banks and failed bani assets, is creating incentives for investors to wait uatil a bank has failed before

Furthermore, the banking agencies are requiring many banks to raise capital at a me when sources
of capital ate scarce and at precisely the time when capital should be available to absorb losses. This
can put these banks in an untenable position, precipitating the failure of a viable bank that has a
200d franchise and could sutvive if capital was made available.’

The ABA recommends that Treasury modify the ctiteria for ics CAP to assist viable community
banks that need help workirg through their current issues. We propose that Treasuty offer
assistance to those banks that did not qualify for CPP funds but thet nevertheless can demonstrate
the ability to operate safely and soundly and survive if given the chance to obtain necessary capital
This ability would be demonstrated in three ways.

© First, a bank would have to present evidence that private investors ate contractually committed
to match Treaswiy’s investment dollar for dollar.

© Second, the private investors would have to agree to receive securities that are subordinate to
Treasury's interests.

© Third, the bank would have to submit a capital cestotation plan to its primary regulator that,
when factoring in the proposed investments by Treaspry and private equity, satisfies the
requirements of the “Prompt Corrective Acton” rules.? As part of that plan, the bank also
would have to show that it has adequate management to address its problems.

The suggested aggregate investment by Treasury of $5 billion is based on the amount of funds,
when matched by private ecuity on a dollar-for-dollar basis, needed to bring all insured depository
insticutions with assets under §5 billion to capital levels equal to a Tier { risk-based capital ratio of
8% and a total risk-based capital ratio of 12% assuming the stressed scenarios used by the
banking regulators in the SCAP. These capital levels significantly exceed the thresholds
established by the banking regulators for a bank to be deemed “well capitalized” vader the Prompt
Corvect Action rules and would provide s cushion that could enable participating banks to contiaue
mecting the credit needs of their communities without having to shrink to comply with minim
regulatory capital requirements. A $5 billion commitment by Treasury is well below half of the
dividends and warrant repurchases received by Treasury from CPP participants’ and less than 4% of

' Further informauon about the rele of community banks and the adverse impact that recent governmental actions have
had on these banks is discussed in Artachment A.

* See 12 CPR. § 6.5 (Office of the Comptroller of the Currency); 12 CFR. § 208.44 (Board of Governors of the Federal
Receewe System): 12 CER. § 325 106 (Federal Deposit Insurance Coeporation): and 12 CFR. § 565.5 (Oflice of Thrift
Sapennsion)

* For a bank co be “well capitalized” under the Prompt Cosrective Action rules, it must ime toral risk-bated capital of ot

leset 10% Thee 1 risk-based capital of at least 6% a leverage eatio of at lease 5%; and not be tubject ro a verieren
requirement to meet a specific capital level,

+ "The dividends prid on those {{:PP] investments and the eepurchates of warcats we received for thove investments
ow total about $12 billion. For the 23 banks that have fully cepaid, Treatury has eamed an annuslized average cetur of
roughly 17 percent.” Secretary of the Treasury Timothy F. Geithnee, Written Testimony before the Congressional
Oversight Panel, September 10, 2009 (available ar hutos/ /avare ustcans gor (peeas/celeasce ig23 htm).

2



Attachment B
Q2 2009 Capital Analysis for Bank under $5 Billion in Assets

$ in 000s
Capital Thresholds # of Banks Below Threshold* Amount of Capital to Reach Threshold
T1- 8% 232 $2,352,917
TRBC - 12% 2,017 $10,970,676

* Eliminated 17 banks with negative capital ratios

Source: FDIC Call Report Data, Q2 2009



Attachment A

Community banks are central to the economic well-being of the towns and communities they serve
across America, providing capital to consumers, small farms, and other srval} businesses that is
crucial for economic development. These banks have been in their communities for decades and
intend to be there for many decades to come. In fact, there are over 2,500 banks — representing
over 30 percent of the banking industry ~ that have been in business for more than a century; 62
percent (over 5,000) have been in existence for more than half a century. These sumbers tell «
dtamatic story about the stazing power of community banks and their commitment to the
communities they serve.

failure of a communiry bank can be devastating to its community. Not enly do the bank’s
employees often lose their jnbs and the bank's shareholders lose their investments, the town's
businesses lose a vital source of credit and a vicious cycle begins. As credit constuicts, businesses
that depend on financing ar: unable to expand ot, in many instances, even operate. Mote jobs are
lost, causing more people tc default on loans with other banks in the community. Property values
plummet as residential and commercial properties that served as collatetal for the loans are dumped
on the market. Sucviving banks then ate forced to write down the value of the collateral on
performing loans, the banks’ conditions worsen, and the spiral continues downward.

