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Interest Rate and Brokered Deposit Restrictions

On January 27, 2009, the FDIC proposed to amend its regulation relating to interest rate restrictions on institutions that are less than well capitalized.  The proposed regulation would tie the interest rate caps to published national interest rates and eliminate the concept of local deposit market areas.

Section 29 of the Federal Deposit Insurance Act places statutory limitations on the ability of any insured depository institution that is not well capitalized to accept funds obtained by or through any deposit broker.  Because of the statutory definition of a deposit broker, these limitations also limit the interest rates which may be paid by insured depository institutions that are less than well-capitalized. In order to be considered well-capitalized, an institution may not be subject to any written agreement or order issued by its primary federal regulatory which requires the institution to meet and maintain a specific capital level for any capital measure.

Under the existing regulations, any institution that is not well capitalized (including any institution subject to a regulatory enforcement action with capital requirements) may generally not pay interest in excess of 75 basis points over the average interest paid for comparable deposits in the institution’s “normal market area.”

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The End of Political Interference?

The End of Political Interference?

January 28, 2009

Authored by: Robert Klingler

On January 27, 2009, new Treasury Secretary Tim Geithner announced new rules intended to bolster transparency and limit lobbyist influence in federal investment decisions under the TARP program.  While the actual rule has not been published, the action appears intended to react to the recent Wall Street Journal article questioning whether political interference is affecting the selection of TARP Capital recipients.

The impact of the new rules may be as much symbolic as practical.  However, we do expect that, to the extent that politicians were previously willing to assist local institutions with  word of support, these new rules will cause the politicians to reconsider how to provide such support.

The press release announcing the new rules identify four key components:

1. Combating lobbyist influence in the Emergency Economic Stabilization Act process.

The press release indicates that the Treasury will implement “safeguards to prevent lobbyist influence over the program, including restricting contacts with lobbyists in connection with applications for, or disbursements of,” TARP funds.  Because of First Amendment concerns, the rules likely bar Treasury officials from talking about specific matters with lobbyists, but do not attempt to forbid people from attempting to lobby for action.

2. Keeping politics out of funding decisions.

The Treasury will, using the existing protections that limit political influence over tax matters as a model, “ensure that political influence does not interfere” with TARP decisions.  The tax model would prevent executive branch officials (but not members of Congress) from intervening in particular decisions about which banks would get funds.

However, the Treasury has also indicated that it will make a public log of all contacts by public officials and bank officials regarding specific financial institutions, posting such information to the department’s web site on at least a weekly basis.  This openness may reduce the willingness of politicians to lobby on behalf of specific institutions.

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Round 11 of TARP Capital Infusions – TARP Map Updated

On January 27, 2009, the Treasury announced the completion of the eleventh round of TARP Capital infusions.  The Treasury purchased a total of approximately $386 million in securities from 23 financial institutions on Friday, January 23, 2009, and has now invested in 319 institutions, totaling $194.2 billion.

1st Source Corporation, of South Bend, Indiana, received the largest capital infusion: $111 million.  The smallest infusion went to the Calvert Financial Corporation, Ashland, Missouri: $1.04 million.

Click here to view our updated TARP Map.

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Tax Impact of Stimulus Bills for Community Banks

The current versions of the economic stimulus tax bills under consideration by the Senate Finance and the House Ways and Means Committees contain two (2) provisions that are likely to be of particular interest to and will directly impact most, if not all, of our bank and other financial institution clients.  The provisions are (i) changes in the rules allowing for the carryback of a net operating loss (“NOL”) of up to five (5) years instead of the current carryback period of only two (2) years, and (ii) a repeal (with limited transitional protection) of the relief provided in Notice 2008-83 issued by the Internal Revenue Service (“IRS”) in the fall of 2008 that exempted certain losses on loans and foreclosure property incurred by banks from the NOL limitation rules applicable to built-in losses.

