banks and failed bank assets, is creating incentives fot investors to wait until a bank has failed before
investing,

Furthermore, the banking agencies are requiring many banks to mise 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 urstenable position, precipitating the failure of a viable bank that has a
2004 franchise and could sutvive if capital was made available.’

The ABA recommends that Treasury modify the criteria 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 that 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 are contractually committed
to match Treasuiy’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 restoration plan to its primary cegulator that,
when factoring in the proposed investments by Treasury and private cquity, satisfies the
requirements of the “Prompt Corrective Action” niles. As part of that plan, the bank also
would have to show that it has adequate management to address its problems.

The suggested aggtegate investment by Treasury of $5 billion is based on the amount of funds,
when matched by private equity 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 1 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” under the Prompt
Correct Action rules and would provide a cushion that could enable participating banks to continue
mecting the credit needs of their communities without baving to shrink to comply with minimum
segulatory 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

* Burther informaucn about the role of community banks and the adverse impact that recent governmental actions have
had on these banks is discussed int Arachment A.

* See12 CER. § 6.5 (Office of tht Comptroller of the Curcency}: 12 CFR. § 208.44 (Board of Governors of the Federal
Reserve System): 12 CER. § 325 104 (Federal Deposit Insurance Comporation); and 12 CFR. § 563.5 (Office af Thrift
Superision)

1 For a bank to be “well capitatiard” under the Peompt Corrective Acuon rules, it must have toral risk-bated capital of at
least 10%; Tier 1 cick-based capital of at least 6%: a leverage eatio of at leant 5¥% and not be eubject r0 a wrieren
requirement to mect a specific expital level

‘The dividends paid on those [CPP] investments and the repurchases of warrents ws received for those investments
now toral about $12 billion, For the 23 banks char have fully sepaid, Treasury has eamed an annualized average return of
roughly 17 percent.” Seerctary 0: the Treasury Timothy F. Geithner, Written Testimony before the Congrcesional
Oversight Panel, September 10. 2609 (available at heto:/dwame wsteens sone/peessdcclenses e283 him)

2



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

$in 000s
Capital Thresholds #t 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 ate central to the economic well-being of the towns and communities they serve
across America, providing capital to consumers, small farms, and other smal] businesses that is
crucial for economic develonment, These banks have been in their communities for decades and
intend to be there fot many decades to come. In fact, there arc over 2,500 banks — representing
aver 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 numbers tell =
dramatic story about the staying power of community banks and their commitment to the
communities chey serve.

‘The failure of a community bank can be devastating to its community. Not enly do the bank's
employees often lose their jabs and the bank's shareholders lose their investments, the town’s
businesses lose a vital source of ctedit and a vicious cycle begins. As credit constricts, businesses
that depend on financing ar: unable to expand of, in many instances, even operate. Mote jobs are
lost, causing mote people tc default on loans with other banks in the community. Property values
plummet as residential and commercial properties that served as collateral for the loans are dumped
on the market. Surviving 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. {n some of the hatder bit arcas such as Phoenix, Miami, Detroit, and San Francisco the
drops have been devastating to community banks. As the following chatt shows, homes in these
cities have lost between 43% and 54% of thcie value in the past fow years.

Dramatic Drop in Metro Housing Prices
Percent Decline from Price Peak in Metro Market

soe Pheonix (5448) nao Miarni (48% = ~Detrott -43%)
—~-San Francisco (-43%) ——National (-20%1

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

Unfornunately there are many other cities experiencing similar declines in home prices, and banks int
these communities face unprecedented pressures on assct quality and collateral values



the total of CPP funds invested to date.’ Our projections show that an estimated 2,000 community
banks would be potentially eligible (see Attachment B), although itis 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. It is
important that private equity qualify regardless 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 investments. Moreover, current investors and management
often are in the best position ta judge the prospects of a bank and to determine the advisability of
investing in that bank.

We believe that, as a genera) 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 rost of securities, subject to
the same conditions, as it hes received through the CPP. To make this workeble for community
banks, we propose two exceptions to this general approach, however. First, given that these funds
arc intended for viable yet s:ruggling 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
quarters 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 bolding
companies ke treated as Tiet 3 capital. It is our understanding that these banke’ interest in the CPP
was significantly diminished by the treatment of CPP investments as Tier 2 capital.

