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TARP Capital Investment Agreements for Private Companies

On December 11, 2008, the Treasury published the investment agreements for privately held companies that are approved to receive TARP Capital infusions.

The Treasury has used the same basic structure as adopted for publicly traded companies: a uniform securities purchase agreement, form of warrant and certificate of designations for preferred stock, along with a personalized letter agreement providing the details for each particular investment.

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TLGP Opt-Out Lists

TLGP Opt-Out Lists

December 12, 2008

Authored by: Robert Klingler

On December 10, 2008, the FDIC published preliminary lists of financial institutions that have elected to opt-out of either the Debt or Transaction Account Guarantees under the Temporary Liquidity Guarantee Program.  As noted by the FDIC,  the decision to opt-out should not be read as a signal, either positive or negative, about the financial health of the entity.  The FDIC recommends that depositors and investors with questions ask the entities on either of these lists for a further explanation concerning the entity’s decision to opt-out of the TLGP.

As of December 12, 2008, 863 banks elected to opt-out of the Transaction Account Guarantee, while 3,116 entities (which includes affiliated bank holding companies) elected to opt-out of the Debt Guarantee.  Looking specifically at Georgia, 16 banks elected to opt-out of the Transaction Account Guarantee, while 54 entities elected to opt-out of the Debt Guarantee.

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Using the TLGP Debt Guarantee to Provide Capital

We are having discussions with clients regarding the possibility of issuing FDIC-guaranteed debt under the TLGP’s Debt Guarantee Program at the holding company level and using the proceeds of that debt to increase the capital of the bank subsidiary.  This is particularly attractive for banks that are eligible to report their risk-based capital positions on a bank-only basis.  (The Federal Reserve’s risk-based capital measures are generally applied on a bank-only basis for bank holding companies with consolidated assets of less than $500 million.)

Permissible Use for BHC FDIC-Guaranteed Debt

The FDIC’s Frequently Asked Questions (FAQ) explicitly permits a bank holding company to use the proceeds from a guaranteed debt issuance to purchase additional shares of bank stock.

Need to Apply to FDIC for Approval

In our experience, however, most bank holding companies for community banks had no, or very limited amounts of, senior unsecured debt outstanding as of September 30, 2008.  As a result, the bank holding company will have to file a letter application with the FDIC and, if different, the federal banking regulator for its largest subsidiary bank to establish an FDIC-guaranteed debt limit.  The letter application must describe the details of the request, provide a summary of the applicant’s strategic operating plan, and describe the proposed use of the debt proceeds.

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Revised Call Report for Transaction Account Guarantee

On December 11, 2008, the Federal Financial Institutions Examination Council issued revised instructions for Call and Thrift Financial Reports applicable to participants in the TLGP Transaction Account Guarantee.

Participating institutions will be required to report the amount and number of its noninterest-bearing transaction accounts (including IOLTA accounts and certain NOW accounts) with balances in excess of $250,000.  In calculating the figures, the bank or thrift is permitted, but not required, to exclude accounts or amounts that are otherwise insured under the FDIC’s pass-through insurance rules.  The FDIC will use the reported amounts to calculate the 10 basis point assessment for participation in the Transaction Account Guarantee.  As a result, it will likely be in the interest of reporting institutions to determine the amount in the accounts that is otherwise insured.  The instructions note that the amounts must be fully supported in the institution’s workpapers.

The FFIEC also noted that the Call and Thrift Financial Reports have otherwise not been modified to reflect the temporary increase in deposit insurance to $250,000.  As a result, institutions should continue to report the amount and number of deposit accounts (other than retirement accounts) of (a) $100,000 or less and (b) more than $100,000.  In addition, when reporting estimated uninsured deposits, institutions should continue to calculate the amount of uninsured deposits based on the deposit insurance limits of $250,000 for retirement deposit accounts and $100,000 for all other accounts.

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Further Guidance on Debt Guarantee

Further Guidance on Debt Guarantee

December 11, 2008

Authored by: Robert Klingler

On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program.  The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Debt Guarantee.

Further Clarification on Brokered Interbank CDs

The FAQ clarifies that if an issuing bank owes a CD to a broker, the CD does not meet the definition of senior unsecured debt (and will not be guaranteed) even where an insured depository institution or credit union is the beneficiary of the CD.  If, on the other hand, the broker merely arranges placement of a CD and the bank or thrift owes the CD directly to another insured depository institution or credit union, then the CD meets the definition of senior unsecured debt (and will be guaranteed), provided that the debt is owed to the insured depository institution or credit union in its own capacity and not as agent for someone else.

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Further Guidance on Transaction Account Guarantee

On December 11, 2008, the FDIC updated its Frequently Asked Questions (FAQ) on the Temporary Liquidity Guarantee Program.  The updated questions address both the Transaction Account and Debt Guarantee portions of the TLGP, but this post focuses on the Transaction Account Guarantee.  Bank action is likely required to assure that NOW accounts are covered by the TLGP’s Transaction Account Guarantee.

The updated FAQ addresses four questions related to the guarantee of NOW accounts under the Transaction Account Guarantee.  NOW accounts with interest rates no higher than 0.50 percent are treated as noninterest-bearing transaction accounts and eligible for the guarantee “if the insured depository institution at which the account is held has committed to maintain the interest rate at or below 0.50 percent.”