The precipitous declines in zeal estate values across the country underlie many community banks"
problems. In some of the harder bit arcas such as Phoenix, Miami, Detroit, and San Francisco the
drops have been devastating: to community banks. As the following chart shows, homes in these
cities have lost between 43% and 54% of their valve in the past few years.

Dramatic Drop in Metro Housing Prices
Percent Decline from Price Peak in Metro Market
Phoenix (54%) ==Miami (-48%) = ~Detrolt (-45%)
~San Francisca [-43%) ——National {-30%)
O%

2008 2008

30%

40%

50%

69%

Source: S&P/Case-Shiller Home Price index, June 2009

Unfortunately there ate many other cities experiencing similar declines in home prices, and banks in
these communities face unprecedented pressures on assct quality and collateral values.



the total of CPP funds invested to date.’ Our projections show that an cstimated 2,000 community
banks would be potentially eligible (see Attachment B), although it is highly unlikely that all 2,000
would choose to, or be approved to, participate.

‘As noted above, this program would involve matching investments by private equity investors. Itis
important that private equity qualify cegatdless of whether it comes from existing shareholders or
new investors. Either way, the bank is receiving a strong vote of confidence in its viability from
stakeholders who stand to lose their iovestments. Moreover, curzent investors and management
often are in the best position to judge the prospects of a bank and to determine the advisability of
inverting in chat bank.

We believe that, as a general matter, Treasury could adopt as many of the terms used in the CPP as
would be relevant. Thus, fer instance, Treasury would receive the same sort of securities, subject to
the same conditions, as it hes received through the CPP. To make this workable for community
banks, we propose two exceptions to this general approach, however. First, given that these funds
arc intended for viable yet scruggling community banks, we believe it would te appropriate for
Treasury to agree that any aaproved banks would not be expected to pay dividends in the first four
guaneers following Treasury's investment. Second, we renew our request, first raised in the context
of the CPP," that investments in $ corporations and mutual institutions that do not have holding
companies be treated as Tiet 1 capital. It is our undeestanding that these banke’ interest in the CPP
‘was significantly diminished by the teeatment of CPP investments as Tiet 2 capital.

We very much appreciate your consideration of these recommendations. Corsmunity banks are the
backbone of our economy and ate critical to the overall improvement of out economy. For a
nominal investment, Treasury can preserve viable community banks, which in turn would preserve
jobs and communities. As the former Comptzoller Eugene Ludwig wrote in an op-ed on Friday,
September 18, 2009 in the American Banker, “Now is the time for regulators to work with the well-
managed community banks wherever possible to taise capital and dispose of troubled assets.
Regulators must look for ways to help these institutions rather than find reasons to close them.”

We would be happy to provide any further information or assistance that you would find helpful

Wz CF blown.

Axthus Johnson

ce: The Hon. Sheila Baz, Chairman, Federal Deposit Insurance Corporation
The Hon. Ben Bernanke, Chairman, Board of Governots of the Fedezal Reserve System
‘Mz. John Bowman, Acting Director, Office of Thrift Supervision
The Hoa. John Dugan, Comptroller of the Currency

5 As ceported on the Transactions Report for the period ending September 4, 2009, Treasury has invested slightly over
#124 billion through the CPP. See hien:/ /amen. fnancialsnability. cov /docs /rransacjoassepous Geansactions.
sspost99022000 nel.

