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Does the Treasury need to Mark-to-Market?

On Friday, February 9, 2009, the TARP Congressional Oversight Panel released its February Oversight Report, with significant press coverage that the Treasury paid too much under TARP.

The Panel’s analysis revealed that in the ten largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66. This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.

Extrapolation to Community Banks?

The Panel’s analysis explicitly extrapolates the value of the Treasury’s investments in 311 banks, including many private community banks will less than $1 billion in total assets, based solely on the individual risk characteristics of Bank of America, Citi, JPMorgan, Morgan Stanley, Goldman Sachs, PNC Financial, US Bancorp, and Wells Fargo.  While criticizing the Treasury for using a “one-size-fits-all investment policy,” the Oversight Panel’s analysis uses a one-size-fits-all investment analysis.  Other than a footnote acknowledging this extrapolation, the Congressional Oversight Panel’s report does not explain why it believes this extrapolation is appropriate.

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A New Capital Injection Program?

A New Capital Injection Program?

February 6, 2009

Authored by: Robert Klingler

On February 6, 2009, the Wall Street Journal ran a story indicating that the Treasury Department is shifting away from a “bad bank” concept and towards a second round of capital injections.  This second round of capital injections, according to the Wall Street Journal, would carry stricter terms than the current TARP Capital Purchase program and would be targeted towards weaker banks.

Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years.

To get money, banks would likely have to pay a higher dividend to the government than the 5% rate the government charged in the first round of infusions and agree to a host of new restrictions, such as lending above a baseline level, reporting frequently on their use of the money and curbing executive salaries. While Treasury wouldn’t preclude healthy banks from participating, the stricter terms would likely attract primarily weaker banks in need of capital.

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SIGTARP's Initial Report to Congress

Adding to the acronyms involved, on February 5, 2009, the Office of the Special Inspector General for the Troubled Asset Releief Program (SIGTARP) released its initial report to Congress.  The report clocks in at 108 pages plus 77 pages of appendices, but appears to do an excellent job summarizing the Emergency Economic Stabilization Act, the overall TARP program, as well as the specific investments made under TARP.

Highlights include tables on page 47 and 48 that outline the basic terms of all of the TARP equity and debt investments and a complete list, as of January 23, 2009, of the warrants held by the Treasury under TARP, including the strike and market price, in Appendix D.  (Most of the warrants held are very “out of the money.”)

TARP Capital Evaluation Process

The report includes a relatively useful summary of the evaluation process being used under the TARP Capital Purchase program.  According to the report, all applicants are classified by their federal banking examiner into one of three categories:

  • Category One
    • CAMELS Composite 1
    • CAMELS Composite 2 and for which the most recent examination rating is not more than 6 months old
    • CAMELS Composite 2 or 3 and “acceptable performance ratios”
  • Category Two
    • CAMELS Composite 2 and for which the most recent rating is more than 6 months old
    • CAMELS Composite 2 or 3 and “overall unacceptable performance ratios”
  • Category Three
    • CAMELS Composite 4 or 5
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A Statistical Look at Community Bank TARP Recipients

We correlated the Treasury’s official list of TARP Capital Recipients through February 2, 2009 with the FDIC’s Statistics on Depository Institutions (with data as of September 30, 2009) to identify the characteristics of community banks that have received TARP Capital funding.

In order to preserve comparability, we limited our search to stand-alone banks and one-bank holding companies with total assets of less than $1 billion.  We identified 161 institutions that met this criteria and had received TARP Capital through February 2, 2009.  The institutions ranged from $46.9 million in total assets (Mainstreet Bank in Ashland, Missouri) to $990.0 million (First Federal Savings Bank of Elizabethtown in Elizabethtown, Kentucky).  The composite group included 87 state non-member banks, 37 state member banks, 29 national banks, and 8 federal thrifts.  The group included representatives from 36 states.

Overall, the 161 institutions, prior to the receipt of TARP funding, generally had very strong capital positions, and were well reserved, but they do show higher concentrations in real estate than expected given today’s emphasis on concentrations.

