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Treasury Announcements of TARP Recipients/Applicants

October 30, 2008

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While the Treasury Department has emphasized that it is allowing institutions to individually announce pre-approval of TARP Capital, Section 114(a) of EESA requires public disclosure of the completion of such purchases within two business days of the actual purchase.  (This is also confirmed in the Treasury’s FAQ, which provides “Treasury will provide electronic reports detailing any completed transactions, as required by the Emergency Economic Stabilization Act of 2008, within 48 hours.”)

The Treasury Department has now begun publicly announcing completed transactions.  As of October 29, 2008, the Treasury Report on Transactions listed only the original “Big 9.”

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ABA Provides Some Clarification for Non-Public Companies

October 29, 2008

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We haven’t seen any more official information directly from the Treasury Department, but according to the American Bankers Association, relief for non-exchange listed public companies, private companies, and Subchapter S companies appears to be coming.  We understand that ABA Staff members met yesterday with senior Treasury officials, and that the Treasury understands that specific action will be required by the Treasury to allow participation in the TARP Capital program by non-exchange listed public companies, private companies, and Subchapter S companies. The ABA believes that clarifications for non-exchange listed companies will be made available soon, while solutions for the others may take additional time. As noted in the American Bankers Association Letter to the Treasury Department, the ABA has requested the Treasury Department extend the application deadline and recommend an alternative investment framework that would work for all companies.

During the meetings between the ABA and Treasury, the Treasury also apparently clarified that the November 14 application deadline and public term sheet only apply to publicly traded entities, with the remaining types of institutions receiving their own term sheets and separate application deadlines in stages.

The Treasury also emphaiszed that while publicly traded institutions should apply by November 14th, they can subsequently decide whether to participate or accept any capital.

Treasury officials also acknowledged that shelf registrations may not be feasible for non-exchange listed public companies, that public companies without blank check preferred may seek shareholder approval for preferred stock following the application, and that the Treasury does not intent to alter privately held company’s private status under the federal securities laws.

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Sterne Agee Industry Report on TARP Capital

October 29, 2008

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On October 28, 2008, Sterne Agee published an Industry Report on the current status of the TARP Capital program.  We highlight below Sterne Agee’s conclusions regarding the “seemingly attractive terms” of the TARP Capital, but encourage bankers to read the entire Strene Agee Industry Report.

SEEMINGLY ATTRACTIVE TERMS. The basic terms of the CPP – up to 3% of risk-adjusted assets in preferred stock with a 5% coupon, augmented by 15% of the total in warrants – are more attractive, both in the amount of capital and its cost, than any bank can expect to find in the public markets today.  Whether to fill a hole in the balance sheet, build an acquisition war chest, or simply provide a cushion against a longer, deeper recession than anticipated, the CPP is an attractive proposition.  Any perceived stigma should be gone in light of the rush of the nation’s largest banks to participate, and managerial constraints, such as on executive compensation, do not strike us as terribly onerous.  Constraints on dividend hikes and share repurchases are entirely academic for most banks in the current environment.  The one big unknown, however – the reason why we say “seemingly” attractive terms – is the degree to which participation subjects a bank to heightened informal scrutiny of its business decisions.  Politicians are already haranguing managements for T&E expenses, and the TARP checks haven’t even cleared yet; some healthy banks will likely pass on the TARP simply to avoid such headaches.

We have separately commented on our belief that TARP Capital participation should not lead to additional regulation uniquely on participating institutions, but we agree with Sterne Agee that this is an unknown.

To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.

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FDIC TARP Capital Application Supplemental Ratios

October 29, 2008

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We understand that the FDIC is requesting that TARP Capital applicants complete (either with their application or supplementally thereafter), this Capital Ratios spreadsheet.  Regardless of whether you elect to submit the spreadsheet with your initial application, we believe completing the spreadsheet is a good exercise to understand what the federal regulators, or at least the FDIC, intends to review.

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TARP Capital Recipients

October 29, 2008

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TARP Capital Recipients

October 29, 2008

Authored by: Robert Klingler

The Wall Street Journal has compiled a database showing banks that annouced Treasury approval for TARP Capital, including the amount of capital that Treasury has committed.  As of the morning of October 29, 2008, the smallest institution to be included is First Niagra Financial Group, which had approximately $9.0 billion in assets as of September 30, 2008.