We very much appreciate your consideration of these recommendations. Community hanks are the
backbone of our economy and ate critical to the overall improvement of our economy. For a
nominal investment, Treasury can preserve viable community banks, which in turn would preserve
jobs and communities. As the former Comptroller 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 raise 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 helpfil.

Sincerely,

Lilia Cleon,

Arthur Jobnron

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

+ Ac reported on the Transactions Report for the period ending Seprember 4, 2009, Treasury has invested slightly over
{$134 billion through rhe CPP. See http: //ssms: feancialetabiline enw /dags/ccansaptioasirpons teansaciions.
aspost 09092009 pall

“ See Letter feom Diane Casey-Landey to the Hon. Timothy F. Geithner. dated April 16, 2009,



letter from the ABA to the FDIC regarding reciprocal deposits offered by Promontory
Interfinancial Network, these deposits exhibit the charactetistics 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 progeams to date have not helped struggling community banks. In addition to
the issues noted above with the CPP and to the issues with the Legacy Loans Progtam
discussed in the letter accompanying 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 institution.

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

© The CPP treatment of investments in stand-alone S corporations and mutual

institutions as Tier 2 capital made thar capital of considerably less valuc to those
banks.

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

There are discrete actions the government can cake to assist viable community banks to stop this
downward spiral. The success 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. Such an arrangement, cnables a bank to offer ics
customers a convenient way t© ortain FDIC inturance on large deposits by working solely sith the bank with whom the
customer bas 4 telationship. At 1 result, the bank is able to atteacr and retain large deposits wvithout having to post
collareeal, which in tuen makes moxe Funds available to meet the credit needs of the bank’s community.

S Letter from Bdwacd I., Yingling; to the Hon. Sheila Bair, 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 , 7 “
. Brief description of the communication:
Date and time of contact: em ata (attach separate sheet if necessary)

November 19, 2009

Timothy F. Geithner
Secretary of the Treasury

The incoming letter is a follow up to a letter sent earlier
this year regarding the Administration's small business
lending initiatives. In it, Ms. McTighe asks the
Department of the Treasury to raise the asset eligibility
cap in the lending initiative from $1 billion to $5 billion.

Registered Lobbyist Name:

Kathleen P. McTighe

Title:

Senior Counsel

applicable
American Bankers

Office of Regulatory Policy| association

Name of the Employee(s) who prepared this form: Date
Cort Bush 11/30/2009
Firm or Organization:, if Client



1120 Connecticut Avenue, NW
| Washington, DC 20036

AMERICAN, 1-800-BANKERS,
BANKERS vwrew.aba.com

iSSSOCIATION]

Warld-Clats Sebations, Date: November 19, 2009
Leaderibp &e Admsosy
Since 1873
Pages: 10 (including cover page)

To: __ Secretary Timothy Geithner

Organization: _U.S. Deparment of the Treasury

Fax: 202-622-0073

From: Kathleen McTighe

Department __ Office of Regulatory Policy

Phone: 202-663-5331 Fa: 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 attocloryects Gre. n\\
Saath sare)

Atenvaneranversrcneretenenotattirusinsurasurstantneneetettenenchcnambatehtyageennpnestnee
‘You ate recciving this fax communication because of your established business relationship with the
‘American Bankers Association, Our objective is to provide you with the mott relerant information,
opportunities and issues impacting the financial services industry. If you would like to change your
comonunication prefereaces, unsubscribe or receive addivional information, please contact 1-800-
BANKERS or emu your request to custrerw@laba com. Your request will be processed within 30
days of receipt, as requized by lew [47 CFR § 64.120068)(3) (ed)



The sudden and dramatic declines in property values caught policymakers and bankers alike off
guard. Typical of the perceptions at the onset of what became a crisis were the views expressed by
Federal Reserve Board Chairman Bernanke, who stated in 4 speech in May 2007 ~

[Gliven the fundamental factors in place that should support the demand for housi
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 market to the
rest of the economy os to the financial systern.’

