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Interagency Statement on Meeting the Needs of Creditworthy Borrowers

On November 12, 2008, the FDIC, Federal Reserve, OTS, and OCC jointly issued an Interagency Statement on Meeting the Needs of Creditworthy Borrowers.  This new release is a broad statement that covers both lending practices and restructuring mortgages and addresses dividend policies and executive compensation.  We encourage every bank CEO to carefully review this Interagency Statement as an initial glimpse into the direction that the federal banking regulators appear to be headed.

As we’ve previously noted in our commentary, we believe that any future regulations will be placed on the industry as a whole and not merely on those that participate in the TARP Capital program.  We believe this Interagency Statement lends credence to our position.  While the Interagency Statement initially notes the Treasury’s program to make new capital widely available, the Interagency Statement provides that “it is imperative that all banking organizations and their regulators work together to ensure the needs of creditworthy borrowers are met,” and that “each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention and reassess the incentive implications of its compensation policies.”

For bankers already planning to participate in the TARP Capital program, this Interagency Statement may provide some guidance (and comfort) as to what the regulators will expect regarding expansion of the flow of credit and modification of residential mortgages.

For bankers who were not planning to participate in the TARP Capital program, this Interagency Statement may lead to a reconsideration of the relative risks of participating versus not participating.

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What does the November 14th Deadline Mean?

When the Treasury announced the TARP Capital program on October 14, 2008, the program was available to those that “elect to participate before 5:00 pm (EDT) on November 14, 2008.”

On October 31, 2008, Treasury announced that the deadline was only for “publicly traded eligible institutions” and that Treasury would establish “a reasonable deadline for private institutions to apply.”

On November 10, 2008, Interim Assistant Secretary Neel Kashkari stated “The November 14 deadline will be extended for private banks so they have time to apply.”

So to whom does the deadline apply, and what does it mean?

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Updated Guidance from Regulators

Updated Guidance from Regulators

November 5, 2008

Authored by: Robert Klingler

Over the last several days, we’ve had a number of conversations with the federal banking regulators on TARP Capital applications.  Although this guidance has not proved to be entirely consistent across agencies, we wanted to pass it along as we have it.  We have identified the federal regulatory agency which provided us the guidance, but we generally expect some degree of uniformity across agencies.

In addition to discussing the treatment of non-exchange listed public companies, private companies, and Sub S companies, the Federal Reserve Bank of Atlanta also emphasized that the Treasury Department intends to invest only in entities that are “viable,” with viability being determined on a case-by-case basis.  The OCC has separately provided guidance that, as a rule of thumb, an applicant must be viable without the TARP Capital in order to be approved to received TARP Capital.  Based on our conversations with regulators last week, we continue to believe the best indicator of viability is the ability of the applicant to earn money operationally, i.e. pre-tax and pre-provision, which is also known as “pre pre” earning).

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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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FDIC Issues Guidance on TARP Capital Applications

On October 20, 2008, the FDIC published Financial Institutions Letter FIL-109-2008 that contains some useful guidance for community banks regarding the completion of TARP Capital applications.

Some of the highlights are:

  • The FDIC notes that the Treasury Department is aware of potential legal and tax obstacles for non-public, Subchapter S, or mutual corporate structure and states that it is “investigating possible alternatives.”  The FDIC provides that applicants should “describe any structural conditions that may not comply” with the announced plan.  While we hope that more details are announced for smaller reporting companies, public but non-listed companies, private companies and Subchapter S corporations, this approach allows many banks to move forward with the application process.  Please see our list of concerns and issues with the Public Term Sheet for TARP Capital.
  • While the Federal Reserve will be the primary federal regulator to consider applications for all banks with bank holding companies, holding companies should also submit the application to the appropriate federal banking regulator for their subsidiary banks.
  • Institutions with less than $1 billion in assets that serve low-to-moderate income populations and underserved communities and that have been impacted by Fannie Mae or Freddie Mac stock depreciation may receive specialized consideration.  Based on this guidance, we would recommend that all institutions that were impacted by Fannie Mae or Freddic Mac stock depreciation should make special note of that in their application materials.
  • FDIC encourages all state nonmember institutions to “seriously consider” applying for TARP Capital.

An attorney in one of the OCC’s regional offices has told us that he would assume that the OCC will take a similar position to that of the FDIC.

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