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:
We will provide additional analysis over the next several days, but here are some highlights:
The public company Securities Purchase Agreement (the “Agreement”) provides the standard terms for the TARP Capital investment for public companies. We address some of the most important sections of the Agreement, especially those that we believe are of particular interest to community banks or that significantly clarify the term sheet.
The recitals to the Agreement contain two provisions that not only highlight the intent of the TARP Capital Program but also make clear what the Treasury expects from a company that receives TARP Capital.
WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy;
WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market;
The recitals do not form binding obligations on participating companies, and these provisions are not repeated in the binding terms contained later in the Agreement. Moreover, subsequent guidance from the Treasury and the federal banking regulators makes clear that all banks are expected to undertake these actions, not just those that receive TARP Capital.
There is no complete answer, and that’s exactly how the Treasury and banking regulators want it.
Lists of Applicants
There are several lists of applicants: the Wall Street Journal has a list, FIG Partners has a list, and SNL Financial (account required) keeps a running tally of public announcements of applications, completions and decliners. However, all of these lists are necessarily unofficial and incomplete, as they only include companies that have made voluntary public announcements.
There are no requirements that companies announce whether they have applied for TARP Capital. The Treasury and federal banking regulators have made very clear that they will not publicly disclose the names of who applied for TARP Capital, or the names, if any, of companies that are ultimately turned down for TARP Capital. (As noted by Assistant Treasury Secretary Kashkari on Monday, several opportunities will be made to allow applicants to withdraw their applications rather than facing a formal denial of applications.) This confidentiality helps protect the overall stability of the banking system.
List of TARP Capital Recipients
Section 114(a) of Emergency Economic Stabilization Act of 2008 requires public disclosure of the completion of TARP 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’s list of completed transactions is available here, and this is the only official list. There is, however, a significant lag time between preliminary approval and completion of any given capital infusion. The first TARP Capital infusions were not consummated until October 28th. No further TARP Capital purchases were completed until November 14th (and the number and volume of the infusions that occurred on November 14th are not clear as of the time of this post).