On March 23, 2010, the Special Master for TARP Executive Compensation issued a letter to all financial institutions that received TARP CPP funds prior to February 17, 2009. The letter requests compensation data to permit the Special Master to review all bonuses, retention awards and other compensation paid to the institution’s senior executive officers and next 20 most highly-compensated employees from the receipt of TARP CPP funds through February 17, 2009.
In the event the Special Master determines that such compensation is inconsistent with the purposes of TARP or otherwise contrary to the public interest, the Treasury shall seek to negotiate with the TARP CPP recipient and the affected employee for appropriate reimbursements to the federal government.
The review is applicable to all institutions that received TARP assistance prior to February 17, 2009, even if the institution has repaid such funds. Institutions that received TARP assistance after February 17, 2009 are not included in the review. A complete list of the affected TARP institutions is included as an appendix to the Special Master’s letter.
Institutions must confirm receipt of the Special Master’s request no later than April 6, 2010, and must submit the required data and certification not later than April 22, 2010.
On January 12, 2009, the FDIC issued a Financial Institution Letter, FIL-1-2009, addressing the use of funding from Federal Financial Stability and Guaranty programs. FIL-1-2009 was brought to the attention of one of our financial institution clients that is a pubic reporting company and a TARP recipient, during the course of its annual examination. Based on the guidance in the FIL, we advised the client to document and summarize the data that it had been monitoring on its use of TARP proceeds and also to include a fairly brief discussion summarizing that information in its Annual Report on Form 10-K. This advice is intended to address the suggestion in the FIL that state nonmember banks “summarize such information in published annual reports and financial statements. Including such information in public reports will provide important information for shareholder and public evaluation of participation in these programs.”
If you are a smaller reporting company that has not finalized your 10-K, you should consider adding this disclosure, or perhaps including it elsewhere in public releases or reports. Also, to the extent you have an examination scheduled in the coming weeks and months, be prepared for an inquiry concerning this FIL.
On February 3, 2010, the Treasury Department announced the final terms of the Community Development Capital Initiative (“CDCI”), a new TARP program that will invest lower-cost capital in certified Community Development Financial Institutions (“CDFIs”). A certified CDFI is a financial institution that works in markets that are underserved by traditional financial institutions and is certified by the Department of the Treasury’s CDFI Fund.
In order to become a certified CDFI, an institution must meet each of the following certification criteria:
Primarily Serve One or More of the following CDFI Designated Target Markets
1. Investment area, which includes, but is not limited to, geographic boundaries that (i) have a population poverty rate of at least 20%; (ii) have an unemployment rate 1.5 times the national rate; or (iii) are located within an Empowerment Zone or Enterprise Community.
2. Low-income targeted populations, which are comprised of populations with income of not more than 80% of the metropolitan area median family income, or, for rural areas, not more than the greater of 80% of either the area or statewide non-metropolitan median family income.
On February 3, 2010, the Treasury Department announced enhancements to the TARP Capital Purchase Program for Community Development Financial Institutions (CDFIs). In addition to significant improvements for CDFIs, for the first time the Treasury Department has formally announced that it will consider private matching investments to determine bank viability – which could be a significant signal of how the Treasury might treat community banks under the proposed $30 billion Small Business Lending Fund.
Basic Program Terms
- CDFI’s can apply for capital equal to up to 5 percent of their total risk weighted assets.
- The dividend rate on the preferred stock will be 2% for eight years (as opposed to 5% for five years under the original Capital Purchase Program) before increasing to 9%.
- CDFI’s with existing TARP Capital Purchase Program investments will be eligible to transfer those investments into this program (effectively lowering the carrying costs of the capital and potentially providing additional capital, if desired).
- Consistent with the previous terms for CDFI’s, CDFI’s will not be required to issue any warrants or other additional equity kickers to the Treasury Department under the program.
Matching Capital
As noted above, for the first time the Treasury Department has formally recognized the possibility of institutions raising matching private capital to become eligible for TARP capital. Specifically, the new plan contemplates that if a CDFI might not otherwise be approved by its regulator, it will be eligible to participate “so long as it can raise enough private capital that – when matched with the Treasury capital up to 5 percent of risk-weighted assets – it can reach viability.” The new private capital will have to be junior to the TARP investment (i.e. common stock or preferred stock with lower preferences – although potentially higher dividend rates – than the TARP preferred stock).
Carrying through with his announcement in the State of the Union, on February 2, 2010, President Obama provided the outlines of a proposed $30 billion Small Business Lending Fund to provide capital to community banks, with incentives to increase small business lending. As proposed, the program will require Congressional approval to move the funds outside of TARP, which should remove the applicability of the executive compensation and governance restrictions and is also hoped to remove the stigma associated with TARP funds.