Increase in the Net Operating Carryback Period

The provisions of the Senate Finance and the House Ways and Means Committees’ bills increasing the NOL carryback period to two (2) to five (5) years are essentially identical.  The increased carryback period only applies to NOLs arising in 2008 and 2009.  In addition, the 90% limitation (or the 10% haircut  required) on the use of NOL carrybacks when computing a corporation’s alternative minimum tax is suspended.  For those banks or other financial institutions with NOLs in 2008 and 2009, the bill will provide three (3) additional years (i.e., 2003, 2004, and 2005) from which they can obtain a refund of federal income taxes paid.

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Treasury to Ask Recipients About Use of TARP Funds

Neil Barofsky, the Treasury Department’s Special Inspector General for the Troubled Assets Relief Program, plans to ask all TARP fund recipients to “account for their use of TARP funds and to describe their efforts to comply with applicable executive compensation restrictions.”  Mr. Barofsky describes the initiatives of the Office of the Special Inspector General for the Troubled Assets Relief Program in a letter, dated January 22, 2009, to the raking member of the Senate Finance Committee.

Specifically, the Treasury intends to request from each entity that has received TARP funds to provide, within 30 days of the request:

  • a narrative response outlining their use or expected use of TARP funds;
  • copies of pertinent supporting documentation (financial or otherwise) to support such response;
  • a description of their plans for complying with applicable executive compensation restrictions; and
  • a certification by a duly authorized senior executive officer of each company as to the accuracy of all statements, representations, and supporting information provided.
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Round 10 of TARP Capital Infusions – TARP Map Updated

On January 22, 2009, the Treasury announced the completion of the tenth round of TARP Capital infusions.  The Treasury purchased a total of approximately $1.5 billion in securities from 39 financial institutions on Friday, January 16, 2009, and has now invested in 296 institutions, totaling $193.8 billion.

First BanCorp, of San Juan, Puerto Rico, received the largest capital infusion: $400 million. First BanCorp is the second Puerto Rico-based institution to receive TARP funds, joining Popular, Inc.  The smallest infusion went to the Community Bank of the Bay, Oakland, California: $1.75 million.

Of note in this tenth round, the first North Dakota-based financial institutions received TARP Capital infusions.  State Bankshares, Inc. of Fargo received $50 million and BNCCORP, Inc. of Bismarck received $20 million.

Click here to view our updated TARP Map.

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House Passes TARP Reform and Accountability Act

On January 21, 2009, the House adopted Barney Frank’s TARP Reform and Accountability Act of 2009, which would impose conditions on the use of remaining TARP funds.  However, the Senate has already voted to release the remaining TARP funds (without conditions) and is believed unlikely to consider this legislation.  As a result, the legislation is non-binding, but theoretically expresses the will of the people.  As a result, Barney Frank believes that the passage of the measure will give Congress additional flexibility of the Obama administration does not follow through on the conditions provided for in the Reform Act.  The text of the bill, as adopted by the House, can be obtained from the Government Printing Office.

The final bill is largely unchanged from Frank’s initial proposal, however some amendments were approved by the House.  The approved amendments:

  • clarify that the requirements on the use of TARP funds would NOT apply to financial institutions that have applied to participate under the existing TARP Capital program;
  • strike the provision requiring divestiture of private planes;
  • require the Treasury to provide a fully searchable database of TARP recipients;
  • state that it is “the sense of Congress” that any institution receiving assistance should not initiate (or continue) foreclosure proceedings with respect to any principal homeowner mortgage until a comprehensive foreclosure mitigation plan has been implemented; and
  • prohibit recipients of TARP funds from entering into agreements with any foreign company for the provision of customer service functions.

Again, these conditions are unlikely to become law, but may provide guidance as to how Obama’s Treasury department will proceed.  The passage of the Reform Act also shows that the House intends to make permanent the increase in FDIC deposit insurance to $250,000 per depositor.

