Whether to apply for or accept TARP Capital is a decision that each bank needs to make individually depending on its own markets and circumstances. However, as explained below, we believe each bank needs to prepare a realistic, worst-case scenario for the next three years. Unless your bank’s capital will remain strong, we think you should apply for TARP Capital.
In three years, your bank will likely be in position to redeem the TARP Capital. If that’s true, then the TARP Capital will have served as an inexpensive insurance policy that went unused, and you won’t be subject to any further government restrictions.
On the other hand, it is possible that, in three years, the financial condition of your bank makes you unable to redeem the TARP Capital. In that event, it is very clear that you needed the TARP Capital.
With only these two scenarios, we believe almost every bank is better off applying for TARP Capital.
Where is the Economy Headed?
As the residential real estate market declined, all the contractors and subcontractors associated with that market began to suffer. These contractors and subcontractors include our drywall installers, plumbers, painters, flooring specialists, lighting specialists, landscapers, pavers, pool installers, and numerous others – a vast group of construction and service-industry workers. With new residential starts drying up, and with in-progress projects shutting down, many of the employees in those contracting and subcontracting fields began to lose their jobs.
On November 21, 2008, the FDIC approved the final rule regarding the Temporary Liquidity Guarantee Program. The FDIC also held a teleconference on the final rule (with 2,100 participants) summarizing the changes, which will be available on the FDIC’s website.
There are important changes from the FDIC’s interim rule, including: (i) the exclusion of short term borrowings (30 days or less) and an alternative minimum cap for guaranteed debt under the Senior Unsecured Debt Guarantee portion of the Program; and (ii) the inclusion of IOLTA and NOW accounts in the Transaction Account Guarantee portion of the Program.
We continue to expect that all banks will decide to remain in the Transaction Account Guarantee portion of the Program, but, with the revised terms, we believe community banks will need to closely examine whether to participate in the the Senior Unsecured Debt Guarantee portion of the Program.
A representative of the Federal Reserve Bank of Atlanta has informed us that the Treasury does not intend to process any applications for private companies until all public company applications have been processed. As a result, we expect (and the Federal Reserve did not deny) that a December 31 funding date is probably a realistic expectation only for public companies at this point. We hope that Treasury will begin to realize some efficiencies in the processing of closing documents, but December 31 is approaching rapidly.
To the extent that any privately-held clients may be expecting a potential TARP infusion to keep them “well-capitalized” at December 31, 2008, they may need to also be working on Plan B.
Conversations with each of the federal banking regulators over the last several days confirm what we have heard elsewhere: the distribution of TARP Capital that started out with a more liberal bias has now turned more conservative. Regulators have recently indicated that institutions with a CAMELS rating of 1 and 2 are almost certainly likely to receive an investment, while 3-rated institutions are now described as “perhaps” receiving an investment. 4 and 5-rated banks are unlikely to receive any TARP Capital, absent unique circumstances. (Just a few weeks ago, these same regulators were telling us that a 3-rated institution would be treated more like a 2-rated institution, and that 4-rated institutions would “perhaps” receive an investment.) This shift is certainly an outgrowth of Treasury’s position that the main test of which institutions will receive capital investments is assured long term viability.
What does this mean for the thousands of banks that will not receive funding? They certainly need to be considering a public relations initiative to manage or preempt the questions that will come at them from shareholders and the local media. Perhaps the conversation could be along the following lines: “(i) the banking industry did not ask for this plan (which has changed dramatically since it was first proposed); (ii) an investment by the Treasury in a bank is not an automatic guarantee that a particular bank will be successful and neither is a decision not to invest some sort of condemnation; (iii) our loan portfolio reflects our community and the real estate lending which helped our community grow is suffering; and (iv) we are here for the long run and look forward to meeting the credit needs of our customers for years to come. Together we will both survive the current economic challenges.”
In light of the new term sheet for non-public institutions, we have been asked by several clients whether they need to amend their application if they have already submitted applications to their federal regulators.
At this time, unless the regulator specifically asks that you file an amendment, we do NOT believe an amendment should be necessary. The Treasury has not updated its application form (available online directly from the Treasury in PDF format, or from Powell Goldstein in Word format) and the application does not contain any information that would differ because the company is applying under the new non-public company term sheet.
