We try to keep this FAQ up-to-date with the latest information, but the information is rapidly changing (and sometimes contradicts earlier information). To get our latest information on TARP Capital, please review our TARP Capital posts.
Who is Eligible to Participate?
What are the terms of the TARP Capital securities?
Should You Participate?
- Update 11/23/08: See our commentary on the big picture analysis of whether to apply for TARP Capital.
- We believe for most community banks, the answer should be Yes! See also FIG Partners’ analysis.
- Consider your need for capital in the current (and prospective) economy. Are you comfortable that you’ll be able to manage your problem assets for another year or two if there is a significant recession?
- Rules of Thumb:
- Take it if you can get it
- Apply for as much as you think you might want
- Prepare (and consider submitting with your application) projections comparing financial results with and without the new capital. Review effects on EPS, book value, cash flows, capital ratios, and other performance measures.
- Dilution should be a secondary consideration—in today’s market, capital is king.
- Generally, the lower your P/E ratio, the more attractive TARP Capital should be.
- Remember that you will not be able to increase common dividends or repurchase common or other junior securities for the first 3 years without approval from the Treasury Department.
- Determine the most beneficial use of proceeds. Just because Treasury wants you to lend does not mean it is the best way to deploy your capital, and other uses of the proceeds will not disqualify you so long as they make the best sense for the institution.
- Regulatory capital treatment: Tier 1 without limitation.
- Warrants receive equity, not liability, treatment. The capital accounting treatment of warrants remains an open issue.
- Compare to other capital alternatives—current market conditions yield few, if any, viable alternatives.
- Consider your executives’ willingness to accept executive compensation limitations. See our summary of the Executive Compensation rules that accompany acceptance of TARP Capital.
- Ensure that the bank subsidiary will have sufficient cash flow to dividend up to the holding company to pay dividends on the Senior Preferred.
- Plan for the lives of the securities:
- Do you plan to raise new capital by 12/31/09 to reduce warrants?
- Will you use qualified offering proceeds to redeem the Senior Preferred within the first 3 years?
- Remember that there is a 5-year dividend increase on the Senior Preferred.
- Warrants remain outstanding for their 10-year term unless exercised earlier.
- Even though only acceptances, and not applications or rejections, are published, the market, customers, and shareholders may draw inaccurate conclusions about your condition if you are not on the “accepted” list.
- Competitive effects—don’t get left behind. Some of your struggling competitors may gain a competitive advantage with new capital, especially if you choose not to participate in the program.
- Although Uncle Sam will be a significant investor, we believe any increased industry regulation will come regardless of whether you participate. If the government imposes new rules, we believe it will use the fact that the TARP Capital program was made available to the industry as a whole to justify new rules for all banks, and not only those in which it has an investment. Remember that the industry is already highly regulated; having Uncle Sam as an investor is unlikely to govern how regulators attempt to implement desired changes. See our analysis of the potential regulatory impact of accepting TARP Capital.
What are the Executive Compensation limitations on participating companies?
What is the Application Process?
- Update as of 12/08/08: We have provided a page detailing the application submission process.
- Update as of 10/28/08: We have posted updated information on the impact of CAMELS ratings and the analysis that will be undertaken by the FDIC.
- Update as of 10/28/08: Looking for the Investment Agreements mentioned in the application? See our post on the Unavailability of the Investment Agreements.
- Discuss with your Board of Directors. Formal board approval is not needed to apply, but approval is necessary to allow a bank’s actual participation.
- Contact your primary federal regulator to indicate interest in participating and to obtain feedback. In-person meetings are not required (or encouraged). Consider e-mail correspondence as a record of your discussions.
- Application and instructions are available on Fed, FDIC, OCC and OTS websites (joint press release issued Oct. 20, 2008).
- In addition to the information requested in the application, regulators are reportedly sometimes requesting projections (with requested capital vs. without) and indications of interest in acquiring failed/failing institutions.
- “Robustly explain” in the application any limitations in ability to execute the required documents or meet closing conditions—this explanation is especially important for private/Sub S companies that apply.
- If possible, review the investment agreement and related documents before submitting the application. If you elect to submit your application before those documents are available, you will need to submit an addendum to the application after you’ve reviewed them.
- After reviewing the investment documents, determine your ability to comply with reps, warranties and closing conditions and address any anticipated compliance difficulties. This information should be added to the “robust explanation” described above (either in the initial application or the addendum) if it has not already been addressed. For example, the investment documents may contain specific representations, covenants, or closing conditions that present problems that are unique to your bank.