In today’s Research and Trading Thoughts, FIG Partners includes a TARP Scorecard for TARP Participants, that analyzes the warrant pricing and concludes that investor complaints about dilution should be curtailed.  The FIG Partners analysis includes an announcement by Saigon National Bank that they have been approved by the Treasury Department.  Saigon National Bank is a de novo institution located in Westminster, California with $43.2 million in assets at June 30, 2008, and is traded on the Over-The-Counter market.  We are seeking more information from management, and will update as we know more.

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Lyn Schroeder Featured in Deal Watch

October 29, 2008

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Lyn Schroeder’s legal advice to a South Carolina bank seeking to go private was featured yesterday in the Fulton County Daily Report’s Deal Watch blog.

We believe that Powell Goldstein has assisted more financial institutions deregister from the SEC than any other law firm in the last four years.  We have prepared a comprehensive presentation on how and why community banks are electing to go or stay private.

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Executive Compensation Rules for TARP Capital

October 28, 2008

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Under the Treasury Rules, new executive compensation rules will govern all financial institutions that participate in the TARP Capital program.  The provisions generally apply as long as the Treasury holds an equity or debt position, including warrants and the common stock underlying the warrants, in the institution.  To be eligible to participate in TARP Capital, financial institutions must meet the following standards:

  • certify that incentive compensation for senior executive officers (“SEO”) does not encourage unnecessary and excessive risks that would threaten the value of the institution;
  • require that SEO bonus and incentive compensation be subject to “clawback” if the payment was based on materially inaccurate financial statements or performance metrics;
  • prohibit any golden parachute payment to an SEO; and
  • agree to deduct no more than $500,000 for an SEO’s compensation.

Powell Goldstein’s preliminary analysis of these standards are included in our Client Alert, titled “Treasury Issues Executive Compensation Rules for the TARP Capital Purchase Program.”

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Commentary: Does Accepting TARP Capital Mean Additional Regulation?

October 28, 2008

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We have heard a number of bankers state that they are concerned with accepting the TARP Capital, fearing potential future regulation imposed on those that accept government money.  While each bank’s situation is unique, we generally consider this concern to be overstated for the following reasons:

  1. Once the TARP Capital is in place and the preferred stock and warrants are issued, the terms of those instruments are defined by contract.  The government should not be able to modify the terms to give itself a better deal.  For example, the government cannot require that the institution pay the 9% dividend before the expiration of five years.
  2. We believe that if the government decides to impose additional regulatory restrictions (which in this economic environment seems likely), it is more likely to do so with regard to the whole industry rather than distinguish between banks that accepted the TARP Capital and those that did not.  From a policy perspective, Congress and the regulators may view “the whole industry” as having been helped and therefore that “the whole industry” should bear the burden of any additional regulations.
  3. The government already has broad powers to regulate financial institutions; it seems unlikely that the government would use its relatively weak power as a preferred shareholder to impose change when it has stronger regulatory powers to impose change.
  4. The government may impose one or more of the restrictions that are currently associated with the TARP Capital program on all companies – for example, it is possible that the executive compensation changes may be expanded to all companies, whether or not they have accepted (or were even eligible for) TARP Capital.

That’s our belief.  We’d love to hear yours in the comments.

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TARP Capital Application Process

October 28, 2008

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TARP Capital Application Process

October 28, 2008

Authored by: Robert Klingler

We have been speaking with all of the regional Southeastern federal banking regulators, and we have received significant input on the TARP Capital Application Process.   (Institutions in other areas of the country should confirm the advice with their corresponding federal regulators; we have no reason to believe the advice will be different, but have only talked with the regulators located in the Southeast.)

Submission of Application

  • Bank holding companies should submit their application to the Federal Reserve, with a copy to the primary federal regulator for their lead (i.e. largest) subsidiary bank.  The Federal Reserve intends to defer decisions on any shell holding companies to the primary federal regulator of the lead subsidiary bank.
  • The Federal Reserve (at least Atlanta) requests that applications be emailed to them, with a signed hard copy to follow.  Processing will begin upon receipt of the emailed application.
  • Applications to the Atlanta Federal Reserve should be emailed to Ms. Nicky Hennings (nicky.hennings@atl.frb.org) with a copy to Ms. Kate Gaboardi (kate.gaboardi@atl.frb.org).  The hard copy should be sent in accordance with standard Atlanta Federal Reserve rules.
  • Applications to the FDIC should also be emailed, based on the state of the institution’s primary office:
  • State banks should also carbon copy their state banking Commissioner.   The Commissioners are taking an active and helpful role in supporting the Capital Process and Regional FDIC and Fed (for member banks) have indicated an intent to communicate with State Commissioners before making a recommendation to the Treasury.
  • Applications for all national banks should be emailed to HQ.Licensing@occ.treas.gov, with questions directed to Fred Finke at fred.finke@occ.treas.gov.
  • Applications for federal thrifts and their holding companies must be submitted to OTS through secure e-mail.  The Atlanta contact person is Yashica Pope at yashica.pope@ots.treas.gov, with copies to the Review Examiner or AD for the institution.