The “Commitment” Process

The TLGP regulations do not provide a procedure for making this commitment or for reducing interest rates.  The FAQ clarifies that the Board of Directors or other authorized officials can make the commitment in accordance with the institution’s usual procedures for making decisions.  The commitment should be clear, in writing, and maintained in the institution’s books and records to avoid any confusion as to the nature of the commitment.

Tiered-Rate or Floating NOW Accounts

If it is possible for the interest rate paid on the NOW account to exceed 50 bps, then the account is not eligible for the guarantee, even if the interest rate remains below 50 bps.  If a NOW account (i) has a tiered-rate structure in which an interest rate above 0.50 percent is paid if the account balance is sufficiently large, or (ii) floats with an industry interest rate, then the NOW account will not be covered under the Transaction Account Guarantee “because the possibility exists that the interest rate will rise above 0.50 percent.”

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OTC Bulletin Board and TARP Capital

OTC Bulletin Board and TARP Capital

December 10, 2008

Authored by: Robert Klingler

The Treasury’s fourth round of completed TARP Capital infusions added four more public companies that are traded on the Over-The-Counter Bulletin Board (OTCBB): Blue Valley Ban Corp., Coastal Banking Company, Inc., Manhattan Bancorp, and Oak Valley Bancorp.  As a result, it seems clear that the Treasury is willing to allow public reporting companies that are traded over the OTCBB participate in the TARP Capital program under the public company terms.

As we’ve previously noted, the definition provided by the Treasury of a publicly traded company is “a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.”  While the Treasury has not defined what constitutes a national securities exchange, the OTCBB is generally not considered a “national securities exchange.”  The SEC does not consider the OTCBB to be a national securities exchange.   Neither does the OTCBB itself, which states that it is “not an issuer listing service, market or exchange.”

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Round 4 of TARP Capital Infusions

Round 4 of TARP Capital Infusions

December 9, 2008

Authored by: Bryan Cave

On December 9, 2008, the Treasury announced the completion of the fourth round of TARP Capital infusions.  The Treasury purchased a total of approximately $3.8 billion in preferred stock from 35 financial institutions on Friday, December 5, and has now invested a total of $165.3 billion of the $250 billion TARP Capital program.

Interestingly, this round saw the first investment in a financial institution not based within the continental United States – Popular, Inc. from San Juan, Puerto Rico.   In fact, Popular’s receipt of $935 million was the largest investment in the fourth round.  The smallest investment was $1.7 million, which went to Manhattan Bancorp out of El Segundo, California. 

We have updated our TARP Map to display the locations of the institutions that received infusions in the fourth round. 

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TLGP: Debt Instrument Reporting

TLGP: Debt Instrument Reporting

December 9, 2008

Authored by: Robert Klingler

On December 8, 2008, the FDIC published a Financial Institution Letter that clarifies the reporting requirements for newly issued guaranteed senior unsecured debt.

Beginning on December 6, 2008, all newly issued guaranteed debt must be reported to the FDIC via FDICconnect within five (5) calendar days of the date of issuance.  Guaranteed debt that was issued between October 14, 2008 through December 5, 2008 and was still outstanding on December 5, 2008 must be reported to the FDIC via FDICconnect by December 19, 2008.

The FDIC will generate the first TLGP assessment invoices for guaranteed debt on December 17, 2008, with settlement of the invoices on December 19, 2008.  Thereafter, new invoices will run each Wednesday for debt issuances reported the prior week, with settlement each Friday.

These reporting requirements are in addition to the monthly reports to the FDIC of aggregated guaranteed debt outstanding pursuant to the Master Agreement.  The FDIC promises to issue information on these ongoing reporting requirements shortly.

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Several TARP Updates

Several TARP Updates

December 9, 2008

Authored by: Robert Klingler

Last week, the federal government provided several updates on the status of the Troubled Asset Relief Program: the Third Tranche Report to Congress (December 2nd); a speech by SEC Chairman Cox (December 4th); the first Section 105(a) Report to Congress (December 5th); and a speech by Treasury Interim Assistant Secretary Kashkari (December 5th).  We have highlighted the more important components of each update below.

Third Tranche Report to Congress

The Third Tranche Report to Congress provides the basic factors that the Treasury will use in analyzing whether an institution should be supported under the Systemically Significant Failing Institutions (SSFI) Program.  It was under the SSFI Program that Treasury closed a $40 billion transaction with AIG on November 26, 2008.  Participation in the SSFI Program will continue to be on a case-by-case basis, based on these and other factors:

  1. The extent to which the failure of an institution could threaten the viability of its creditors and counterparties because of their direct exposure to the institution.
  2. The number and size of financial institutions that are seen by investors or counterparties as similarly situated to the failing institution, or that could otherwise be likely to experience indirect contagion effects from the failure of the institution.
  3. Whether the institution is sufficiently important to the nation’s financial and economic system that a disorderly failure would, with a high probability, cause major disruptions to credit markets or payments and settlement systems, seriously destabilize key asset prices, significantly increase uncertainty or losses of confidence thereby materially weakening overall economic performance.
  4. The extent and probability of the institution’s ability to access alternative sources of capital and liquidity, whether from the private sector or other sources of government funds.

It seems unlikely that the Treasury will include any financial institutions other than the largest ones in the SSFI Program, unless an institution can make a strong case that its stability is critical to the overall stability of the nation’s financial and economic system.

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