“ See Lester feom Diane Cascy-Landry to the Hon. Timothy F. Geithner, dated April 16, 2009.



letter from the ABA to the FDIC zegarding reciprocal deposits offered by Promontory
Interfinancial Network, these deposits exhibit the characteristics of “core” funding
Notwithstanding these characteristics, the current statute governing brokered deposits, as
implemented by the FDIC, creates instability in an otherwise very stable source of funding

© Many of the programs to date have not helped struggling community hanks. In addition to
the issues noted above with the CPP and to the iseues with the Legacy Loans Program
discussed in the letter accoropanying this attachment, we note the following:

© The Legacy Securities Program has yet to result in a single transaction.

© The Capital Assistance Program (CAP) has not been used to fund any i

itution.

© The stress test conducted as part of the CAP served to bolster confidence in the
largest 19 banks but had the unintended consequence of causing questions to be
saised about the stabilicy of smaller banks.

© The CPP treatment of investments in stand-alone S$ corporations and mutual
institutions as Tier 2 capital made chat capital of considerably less valuc to those
banks.

© Some coramunity banks that sought to participate in the Term Auction Facility have
been denied the opportunity.

There are discrete actions the government can take to assist viable community banks to stop this
downward spiral. The succzss of many local economies ~ and, by extension, the success of the
broader national economy ~- depends in large part on the success of these banks. The accompanying
letter outlines one such approach.

group members and then swaps deposits with other group members. Suich an arcangement enables a bank to offer its
customers a convenient way t0 ootain FDIC inturance on large deposits by working solely with the bank with whom the
customer has 2 celationship. At « result, che bank is able to attract and retain large deposits vithout having to post
collateral, which in turn males core funds available to meet the credit needs of rhe bank's community.

5 Leter from Edward I.. Yingling to che Hon. Sheila Bai, dated July 29, 2008,



REGISTERED LOBBYIST CONTACT DISCLOSURE FORM

This form is to be completed by Executive Branch employees who are contacted by registered lobbyists regarding
EESA. This report includes a written description of each contact, the date and time of the contact, and the names
of the registered lobbyist(s) and the employee(s) with whom the contact took place. Written materials prepared

by registered lobbyists should be attached to this form for posting on the website. The information on this form will

be available to the public on Treasury's website.

To be completed by the employee contacted

Name of the
Employee(s) Contacted
(Name and Title)

Lori Bettinger, Deputy
Director of Capital
Purchase Program

Brief description of the communication:

Date and time of contact: (attach separate sheet if necessary)

Discuss auction announcement, new small banks

Friday, 4:00 PM
capital program and recent ABA letter sent to UST

Kathleen McTighe

Association

Name of the Employee(s) who prepared this form Date
Lori Bettinger 11/24/09
Registered Lobbyist Name: Title: Firm or Organization:, if Client
applicable
Senior Counsel American Bankers



AMERICAN
| BANKERS
[ASSOCIATION] @

Facsimile

Worle Sabatinns,
Leoderbip & Admeasy
Since 1875

120 Connecticut Avenue, NW
‘Washington, DC 20936

1-800-BANKERS,

wrew,aba,com

Date: November 19, 2009

Pages: 10 (including cover page)

To: __ Secretary Timothy Geithner

Organization: U.S. Department of the Treasury

Fax: 202-622-0073

From: Kathleen McTighe

Department. __ Office of Regulatory Policy

Phone: 202-663-5331 Fax: 202-828-5047

RE: ABA Letter Re: Community Bank Assistance

Please see an updated version of the letter previously submitted by

Comments: Kathleen McTighe._ (Tre athoclnrvecrs Gre. shi\

re sare.)
‘You are receiving this fax communication because of your established business zelationship with the
American Bankers Association. Our objective is 10 provide you with the most relevant information,
‘opportunities and issues impacting the financial secvices industry. If you would like to change your
communicaton preferences, unsubscribe or receive additional information, please contact 1-300
BANKERS or email your request to custserv@aha com. Your request will be processed within 30
days of receipt, ax required by lav: [47 CFR § 64.1200(2)(3)(r9)}

TATRA Onn Re Ee ieee neg RET TSE TEENIE rAYRTEEHMRnETOREHEE REE CEE TR) LEweeNLENHEE TEE



‘The sudden and dramatic declines in property values caught policymakers and bankers alike off
guard. Typica of the perceptions at the onset of what became a crisis were the views expressed by
Federal Reserve Board Chairman Bernanke, who stated in a speech in May 2

[Gliven the fundamental factors in place that should support the demand for housing, we
believe the effect of the troubles in the subprime sector on the broader housing market wil]
likely be limited, and we do not expect significant spillovers from the subprime matket to the
rest of the economy or to the financial system.”