Supplemental Information with Application

  • The Atlanta office of the FDIC advised that they are following up with each applicant when additional information (beyond the application) is necessary.  Whether additional information is necessary, and the contents of such information, may vary by applicant.  The FDIC advises banks to file the application without supplemental information, and the FDIC will subsequently contact the institution regarding what additional information is needed.  Update 10/29/08: See the supplemental spreadsheet requested by the FDIC.
  • If you have supplemental information ready to submit with your application, we do not believe there is any harm in doing so, but it is not required as part of the application.  Should the supplemental information be lengthy, it may be better to state that such information is available upon request.
  • The regulators are divided as to whether the application should be submitted in draft and/or with a confidential treatment request, and whether the application is subject to the Freedom of Information Act.
  • Until concrete guidance is given, and potentially even then, we recommend that applications be submitted in draft form (especially for private companies that do not anticipate participating under the terms of the public term sheet) and with a confidential treatment request for any confidential information.  See more information about requesting confidential treatment.
  • We do recommend that counsel review the application before submission to include suggested improvements that may be available.

CAMELS Ratings and TARP Capital

  • The federal regulators unanimously told us that institutions should not forego an application regardless of their CAMELS ratings.
  • The Atlanta FDIC gave us the following framework that it would use for analyzing TARP applications:
    • CAMELS rating 1 or 2 – Submit the application saying that you hope to make prudent loans and are available to consider problem banks, if appropriate.
    • CAMELS rating 3 – Justify the long-term viability of the institution.  Viability means the ability to earn money operationally (pre-tax and pre-provision, a.k.a. “Pre-Pre” earnings) and be able to survive.
    • CAMELS rating 4 – Justify the long-term viability of the institution, with viability including new capital and a new business plan.
    • CAMELS rating 5 – Justify the long-term viability of the institution, which includes all of the above plus new management.
  • The FDIC stated that this breakdown was designed to be an example of the kind of analysis that the FDIC will perform.
  • We believe that 3’s will generally be eligible and treated closer to 1’s and 2’s, while 4’s and 5’s may also be eligible given the right circumstances.
  • In an acquisition, both the acquirer and acquiree can receive TARP Capital up to 3% of their respective risk weighted assets.
  • The regulators all said that CRE concentrations are not a bar to receiving TARP Capital, assuming the institution has long-term viability, as discussed above.  They specifically mentioned an institution which had 600% of capital in CRE, which had reduced its CRE concentration to 400% and had plans to reduce CRE to 200% over time, and suggested that the institution would be eligible for TARP Capital.

Private Company Term Sheet

  • We have heard rumors of drafts of private company term sheets floating around, but can confirm that nothing has been finalized.  The Conference of State Bank Supervisors is meeting daily with the Treasury and told us today that they had not seen a term sheet.
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FIG Partners' Analysis of TARP Capital

October 28, 2008

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On October 24, 2008, FIG Partners published an alert analyzing the opportunities for community banks under the TARP Capital plan.

We view the TARP Capital Purchase Program as an excellent opportunity for the banking industry to secure some much needed capital at relatively inexpensive and mildly dilutive terms. The opportunity is particularly attractive at a time when outside capital is extremely difficult to find. As such, we at FIG would like to urge any and all banks and thrifts to seriously consider participating in the program. Some of the immediate benefits of the initiative are:

  • Improves capitalization ratios
  • Provides capital for future growth, organic and M&A
  • Solidifies the institution’s balance sheet and puts it in a position to take advantage of failed institutions/assisted transactions
  • Implies that the institution received the “blessing” of Treasury/regulators – investors are likely to perceive the companies taking advantage of the TARP Capital Program as survivors

Again, we believe that all banks and thrifts should utilize the TARP Capital Purchase program, and since the November 14th deadline is fast approaching, we urge you to explore the program and familiarize yourself with all the details sooner rather than later.

Read FIG Partners’ full alert on the TARP Capital program.  To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.

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