We are aware of one instance in which the regulators specifically requested an amendment, but in that case the applicant also desired to increase the amount of TARP Capital they were applying for, which would seem to independently necessitate an amendment.
Update 11/20/2008 – An FDIC representative confirmed to one of our privately-held clients that they did NOT need to file a new application or amend their application, but that they should confirm to the regulators that they have reviewed the new Term Sheet.
Update #2 11/20/2008 – A Federal Reserve Bank of Atlanta representative stated that they expect that private banks WILL NEED to make some kind of amendment, but they don’t know what form that amendment will take. They expect to receive guidance later this week from D.C., and will inform applicants accordingly.
Update #3 11/21/2008 - The representative of the Federal Reserve Bank of Atlanta has informed us that the staff at the Board of Governors has advised that there is NO need to amend the application to reflect the recent terms announced for private companies. The documents the Treasury will require participants to sign in order to participate will incorporate all of the changes, terms, conditions, etc.
Our TARP Capital Spreadsheet for Private Banks provides a basic analysis of the terms of TARP Capital under the newly announced term sheet for non-public institutions. By adjusting the Risk Weighted Assets and percentage of Risk Weighted Assets that an institution is requesting in TARP Capital (minimum 1% and maximum is 3%), an institution can review the estimated annual interest costs of the Preferred stock and the Warrant Preferred stock, as well as the ultimate redemption cost.
1st Financial Services Corporation’s inclusion on the Treasury’s Transaction Report, as an OTCBB company, appears to show that the Treasury is NOT requiring that companies be traded on a national securities exchange in order to participate in the TARP Capital program for publicly traded companies. The inclusion would also suggest that any company that is required to file periodic reports under the federal securities law: (a) is considered a “publicly traded” company, (b) had a deadline to apply of November 14, 2008, and (c) is not eligible to participate in the newly announced TARP Capital program for private companies.
On November 17, 2008, the Treasury published an updated Transaction Report, showing 21 new TARP Capital transactions that closed on November 14, 2008, bringing the total number of completed transactions to 30, with a total outlay of $146.8 billion (exclusive of the settlement of Merrill Lynch’s investment of $10 billion, which is pending its merger with Bank of America).
The second round includes many of the nation’s next largest banks, including BB&T, Capital One, Comerica, First Tennessee, Huntington, KeyBank, M&I, Northern Trust, Regions, SunTrust, U.S. Bancorp, and Zions.
The second round also included some smaller community banks:
- Bank of Commerce Holdings (Redding, California) is the parent holding company of Redding Bank of Commerce, Roseville Bank of Commerce, Sutter Bank of Commerce, and Bank of Commerce Mortgage, with total assets of $618 million as of December 31, 2007. Bank of Commerce Holdings is traded on the NASDAQ Global Market under the trading symbol BOCH.
- 1st Financial Services Corporation (Hendersonville, North Carolina) is the parent holding company of Mountain 1st Bank & Trust Company, with total assets of $606 million as of December 31, 2007. 1st Financial Services Corporation is traded on the NASDAQ Over-the-Counter Bulletin Board under the trading symbol FFIS.
- Broadway Financial Corporation (Los Angeles, California) is the parent holding company of Broadway Federal Savings and Loan Association, with total assets of $357 million as of December 31, 2007. Broadway Financial Corporation is traded on the NASDAQ Capital Market under the trading symbol BYFC.
The Treasury has published a new Term Sheet and FAQ for banks that are not publicly traded.
We will provide additional analysis over the next several days, but here are some highlights:
- The new Term Sheet applies to all non-public qualifying financial institutions, excluding S Corporations and mutual organizations. The Treasury has NOT clarified its prior statement regarding the definition of “publicly traded” companies to clarify whether such companies must be traded on a national securities exchange or whether being obligated to file periodic reports is sufficient to constitute a publicly traded company.
- Investment structures for S Corporations and mutual organizations are still “under consideration,” and the announced deadline does not apply to S Corporations or mutual organizations.
- The deadline for applications for private C Corporations is Monday, December 8, 2008.