Itis no surprise that many institutions continued to provide loans to consumers and businesses.
While we have heard from many banks about their efforts to uphold underwriting standards in the
face of market pressures to dund ever mote projects. none have been immune to the extraordinary —
and exttaordinarily swift — decline in asset values.

Governmental actions in addition to the ones noted in the accompanying letter have exacerbated

community banks’ problems and in so doing have made it harder for them to raise capital. For
instance:

* The decision to place Fannic Mae and Freddie Mac into receivership caused a sudden and
unexpected loss of billions of dollars to the banks that held shares of Fannic’s and Freddie's
stock.”

‘= The serial implementation of the Capital Purchase Program (CPP) meant that the
applications of many noo-public financial institutions were not considered unsi} further into
the recession.’ As a result, banks that pethaps would have qualified for CPP funds early in
the process wexe deaied the opportunity to participate once a deteriorating economy started
to adversely affect the banks’ condition.

The government's investment of billions of dollars in the largest financial institutions has
improved the competitive position of thesc institutions, making it casier for them to taise
capital and issue debt, However, the relative condition of many of the community banks
that did not receive CPP funds has looked worse as a result.

* The government's treatment of “reciprocal deposits as brokered significantly impedes
many community banks’ ability to compete with larger banks for deposits. As explained in a

' Chaisman Ben S. Beenanke, at the Federal Reserve Bank of Chicago's 434d Annual Conference on Bank Strncmre and
Competition, Chicago, Tlinois, May 17, 2007.

2 We note that the banking agencies proposed. but have not yet Bnalized, 2 lowering of the rk weight of claims on, or
gyatanteed by, Fannie Mae and Freddie Mac. 73 Fed Reg. 63656 (Oct. 27, 2008). Lowering che risk weights for at
Government Sponsored Enteepr.se debt and guarantees would pravide significant relicf to affected hank.

* The term sheeis were issued on the following dates: 10/14/08 for publicly traded instinutions: 11/17/08 for non-
publicly tcaded inctitutions (excluding $ ensporations and mutual institutions); 1/14/09 for S comporations; 4/7/09 for
muna! holding companies: and 4/17/09 for stand-alone mutual depository institution.

"There deposits are available to customers of banks that are members of a group of insured denottory instinution:
where each member of the group sets the intercst rate to be paid on the entire amount of fonds it places with other



do

AMERICAN
BANKERS
ASSOCIATION) =

1120 Conneticut Avenue, NW
Wathingran, DC 20036

1-800-BANKERS

wrew.abacom

World Cle Saban
Landers & Ateoacy
‘Sine 1923

Asthur C, Johnson
Chaieman Fleet, ABA &

sahnsan@el.cnen

September 21, 2009

The Honorable Timothy Gcithner
Secretary of the Treasury

USS. Deparonent of the Treasury
1500 Pennsylvania Avenuc, NW
Washington, DC 20220

Dear Secretary Geithner:

Earlicc this year, the American Bankers Association formed a task force to focus on
community Dank solutions to the financial crisis. We appreciate the opportunity our
bankers had to mect with several Treasury representatives, and we appreciate
Teeasuzy’s exeognition of the vital role that community banks play in out financial
system. After those meetings as well ax meetings with the bank regulators and
significant discussions internally, we have developed specific recommendations for
ways the existing Capital Assistance Program (CAP) could be modified to assist well-
managed, viable community banks and therefore be more effective in achieving its
objectives. These recommendations may be summarized as follows:

‘= Tavest up to §5 billion of Troubled Asset Relief Pzogram (TARP) funds in
community banks that did not receive Capital Purchase Program (CPP)
funcs;

* Lim the maximum CAP investment by Treasury in any one bank to 5% of
the bank's tisk-weighted assets;

‘+ Requize participating banks to issue Treasury senior preferred securities:

*  Requise participants to show that they have commitments from private
equity to match Treasusy’s investment dollar for dollar; and

* Allow any bank with total assets of $5 billion or less to apply but condition
approval upon the submission of an acceptable capital restoration plan.