Based on the initial fact sheet, the terms appear generally comparable to the financial terms under the Capital Purchase Program, with reductions in the dividend rate for the first five years triggered by increases in small business lending. Every 2.5% increase in small business lending through December 31, 2011 over 2009 levels would trigger a 1% decrease in dividend rate, down to a minimum rate of 1%.
Banks with less than $1 billion in assets would be eligible to receive a capital investment of up to 5% of their risk-weighted assets. Banks with between $1 and $10 billion in assets would be eligible to receive a capital investment of up to 3% of their risk-weighted assets. Participation in the program will require approval by the bank’s primary federal regulator, although no details are available as to the standards that will be employed.
In his January 27, 2010 State of the Union address, President Obama renewed his call for using some of the TARP money for community banks in an effort to drive small business lending.
So tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat.
This proposal would be consistent with President Obama’s speech last October in which he stated the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business, as well as Secretary Geithner’s extension of the TARP program.
We understand that government officials have indicated that additional details on the program will be rolled out by Treasury officials in the coming days. We have previously analyzed the known terms of such an expansion, based on the guidance provided last October.
We’ve identified a number of stories that or posts that never quite made it into individual BankBryanCave.com posts. Rather than continuing to hold on to them, I’ve assembled them here.
The Simpsons
Two of the more commonly discussed programs that Treasury implemented pursuant to its discretion under TARP, the Capital Purchase Program (the “CPP”) and the Capital Assistance Program (the “CAP”), have been closed.
According to the Treasury’s FAQs, as of December 31, 2009, the Treasury will not make any additional investments under the CPP. Over 700 institutions participated in the CPP, representing institutions from every state, except Montana and Vermont, and from Puerto Rico and Washington D.C. California’s institutions were most highly represented, with 72 institutions receiving CPP funds. Illinois and Missouri followed with 47 and 32 institutions, respectively, receiving CPP funds.
Although Treasury Secretary Geithner has extended TARP generally to October 3, 2010 and President Obama previously announced an that initiative would be developed for small community banks, there is currently no Treasury program aimed at providing capital support for community banks.
The CAP, which was intended to provide capital support to financial institutions in conjunction with the stress tests, was closed on November 9, 2009, without making any investments.
We will provide an update if the Treasury develops and implements any new program.
During the month of December, the Treasury completed rounds fifty-two, fifty-three, fifty-four, fifty-five, and fifty-six of TARP Capital infusions. In these five rounds, which closed on December 4, December 11, December 18, December 22, and December 29, respectively, the Treasury purchased a total of approximately $159 million in securities from 37 financial institutions (24 of which previously received a TARP capital infusion). Through December 2009, the Treasury had invested in 709 institutions, totaling approximately $204.9 billion.
In these five rounds, First Community Financial Partners received the largest infusion, $22 million, and Valley Financial Group Ltd. received the smallest infusion, $1.3 million.
During the month of November, the Treasury completed rounds forty-nine, fifty, and fifty-one of TARP Capital infusions. In these three rounds, which closed on November 6, November 13, and November 20, respectively, the Treasury purchased a total of approximately $38 million in securities from 7 financial institutions (3 of which previously received a TARP capital infusion). Through November 2009, the Treasury had invested in 696 institutions, totaling approximately $204.7 billion.
In these three rounds, Presidio Bank, San Francisco, California, received the largest infusion, $10 million, and Community Pride Bank Corporation, received the smallest infusion, $4.4 million.
Of note during the month of November, F&M Bancshares, HPK Financial Corporation, and Metropolitan Capital Corp., joined WashingtonFirst Bankshares, Inc. as institutions to receive a second investment from Treasury in connection with the TARP expansion for community banks. F&M Bancshares received an additional $3.5 million and had already received $4.6 million; HPK Financial Corporation received an additional $5 million and had already received $4 million; and Metropolitan Capital Corp. received an additional $2.4 million and had already received $2 million.
During November, nine financial institutions (one of which had already re-paid a portion of its funds) re-paid their TARP capital investments: Bank of Ozarks, Inc. ($75 million), LSB Corporation ($15 million), Wainwright Bank & Trust ($22 million), Union Bankshares Corp. ($59 million), Midwest Regional Bancorp, Inc. ($700,000), 1st United Bancorp, Inc. ($10 million), Magna Bank ($3.5 million, approximately 25% of the outstanding amount), Frontier Bancshares, Inc. ($1.6 million), and Westamerica Bancorporation ($41.9 million, completing its repayment). As of the end of November, 2009, 53 financial institutions had re-paid all, or some portion, of their TARP Capital investment, bringing the total amount re-paid to approximately $71 billion. At the end of November 2009, Treasury’s outstanding investment equaled approximately $133.7 billion.
As discussed in another post, TARP has been extended until October 3, 2010.