- Although applications may be processed under supervisory, as opposed to application, authority, consider requesting confidential treatment for information that you would not want a competitor to have. The request needs to identify the information in question and state why disclosure would cause competitive harm. For example:
- disclosure of internal projections could allow competitors to gauge your available resources, plans, and strategic priorities, and provide them an opportunity to adjust their plans to compete against you more effectively;
- disclosure of acquisition plans could allow competitors to adjust their strategy and operations to compete more effectively against the potential combined organization or to interfere in the contemplated transaction and could also violate contractual confidentiality obligations;
- disclosure of your planned use of proceeds could provide competitors with information regarding the condition of your business and your strategic plans that they could use to their competitive advantage; and
- disclosure of a planned private placement could constitute a “general solicitation” under federal securities laws and result in your inability to raise additional capital to enhance your competitive position.
- These are only examples–there may be other provisions of the application that you should keep confidential. Update as of 10/29/08: Please see our post on Seeking Confidential Treatment for Portions of the TARP Application.
- Bank holding companies should submit applications to the Fed and to the Bank’s primary federal regulator. The Fed is involved because capital will be issued at the holding company level, but in most cases, the lead subsidiary bank’s primary federal regulator will likely take the lead in determining the recommendation.
- To protect banks against potential FOIA and discovery requests, the Federal Reserve Bank of Atlanta has indicated that it will review applications in draft before accepting them as submitted—that way, you can withdraw if the Fed indicates that it will not be recommending approval and neither your application nor the Fed’s action will be publicly available.
- Banks without holding companies should submit applications to the bank’s primary federal regulator.
- Publicly traded companies were required to submit application to the federal banking regulator(s) by 5:00 p.m., November 14, 2008. Privately traded companies are required to submit applications to the federal banking regulator(s) by 5:00 p.m., December 8, 2008. [Updated as of 10/29/08] The federal regulators are encouraging banks to apply as soon as possible. Although the TARP Capital money is not “first come, first serve,” the processing of applications may be. As a result, we now encourage banks that are definitely interested in TARP Capital and/or are trying to decide between TARP Capital and other capital alternatives, to file as soon as possible. However, we continue to believe there’s plenty of capital to go around, and those that apply later will still have access to TARP Capital. We have posted updated information on whether to submit applications early as well as subsequent regulatory guidance encouraging filing now.
- Advantages of applying now:
- Starts the official review process—gets you “on the list”
- Provides regulators time to review applications
- May enhance chances of completion prior to year-end, assuming preliminary approval is issued promptly and continuously throughout the process.
- Advantages of waiting a bit:
- Program may change for private, Subchapter S, and mutual institutions, and the new program may require withdrawal of the prior application and fresh analysis.
- Investment documents are not yet available—ultimately, you will need to amend the application to review and identify any new issues presented by the investment materials, including compliance with any specific reps and/or warranties required by the additional documents.
- You will have the time necessary to analyze effects and parameters of participation thoroughly, and can submit a final, solid plan, identifying potential issues.
- Federal banking regulator will forward applications to Treasury with its recommendation
- After receipt and review of the application (giving “great weight” to the regulatory recommendation), Treasury will issue preliminary approval “promptly.”
- Must submit final documentation and fulfill any outstanding requirements (i.e., authorization of preferred stock) within 30 days after preliminary acceptance
- Treasury will publish final acceptances within 48 hours of approval
- No publication of rejection
What Do We Need to Do Now?
In planning your participation in the TARP Capital program, consider the following issues that require some additional lead-time:
- Charter Amendment. Your articles of incorporation may need to be amended to provide: (1) authority to issue “blank check” preferred stock (where the board is authorized to set specific terms without shareholder approval); and (2) sufficient authorized shares of common stock to cover the warrants upon exercise. If an amendment is needed:
- Call a special shareholders’ meeting to approve amendment
- If you’re subject to SEC proxy rules, file preliminary proxy materials with the SEC for potential review
- You must have shareholder approval of the amendment and have filed it with the Secretary of State (or similar agency) so that it is effective before the Senior Preferred is issued
- Authorization of additional warrant shares can wait, but remember that the exercise price goes down by 15% every six months until shareholder approval is obtained, with substitution of other instrument(s) after 18 months
- Shelf Registration.
- For publicly listed companies, the program requires the issuer to register the Senior Preferred, warrants, and warrant shares with the SEC.
- Must also apply to list the warrant shares on the same exchange on which your common stock is traded.
- Warrants will be exchangeable, at Treasury’s option, for other securities/instruments that reflect equivalent value if your exchange listing is lost or shareholder approval of warrant shares is not received within 18 months.
- Begin preparing the registration statement. Items that will require additional lead time in that regard include, but are not limited to:
- Completion of 9/30 financials and MD&A
- Updating risk factors to reflect the bank’s current situation and market
- Updating Guide 3 information and the description of the bank’s business, loan portfolio, etc.
- Review by independent auditors and securities counsel for compliance with registration requirements
- The registration statement does not need to be filed or effective before the Senior Preferred and warrants are issued, but the investment agreement will likely require that you make your best efforts to register the securities promptly thereafter.