‘Background and discussion. Strong capital is essential to helping community
banks work through the problems caused by declines in asset values. While
conditions have improved over the past year in the economy overall, many
community banks ate finding that the lagging impacts of job losses and declines in
property values arc negatively affecting these banks, causing declines in their capital
ata time when new capital often is hard to find.

This problem is compounded by the unintended consequences of policies that have
the effect of steering private investors to failed banks. For instance, the FDIC
announced 1m June that, while the Legacy Loans Program remained a viable program,
the agency intended to scale the program back at least initially to a pilot involving
failed banks. The FDIC announced last week that it had selected a wineing bidder ia
a sale of receivership assets and that the bidder would receive FDIC-guaranteed
financing. This, coupled with loss-sharing agreements used to entice buyers of failed



initiative would be available to viable community banks with less than $1 billion in
assets, contingent on the bank submitting a srnall business Jending plan.

‘We have heard from some of our bank members that it would be helpful if the
Treasury Department could increase this asset eligibility cap to include banks with
less that $3 billion in assets, instead of the announced lower eligibility cap of less
than $1 billion in assets. This increased cap would expand the eligibility pool of
community banks that could participate in this proposed new program and thereby
increase access to credit for small businesses. We urge Treasury to offer this lower-
cost capital to banks under $5 billion in assets that demonstrate their abiliry to
operate safely and soundly.

We appreciate your consideration of this recommendation as you work with
community banks and the small business community to finalize the terms of this
program. We would be happy to provide additional information ot assistance.

Sincerely,

Paha, H. Miclako
Kathleen P. McTighe
Seniot Counsel



2009-SE-005792

1120 Coanceticut Avenuc, NW
Washington, DC 20036

1-800-BANKERS
www.aba.com

Lentirhip & Advecy

WarkdsChers Sabecions,
Sine 1875

Kathleen P. McTighe |

Senior Counsel i

Office of Regulatory
Policy

Phone: 202-663-331

Fax; 202-928-5047

kectighe@aba.com

November 19, 2009

The Honorsble Timothy Geithner
Secretary of the Treasury

USS. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220 i

Dear Secrenury Geithner:

Tam writing to follow up on the American Bankers Association (ABA) letter df
September 71, 2009, in which the ABA requested you to consider a program to assist
well-managed, viable community banks and to urge a modification to the recently-
announced Small Business Lending Initiative.

In our letter we recommended that Treasury create an equity matching program
available to any bank with total assets of $5 billion or less that submits an acceptable
capital restovation plan to its primary federal bank regulator. Enclosed are the ABA
letrer and its two attachments. As noted in that letter, there are many viable banks
that, with a compatatively nominal investment, can continue to mect the credit needs
of their communities. We again urge Treasury to work with these well-managed
community banks to help them raise capital and dispose of troubled assets. This
would bencfit not only these banks and their customers but also the banking system
and the economy as 2 whole.

We appreciate the recent announcement of the President's New Small Business
Lending Initiatives and the accompanying Fact Sheet.’ While this program
addresses a different isnuc than the one that our proposal is intended to address, we
nevertheless think that it is potentially help ul in stimulating additional lending to
small businesses.

The Fact Sheet includes Treasury's proposed initistive to improve access to credit for
sinall businesses by providing lower-cost capital to community banks that submit a
plan to increase small business lending. The Cact Sheet also indicates that thie

' The Treaeury Department Press Release on President Obama's Announcement of New Small
Busines Lending Initiatives is located ae

hump LLsoy, firancialssabiliy gow/latest/tg 10212009b.huml, and the accompanying fret shect on the
President's Small Buoness Lending Inidatves is located at

bup.Lismnuwhitshouse.gov (asset/documens seal business final paf.