Through multiple conversations with bankers and regulators, we’re starting to see some clarity in the standards currently being used by regional regulators to establish “viability” for TARP recommendations, subject to variances between markets and regulators, as well as continuing evolution of the standards under the new administration.

If a bank lacks in one or more criteria, it may need to emphasize the actions that it is taking to correct over time and the bank’s strengths in other criteria.

Well Capitalized: A bank needs to be well capitalized “for its condition.”  This may require higher capital levels than the regulatory requirement to be considered well capitalized.  The calculation can be following the TARP Capital infusion, and may also require additional private capital to be raised.

CAMELS Rating: A 3 or better is likely required.  Some regulators have indicated that a 4 might also qualify, but only if conditions have subsequently changed to make it look more like a 3.  Conditions that could have changed include the bank’s capital, its business plan and/or its management (see below).

Classified Assets:  Classified assets must be below 100% of capital, following the TARP Capital infusion.  Regulators prefer less than 75%.

Nonperforming Assets: Nonperforming assets must be below 100% of capital, following the TARP Capital infusion.  Regulators prefer less than 75%.

Compliance with CRE Guidelines: The bank’s concentration in Commercial Real Estate should be less than 300% of capital, following the TARP Capital infusion, and the concentration in Acquisition, Development and Construction loans should be less than 100% of capital, following the TARP Capital infusion.  This is a very tough standard for banks that were in previously high-growth real estate areas, such as the metro Atlanta area.  We understand that the federal banking agencies are not particularly sympathetic to the high number of banks that don’t meet these guidelines.  “Everybody else was doing it” has not been well-received as a rationale.

Solid Liquidity: Banks should show solid liquidity (over 15%).  Showing core, local deposits is particularly good.

New Business Plan? If the bank previously had “excessive” reliance on brokered deposits or CRE or ADC lending, the bank should have a new business plan to demonstrate that the bank is going to take a different path with the TARP Capital funds.  The regulators do not wish to “throw more money” at the same business plan that caused issues before and “hope” for a different result.

New Management? In some cases, banks need to make management (or board) changes to bolster existing weaknesses, e.g. new workout hires.  Once again, the regulators do not wish to simply “throw more money” at the same management that caused issues before and “hope” for a different result.

Caveat: Trying to follow the application of these “standards” is like looking through a kaleidoscope.  So far, the only thing written in stone is that the bank must be “viable.”