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:
  • Georgia – Tony Womack – awomack@fdic.gov
  • Alabama/Florida – Russ Marshall – rmarshall@fdic.gov
  • Tennessee/Mississippi – Ruth Cetto – rcetto@fdic.gov
  • Louisiana – Paul Borris – pborris@fdic.gov
  • North Carolina/South Carolina – Pebble Conneley – pconneley@fdic.gov
• 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.

In conversations this morning with all of the federal regulators, we have been advised in no uncertain terms that draft applications should be submitted as soon as possible.  More details to follow as we get them…

(See Update on Later Regulatory Guidance.)

No topic has been discussed more around our offices today then whether an institution interested in receiving TARP Capital should go ahead and file an application now.  For banks that fit squarely within the parameters of the proposed program (i.e., exchange-listed, publicly traded institutions), it’s best to apply now.  For a smaller public, private, or S corp institution with “structural”  difficulties with the program as currently designed, it may also be in the bank’s best interest to go ahead and submit an application now–especially if its regulator has encouraged it to do so.   If it does, however, the bank needs to keep in mind that it will need to identify the participation difficulties now (see TARP Capital Issues) and supplement/amend the application later, with the extent of the required amendment being currently unknown.

If it applies now, even with several “structural” compliance issues noted in its application, the bank might get formal regulatory feedback more quickly, which would help with capital planning.  In other words, “First come, first served” is not the same as “first come, first look.”  For example, a bank may be able to meet its capital needs solely with TARP and prefer to do that, but if it receives definitive word that TARP is not available, it’ll need to move forward with alternative financing and plan accordingly.

In a best case scenario, an amendment to the application would just involve reviewing the investment documents when they’re available and certifying that the bank has no issues with them that haven’t been previously noted in its application. On the other hand, the entire program for private/S corp/smaller public companies could change significantly (for example, from equity to debt), and the bank could need to revise projections, review other potential issues presented (i.e., third party or regulatory restrictions on debt issuance) under the new program and submit a significant amendment to its application.  If we knew that a new program would be unveiled this week, it would make sense to hold off on the application, but if it won’t be developed until a later date (or at all), it’s best to apply for the program in its current form and note any difficulties that the bank will experience in complying with its terms.

The Field Office Manager for the FDIC’s Atlanta Office recently encouraged a client to go ahead and file the application.  The Manager specifically inquired about whether the client had a “corrective plan” in place to address declining asset quality.  The FDIC plans to follow-up after receiving the application with any questions.

The Field Office Manager said that the goal of the TARP Capital plan was to stabilize banks that have taken action to correct their situation with regard to real estate problems, had a viable plan and could show how the capital would assist them in achieving that plan. He said they were looking for “added value” above and beyond the just waiting for the government to act.  He also confirmed that they were injecting capital in healthy banks to provide liquidity into the market, and that they did not plan to inject capital into banks where the capital would not help.

He asked that the application be emailed to the bank’s Case Manager with a copy to the Field Office Manager.

In light of this guidance from the FDIC, we are slightly revising our advice.  For banks with no issues, we would still recommend waiting.  However, now that the local offices appear to be getting their arms around the TARP Capital program, banks with issues may want to make contact and file.  We are meeting directly with the Atlanta office of the FDIC tomorrow, and will follow up.

FDIC Chairman Sheila Bair has informed the Florida Bankers Association that higher CAMELS rated banks can apply for the Treasury Capital Program, but it will subject those banks to further regulatory scrutiny.

Another regulator with a federal banking agency informed the Florida Bankers Association as follows:

CAMELS ratings are not the sole determinant and each situation will be looked at individually. Based on what we know thus far, we think many 3-rated banks will meet the standards as long as there are no mounting deficiencies that suggest future prospects are poor or that additional downgrades are likely. Further, it is possible that certain 4-rated banks will qualify, as long as conditions are stable or improving. We also think that a larger number of troubled banks might warrant TARP approval if there is an accompanying injection of private capital.

In addition to the above, banks with less than satisfactory CRA ratings are not likely to be approved. Further, banks with certain risk factors such as high concentrations of construction and development loans will be subject to closer scrutiny, although that will not necessarily disqualify them.

Although ultimate approval for troubled banks remains unlikely, it is very clear that regulators want troubled banks to present proposals for consideration under the TARP Capital plan, and that no regulator wants to be blamed for erroneously pushing a struggling bank out of the program.

We have heard from several federal and state banking regulators that the factors that may be determinative in a bank’s application for TARP Capital are continuing to change.  We understand that federal regulators now want a “with” and “without” projection for each application, and want larger banks to indicate a willingness to buy failed and failing banks (to this end we’ve been told of large client that was given a physical list of potential banks to be bought).

One of our clients has a residual Fair Lending issue, but was told that since they have a Satisfactory CRA rating, the Fair Lending issue would not prevent the bank from receiving TARP Capital.  That client was also told that the projections should show a CRE concentration of less than 300%. Finally, the client was told to file its Application as a “Confidential Draft” to avoid public scrutiny.