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WSJ Articles on Political Interference and Nationalization

On January 22, 2009, the Wall Street Journal published two stories of importance to community bankers:

The “Political Interference” article focuses on the potential role of politics in determining which institutions receive TARP  Capital.

Bankers, regulators and politicians complain of a secretive and opaque process for deciding which banks get cash and which don’t. The goal of aiding only banks healthy enough to lend — laid out by the Treasury when the program began — clearly seems to have shifted, but in a way that’s hard to pin down and that the Treasury has declined to explain. Part of the problem is that some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states.

The article focuses on OneUnited Bank in Boston, Massachusetts, which received $12 million in TARP Capital in December.  Nominally, OneUnited Bank was certainly a poor candidate for receiving TARP Capital; according to its September 30, 2008 Call Report, One United Bank was critically undercapitalized, with a leverage ratio of 1.7%, a Tier 1 risk-based capital ratio of 2.92%, and total risk-based ratio of 3.67%.  In addition, it was subject to a Consent Order to Cease & Desist with the FDIC.

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Treasury Provides Updated Executive Compensation Rules

On January 16, 2009, the Treasury issued new interim final rules on the executive compensation provisions applicable to participants in the TARP Capital Purchase program, as well as additional FAQs.

In addition to a technical change to require move the required annual disclosure from the Compensation Discussion and Analysis section to the Compensation Committee Report, the interim final rule imposes additional certification and record keeping requirements. In order to comply, institutions will need to schedule a compensation committee meeting for the committee to review, with the institution’s senior risk officers, the incentive compensation arrangements with its senior executive officers.

Within 120 days of the closing date of TARP Capital Purchase, the principle executive officer of the financial institution is required to certify that the compensation committee of the financial institution has reviewed the senior executive officer incentive compensation arrangements with the senior risk officers of the financial institution to ensure that the senior executive officer incentive compensation arrangements do not encourage the senior executive officers to take unnecessary and excessive risks that could threaten the value of the financial institution.

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Obama's TARP Commitments

Obama's TARP Commitments

January 16, 2009

Authored by: Robert Klingler

In connection with the Senate’s rejection of the withholding of the second $350 billion under the Emergency Economic Stabilization Act of 2008, Director-designate of the National Economic Council, Larry Summers, submitted a letter to Senator Reid containing additional commitments of the Obama administration.  The letter is generally focused on the use of the second $350  billion, but also contains several provisions that may affect existing TARP Capital programs.

The Obama administration has committed that the TARP funds will be used to protect the financial and housing markets, and will not be used to implement a broader industrial policy, and that at least $50 to $100 billion of the remaining funds will be allocated to an effort to address foreclosures.  In addition, the letter highlights four areas of reform that it intends to implement:

  1. Provide a  Clean and Transparent Explanation for Investments
  2. Measure, Monitor and Track the Impact on Lending
  3. Impose Clear Conditions on Firms Receiving Government Support
  4. Focus Support on Increasing the Flow of Credit

The letter provides that the Treasury will make a condition of federal assistance for healthy banks that they “will increase lending above baseline levels.”  It appears that Treasury will require quarterly reports, perhaps in conjunction with Call Reports of SEC filings.

Among the conditions that Summers lists (which may or may not apply to TARP Capital investments), community bankers may find both positive and negative implications.  On the positive side, the only additional limitation on executive compensation is that compensation “above a specified threshold” must be paid in restricted stock or similar form that cannot be liquidated until the government has been repaid.  Substantive dividend restrictions appear limited to those banks that receive “exceptional assistance.”  For all others, dividends must be “approved” by their primary federal banking regulator; presumably, federal banking regulators will continue to use the same standards to determine whether dividends are acceptable.  “Summers also provides that the investments will be designed to “promote early repayment and to encourage private capital to replace public investments as soon as economic conditions permit.”  The Obama administration will not permit government funds to be used to purchase “healthy” institutions.

Positively, the Summers letter specifically provides that funds should be provided to “ensure the soundness of community banks throughout the country.”

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