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California Holding Company Announces SBLF Approval

First California Financial Group, Inc., Westlake Village, CA, holding company for the $1.8 billion First California Bank, announced last night that it has been approved to receive SBLF funding, “subject to the Treasury’s customary due diligence and closing conditions.”  According to the company’s press release, it expects to close within the next 30 days and will use the funds to refinance $25 million in CPP investment.  While no funds have been disbursed, we are aware of several similar preliminary approvals that have been issued within the last week.  The Treasury has stated that it will publish an online list of participating institutions on a rolling basis as funds are disbursed.

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Treasury Adds Restrictions on SBLF Eligibility

On May 26, 2011, almost two weeks after the deadline for C-Corporation financial institutions to apply, the Treasury further restricted eligibility for participation in the Small Business Lending Fund.  The Treasury has determined that only institutions without any dividend restrictions may participate in the SBLF.

In order to be eligible to participate in the SBLF, the Treasury has determined that applicants must be able to pay dividends without being subject to approval by any third party, including the federal banking regulators. This requirement goes beyond the eligibility standards included in the authorizing statute, which provided that banks on the FDIC’s troubled bank list were ineligible.  In light of the Federal Reserve’s propensity to impose dividend restrictions, Treasury’s decision will further limit the potential positive impact of the Small Business Lending Fund.

This decision was communicated to applicants via an “Inquiry Regarding Dividend Payments” and an undated update to the SBLF Frequently Asked Questions website. While the Treasury’s communication makes it sound as though the decision was out of its control, it appears to be Treasury’s determination that the ability to pay dividends should be an eligibility factor, as nothing in the original SBLF documentation provided similar requirements.

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Treasury Releases Small Business Lending Fund Application, Term Sheets and Guidelines

On December 21, 2010, the U.S. Treasury published the application form, term sheet and other guidance for participation in the $30 billion Small Business Lending Fund (SBLF) that was authorized under the Small Business Jobs Act earlier this year.   As a result, banks considering participation in the program have a variety of new resources available to them via Treasury’s website for the SBLF.   These resources include:

A summary of the SBLF’s principal provisions follows, but is not exhaustive.  Please see the documents listed above and Treasury’s SBLF website for more detailed information about the program and application process.

Eligibility

Asset size: Total assets of less than $10 billion as of the end of the fourth quarter of 2009.  Holding company assets are measured on a consolidated basis.

Type of Institution: Current terms and guidance apply to insured depository institutions and their holding companies.  Treasury is developing separate provisions for mutuals, S corporations and community development loan funds, which will have their own terms and application time frames.

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Sub S Deadline for TARP 1.0 Capital on Friday

As a reminder, the deadline for Subchapter S institutions to apply for the TARP Capital Purchase Program is Friday, February 13, 2009.  (Review the terms for Subchapter S institutions.)

The application form is unchanged from the initial application, and is available from the Treasury or as a Word document.  The Treasury has also confirmed that Subchapter S institutions that applied prior to the announcement of the terms for Subchapter S institutions do not need to re-apply.

While there is significant uncertainty over the application of TARP 2.0 rules to the TARP Capital Purchase program, with over 2,000 applications in the hands of the banking regulators, there is likely to be significantly more clarity to the program before an institution has to make a final decision on whether to accept TARP Capital.  Filing  an application by the deadline preserves the institution’s flexibility to make a final decision, while declining to make an application effectively constitutes an irrevocable decision not to participate.  (See our big picture thoughts on whether to apply for TARP Capital.)

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Updated TARP Application Timing Information

Based on a number of sources, we understand that banks that submit their applications to the FDIC are getting a request for the ratios right after they submit the information and are hearing within a couple of days whether they will, or are expected to be, eligible.  If they are not eligible, banks are being given the opportunity to withdraw the applications to avoid reputational issues.

We have also been advised by the regulators that particularly high capital ratios will not be a basis for the FDIC to find a bank ineligible.  From the regulator’s perspective, you cannot have too much capital.