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Treasury Announces New Restrictions on Executive Compensation

On February 4, 2009, the Treasury Department announced it was issuing a new set of “guidelines” on executive pay for financial institutions receiving governmental assistance.  The Treasury states that its new guidelines are intended to strike a balance between the need for monitoring and accountability with the need for financial institutions to fully function and attract needed talent.

The new guidelines provide only minimal additional obligations for companies that have participated (or will participate) under the TARP Capital Purchase Program.  The majority of new restrictions are limited to new “exceptional assistance” or future programs that are “generally available capital access programs.”  However, the guidelines also provide a road map for future reforms that would affect all financial institutions, whether they receive governmental assistance or not.

New Requirements for All Companies Receiving Assistance

All companies that have received governmental assistance, or that will receive any assistance, must provide an annual certification signed by it chief executive officer that the company has “strictly complied” with all statutory, Treasury and contractual executive compensation restrictions.  In addition, the compensation committee of such companies must “provide an explanation” of how their senior executive compensation arrangements do not encourage excessive and unnecessary risk-taking.

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Round 12 of TARP Capital Infusions – TARP Map Updated

On February 2, 2009, the Treasury announced the completion of the twelfth round of TARP Capital infusions.  The Treasury purchased a total of approximately $1.2 billion in securities from 42 financial institutions on Friday, January 30, 2009, and has now invested in 361 institutions, totaling $195.3 billion.

Ojai Community Bank, of Ojai, California, received the smallest capital infusion: $2.08 million.  The largest infusion went to the Flagstar Bancorp, Inc.,  Troy, Michigan: $266.7 million.

Of note in this twelfth round, an Arizona-based bank (Goldwater Bank, N.A.) and two Nebraska-based banks (Country Bank Shares, Inc. and Adbanc, Inc.)  received TARP infusions.  In total, institutions in 45 states and Puerto Rico have received TARP Capital infusions.  This leaves only Alaska, Montana, New Mexico, Vermont, and Wyoming without an institution to have received TARP Capital. 

Click here to view our updated TARP Map.

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More than 2,000 TARP Applications in Banking Regulators' Hands

On January 30, 2009, the Government Accounting Office (GAO) released its second report on the Troubled Asset Relief Program (TARP).

The report indicates that “thousands of applications are under review.”  As of January 16, 2009, the Treasury was in the process of reviewing approval recommendations from fewer than 150 financial institutions; however, the bank regulators reported that they are reviewing applications “from more than 2,000 institutions that have not yet been forwarded to Treasury.”  Furthermore, there is a backlog of closings due to the need for some institutions to require shareholder approval and/or to finalize closing documents.

The report follows up on the nine recommendations from its prior report, finding that Treasury has yet to fully address eight of the recommendations, and includes further recommendations on how to monitor TARP funds and more clearly articulate and communicate a strategic vision for the program.

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An Update on All Things TARP

An Update on All Things TARP

February 2, 2009

Authored by: Robert Klingler

On January 30, 2009, Rob Klingler presented An Update on All Things TARP at the Alabama Bankers Association Community Bank Directors College.  The presentation gives an overview of the TARP Capital Purchase Program and FDIC’s Temporary Liquidity Guarantee Program.

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Approaching Clarity on TARP "Viability" Standards?

Through multiple conversations with bankers and regulators, we’re starting to see some clarity in the standards currently being used by regional regulators to establish “viability” for TARP recommendations, subject to variances between markets and regulators, as well as continuing evolution of the standards under the new administration.

If a bank lacks in one or more criteria, it may need to emphasize the actions that it is taking to correct over time and the bank’s strengths in other criteria.

Well Capitalized: A bank needs to be well capitalized “for its condition.”  This may require higher capital levels than the regulatory requirement to be considered well capitalized.  The calculation can be following the TARP Capital infusion, and may also require additional private capital to be raised.

CAMELS Rating: A 3 or better is likely required.  Some regulators have indicated that a 4 might also qualify, but only if conditions have subsequently changed to make it look more like a 3.  Conditions that could have changed include the bank’s capital, its business plan and/or its management (see below).

Classified Assets:  Classified assets must be below 100% of capital, following the TARP Capital infusion.  Regulators prefer less than 75%.

Nonperforming Assets: Nonperforming assets must be below 100% of capital, following the TARP Capital infusion.  Regulators prefer less than 75%.

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