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Is the TARP Program Right for Your Bank?

By: Kari Taylor

While BankNews is being published just days before the Dec. 15 deadline for banks to apply for the Treasury’s TARP Capital Purchase Program, it was a hot topic during a general session presented by Jim Reber, president and CEO of ICBA Securities, at the Nebraska Independent Community Bankers Management Conference and Trade Show, Nov. 6–7 at the Embassy Suites Hotel in Lincoln. Reber provided attendees details of how participating in the program will affect their banks.

For banks that participate, the Treasury will receive senior preferred stock with a 5 percent dividend for the first five years, and 9 percent thereafter. Reber said he doesn’t believe the Treasury wants long-term stakes in banks and that the 9 percent dividend is incentive for banks to buy back that stock before it comes to that. The preferred stock is callable at par after three years, and may be called sooner with proceeds from qualified equity offering of any Tier 1 preferred or common stock. The Treasury will also receive warrants to purchase common stock at an aggregate market price of 15 percent of the senior preferred investment.

As far as what banks can use the capital for, there are no limitations. There are, however, suggestions in the preferred stock purchase agreement. The agreement wording states that companies that participate agree to expand the flow of credit to U.S. consumers and businesses on competitive terms to promote growth of the economy. Reber also said there is an expectation that companies will engage in foreclosure mitigation efforts.

Private companies, including S corporations, can expect comparable terms, he said. Some possible options being considered were book value as a substitute for market price, both for determining strike price of warrants and for exercise; and a redemption fee for Sub S banks in lieu of warrants.

For public companies, Reber noted that issuers must file a shelf registration statement for the senior preferred shares, warrants and common stock underlying the warrants; Treasury may transfer or sell the senior preferred shares or warrants at any time; warrants are exercisable immediately; and if the proceeds from a new, qualified equity offering issued before Dec. 31, 2009, are at least 100 percent of the issue price of the senior preferred, the number of shares of common stock underlying the warrants will be reduced to half of the original total.

For bankers still trying to decide whether to participate, Reber said those that don’t have capital needs — current on in the coming years — and banks with organic, wholesale or acquisition growth opportunities need not apply. Having said that, he qualified it by saying the TARP program is the cheapest source of market capital now and in the foreseeable future. But there are risks, and if bankers cannot get comfortable with the warrant scheme and the political risk, then they should not apply.

In the end, Reber noted that there is no penalty to withdraw an application if a bank decides not to participate.

Jason Henderson, vice president and branch executive at the Omaha branch of the Federal Reserve Bank of Kansas City, clearly spelled it out for Nebraska bankers attending the convention: We are in a recession. Henderson said to expect a huge decline in the fourth quarter and for it to continue into the first quarter of 2009. Henderson also said he believes this recession will have a “U” shape instead of a “V” shape, as far as how quickly the economy will recover from it. He estimated that it will be the middle or end of 2009 before the economy turns upward.

When the economy does begin its rebound, Henderson believes the rebound will be spurred by international demand instead of internal growth. More specifically, he believes it will come from developing countries such as China and India. Those countries’ strong desire for U.S. products will spur exports and lower the U.S. deficit. However, it will also keep the U.S. dollar relatively weak.

In a session titled “Eliminate obstacles to TOTAL wealth enjoyment,” William W. Reid Jr., president and CEO of ICBA Financial Services Corp., told attendees that there are two things to remember when planning for retirement and beyond: 1) enjoying what you have earned is the ultimate reward for your hard work and 2) good planning is not about death and taxes, it is about life and living. Reid went on to say that good planning involves family harmony, complete clarity of your financial plan and peace of mind in knowing there is enough money to do things you want and knowing how much money is left afterward.

Reid said there are several roadblocks people hit along the way to achieving their retirement goals. Some roadblocks include lack of concrete goals, uncertainty about the amount of excess wealth, worrying about compromising lifestyles in retirement; incorrect titling of assets and inappropriate asset allocation; conflicting advice from advisors and the retirement plan isn’t updated regularly or is obsolete upon death.

To get past these roadblocks, Reid suggested several ideas. First, Reid said you need to define your goals for life in retirement and for your family once you are gone. Second, he said you need to quantify your investments and expenses in retirement. Then stress test your portfolio. Third, Reid said you must make sure your assets are titled appropriately.

Anything going into a trust, Reid said, needs to be able to avoid estate taxes. Fourth, Reid suggested that all your financial advisors talk to each other. For example, your insurance agent, lawyer and CPA all need to know what the other is doing to make sure there are no expensive mistakes in the long run. In the end, Reid said you need to have a blueprint so you can see the end goal and how you are going to get there, and you need to let your heirs know what is coming to them.

Kari Taylor is associate editor of BankNews magazine.

Copyright © December 2008 BankNews Publications