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Treasury Announcements of TARP Recipients/Applicants

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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FDIC TARP Capital Application Supplemental Ratios

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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Seeking Confidential Treatment for Portions of the TARP Application

What Should be Confidential?

Although the TARP Capital application form itself is simple and does not generally request information that is not otherwise publicly available or that is sensitive in nature, there are some aspects that you should consider for confidential treatment.  A few examples are listed below.  The first item listed (M&A and capital plan) is requested in the application, and the regulators may request the others supplementally.

  • Description of anticipated mergers, acquisitions or other capital plans
  • Projections, if requested by the regulators
  • Contemplated use of proceeds
  • Discussions of CAMELS ratings or other exam-related information
  • Data that raises customer privacy concerns

How Do I Keep Information Confidential?

The TARP Capital program application form contains the following instructions:

Any applicant desiring confidential treatment of specific portions of the application must submit a request in writing with the application.  The request must discuss the justification for the requested treatment.  The applicant’s reasons for requesting confidentiality should specifically demonstrate the harm (for example, loss of competitive position, invasion of privacy) that would result from public release of information (5 U.S.C. 552). Information for which confidential treatment is requested should be:  (1)  specifically identified in the public portion of the application (by reference to the confidential section); (2) separately bound; and (3) labeled “Confidential.”  The applicant should follow the same procedure when requesting confidential treatment for the subsequent filing of supplemental information to the application.

The applicant should contact the appropriate regulatory agency for specific instructions regarding requests for confidential treatment.  The appropriate regulatory agency will determine whether the information will be treated as confidential and will advise the applicant of any decision to make available to the public information labeled as ‘Confidential.’

What Should My Request Include?

When requesting confidential treatment, a separate letter dealing with that issue specifically should be attached to the application.  The letter should:

  • reference your bank and its application;
  • state that you are requesting confidential treatment of the information identified in the request under the Freedom of Information Act (5 U.S.C. 552);
  • identify the nature (but not specific content) of the information for which confidential treatment is requested;
  • state why confidential treatment of the identified information is necessary (see below for typical grounds); and
  • repeat the identification and explanation for other categories of confidential information covered in the request.

How Do I Support My Request?

While the specific issues will vary depending on each bank’s situation, the typical grounds for confidential treatment involve competitive harm, adverse legal or regulatory consequences, or violations of privacy that could be suffered if the information were disclosed.  Examples include:

Acquisition discussions: Disclosure would result in competitive harm because a fundamental competitive aspect of the bank’s strategic plan would be made public.  Third parties could interfere in the negotiations, and premature disclosure could adversely affect both parties’ ability to consummate the transaction and/or the market for their stock.  Disclosure will in any event likely be prohibited under a confidentiality agreement or terms of a letter of intent or definitive agreement.

Capital transactions: Disclosure would result in competitive harm because competitors would be in a position to evaluate the bank’s current and prospective capital position and future performance prospects.  Competitive harm could also result from public disclosure of privately negotiated transaction terms with identified investors.  Additionally, a prior public announcement of a private placement could trigger “general solicitation” concerns under federal securities laws.

Projections: Disclosure would result in competitive harm because this information reflects the bank’s own internal evaluation of its resources, future prospects and operating and growth strategies.

Use of Proceeds: Disclosure would result in competitive harm because the bank’s intended use of capital provides valuable insight into its future plans regarding acquisitions, branching, product and service expansion, and other elements of its strategic plan.

CAMELS and Exam Information: This information is required to be kept confidential under banking regulations.

Customer or Account Data: Disclosure would violate existing statutory and regulatory privacy protections and would also damage the bank’s existing and potential customer relationships.

These are just general illustrations—the key is to think about the harm that disclosure could do and describe it briefly.

Is this Really Necessary?

Applications submitted in draft form are not available publicly, so the confidential treatment request is not as critical at that stage.  For final applications, it’s possible that all information will be treated as confidential under the regulators’ supervisory powers (as opposed to the applications process), but until this is confirmed, it would be prudent to request confidential treatment.

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TARP Capital Application Process

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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