2003
▇. ▇▇▇▇▇▇ ▇▇▇▇, Director Date
/s/▇▇▇▇ ▇. ▇▇▇▇▇▇ March 18, 2003
▇▇▇▇ ▇. ▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Director Date
/s/▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Director Date
/s/▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ March 18, 2003
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Director Date
EXHIBIT A
Liquidity Reserve Deposit Calculation Methodology
The Liquidity Reserve Deposit ("LRD") is intended to fund the amount of Liquid
Assets necessary to fund Credit Card Receivables that Direct Merchants Credit
Card Bank, N.A., Scottsdale, Arizona ("DMCCB" or "Bank") would potentially have
to fund on its balance sheet, including for payment of settlement obligations to
MasterCard(R), should the daily purchase of Credit Card Receivables by Metris
Companies Inc.1 ("MCI") be interrupted due to liquidity problems or
unforeseeable causes. Per the terms of the Operating Agreement, the Bank shall
suspend authorizations, upon direction from the Office of the Comptroller of the
Currency ("OCC"), if Metris fails to fund its portion of Credit Card
Receivables.
Daily Settlement Amount:
The amount of the daily settlement includes previous authorized and unauthorized
transactions that take place prior to the Bank suspending authorizations. Due to
the "date span" of settlement, authorization postings could trickle in several
days after authorizations are suspended.
At the time of settlement, MCI transfers funds to the Bank for its portion of
owned Credit Card Receivables. This constitutes the daily purchase of Credit
Card Receivables by MCI under the Bank Receivables Purchase Agreement.
Liquidity Reserve Deposit Calculation:
The LRD Requirement will be calculated monthly, in accordance with the terms of
the Operating Agreement.
The required amount of the Liquidity Reserve Deposit shall be equal to the
Average Number of Days of Unfunded Volume multiplied by the Average Daily Volume
Amount minus the Pre-funded Amount.
An example of such a calculation is represented in the following table:
Example 1 - Table approach:
Average Average Estimated
# of Days Daily Liquidity
of Unfunded Volume Reserve
Volume Amount Deposit
Authorized Volume 7.3 $1,000,000 $7,300,000
On-Us Volume 6.0 $ 10,000 $ 60,000
Unauthorized Volume 14.3 $ 1,000 $ 14,300
Total Average Volume $1,011,000 $7,374,300
Less:
FDR Pre-funded Amount $1,011,000
MasterCard Pre-funded Amount $ 5,000
Visa Pre-funded Amount $ 5,000
Total Pre-funded Amount $1,021,000
Total Liquidity Reserve Deposit $6,353,300
The Average Number of Days of Unfunded Volume is the sum of the following
elements: 1) Transaction Build-up; 2) Date Span; 3) Decision Day/Authorization
Suspension Day; and 4) Post-Authorization Block Pipeline. The table below
summarizes the components of the Average Number of Days of Unfunded Volume:
Transaction Date Decision Post-Auth. Average
Build-up Span Day/Auth. Block Number of
Suspension Pipeline Days of
Unfunded
Volume
Authorized Volume 3 2.3 2 7.3
On-Us Volume 3 1 2 6
Unauthorized Volume 3 2.3 2 7 14.3
The Average Daily Volume Amount shall mean merchandise sales minus returns, plus
cash advances, plus balance transfers, and plus debt waiver sales. The Bank will
forecast an Average Daily Volume Amount for MCI-owned Credit Card Receivables
for the upcoming month, broken out in authorized, on-us, and unauthorized
volumes. The Average Daily Volume Amount should be a conservative estimate based
on estimated cardholder purchase volumes, new account volume, and portfolio
marketing activities.
The Transaction Build Up shall mean the longest number of consecutive days that
could build up volume without a cash settlement. This is generally 3 days,
assuming a holiday falls next to a weekend on a Friday or Monday. In a month
with no holidays next to a weekend, it would be 2 days.
The Date Span shall mean the average time between transaction and settlement
dates, and represents the "pipeline" of previously authorized transactions. The
Bank will forecast the Date Span on an annual basis, using data supplied by
MasterCard (or other source) for authorizations that posted the day after
Thanksgiving of the previous year. (The day after Thanksgiving is typically the
highest or second highest authorization day of the year and should therefore
represent the longest settlement period.) For example, the date span
calculation, using November 24, 2000 data, is:
Date Span Calculation
Days % of Weighted
Settled Transactions Average # of
After Processed Days*
Auth.
1 20.00% 0.20
2 35.00% 0.70
3 43.00% 1.29
4 1.50% 0.06
5 0.40% 0.02
6 0.03% 0.00
7 0.03% 0.00
8 0.03% 0.00
Total 100.00% 2.28
* Weighted average # of days is calculated by multiplying days settled after
authorization by % of transactions processed.
The Decision Day/Authorization Suspension Day shall mean the amount of time or
number of days needed to block or suspend authorizations through FDR,
MasterCard, or Visa, plus any additional time needed by the Bank or the OCC to
block or suspend such authorizations. For purposes of the LRD calculation, this
amount of time shall be two (2) days.
The Post Authorization Block Pipeline is defined as the average number of days
of valid transactions that occur after authorizations are blocked.
The Authorized Volume is defined as transactions that receive an authorization
number through the MasterCard or Visa network.
The On-us Volume is defined as transactions that represent internal MCI or
affiliate sales to DMCCB cardholders.
The Unauthorized Volume is defined as valid transactions that are not authorized
by MasterCard or Visa, which the Bank is required to fund (i.e., no charge-back
rights). These include transactions authorized by a local authorization provider
or below floor limit transactions that do not require authorization.
The Pre-funded Amount is defined as the sum of (i) the forecast for the current
day's sales volume that the Bank pre-funds with FDR, the settlement agent ("FDR
Pre-funded Amount"), plus (ii) any amount pre-funded with MasterCard
("MasterCard Pre-funded Amount"), plus (iii) any amount pre-funded with Visa
("Visa Pre-funded Amount").2 The FDR Pre-funded Amount is based on the average
of previous two (2) days of settled sales volume. For purposes of this LRD
calculation, the FDR Pre-funded Amount will equal the total Average Daily Volume
Amount. The MasterCard Pre-funded Amount and Visa Pre-funded Amount shall equal
amounts, if any, that have been directly prepaid to MasterCard and/or directly
prepaid to Visa.
____________
1) MCI purchases open-end, revolving Credit Card Receivables from DMCCB on a
daily basis pursuant to the Bank Receivables Purchase Agreement ("RPA"). MCI
funding is provided through public placement of issuances through the Master
Trust and Private Conduits. MCI will sell Credit Card Receivables to any of: 1)
Metris Asset Funding Co. ("MAFC"); 2) Metris Funding Co. ("MFC"); or 3) Metris
Receivables, Inc. ("MRI"). When Credit Card Receivables are sold to MRI, they
are immediately transferred to the Metris Master Trust ("MMT"). For purposes of
the LRD calculation, MCI-owned Credit Card Receivables mean any Credit Card
Receivable sold to MCI pursuant to the RPA.
2) At the same time of the daily settlement, the Bank is required by FDR to
pre-fund that current day's estimated sales volume in anticipation of the next
day's settlement.