Itis no surprise that many institutions continued to provide loans to consumers and businesses.
While we have heard from raany banks about their efforts to uphold underwriting standards in the
face of market pressures to fund ever more projects. none have been imrmunc to the extraordinary —
and extaordinarily 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 madc 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 non-public financial institutions were not considered until farther into
the recession.’ As a result, banks that pethaps would have qualified for CPP funds early in
the process were denied the opportunity to participate once 2 deteriorating economy started
to adversely affect the banks" condition.

* The government’ investment of billions of dollars in the lazgest financial institutions has
improved the competitive position of these institutions, making it casier for them to raise
capital and issue debt. However, the reladve condition of many of the community banks
that did not ceceive 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

" Chairman Ben S. Bernanke, at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Strucnare and
Competition, Chicago, Illinois, May 27, 2007.

2 We note that the hanking agencies proposed, but have not yet Snalized, a lowering of the ek weight of claims on, or
guaranteed hy, Fannie Mae and Freddie Mac. 73 Fed. Reg. 63686 (Oct. 27, 2008). Lowering che sk weights for al}
Government Sponsored Enterpr.se debt and guacantces would provide tignificant relief to affected hanke.

+ The teem sheets were issued on the following dates: 10/14/08 for publicly traded instinutions: 11/17/08 for non-
publicly traded inetitution: (exclvding § corporations and mutual insritution2), 1/14/09 fox S corpomtions; 4/7/09 for
munual holding companies: and 4/17/09 for stand-alone mutual depository institutions

* These deposits are available to customers of banks that are members of a group of insured depository institutions,
where each member of the gxou sets the interest rate to be paid on the entire amount of funds ir placex with other



NS)

|
AMERICAN
BANKE)

[ASSOCIATION =

1120 Conneeticut Avene, NW
‘Wathingron, DC 20036

1-800-BANKERS,
we aba.com

Wend Claes Sabon
Lendermne de Asoongy
Sic 1995,

Anhur C. Jobnson
Chaieman Fleet, ABA &
Chairman and CRO
United Bank of Michigan
Tel: 292-463-5017

Prat: 202-663-7
syoketennialba.comn,

September 21, 2009

The Honorable Timothy Geithner
Secretary of the Treasury

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

Dear Scerctary Geithner:

Earlier 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
Treasuzy’s recognition of the vital role that community banks play in our financial
system. After those meetings as well as mectings 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:

Invest up to $5 billion of Troubled Assct Relief Program (TARP) funds in
community banks that did cot receive Capital Purchase Program (CPP)

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

# Require participating banks to issue Treasury senior preferred securities:

+ Reqaire participants to show that they have commitments from private
equity to match Tzeasury’s investment dolar for dollar; and

* Allow any bank wich total assets of $5 billion or less t9 apply but condition
approval upon the submission of an acceptable cepital 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 are 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 in June that, while the Legacy Loans Program remained a viable program,
the agency intended to scale the progeam back at least initially to a pilot involving
failed banks. The FDIC announced last week that it had selected a winning bidder in
a sale of receivership aescte and that the bidder would receive FDIC-guaranteed
financing. This, coupled with lose-sharing agreements used to entice buyers of failed



initiative would be available to viable community banks with Jess than $1 billion in
assets, contingent on the bank submitting 4 small business Jending plan.

We have heatd 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 than §5 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 ptogratn and thereby
increase access to credit for small busincsses. We urge Treasury to offer this lower-
cost capital to banks under $5 billion in assets that demonstrate theit ability 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,

Feta Ithaka
Kathleen P. McTighe
Seniot Counsel



2009-SE-005792

1320 Conneeticut Avenue, NW
Washington, DC 20036

1-800-BANKERS
wewaba.com

Lentenhip de Asveongy

Warld-Ciacs Sobntons, |
Sine 187

| November 79, 2009

Kathleen P.McTighe | The Honorable Timothy Geithner

Senior Councel | Secretary of the Treasury

Office ofRegsiaory | US. Department of the Treasury
Policy | 1500 Pennswlvania Avenue, NW

Phone: 202-663-833 -
Fre maoesns? Washington, DC 20220 {

kmetighe@aba.com
Dear Secretary Geithner:

Lam writing to follow up on the American Bankers Association (ABA) letter df
September 21, 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 xecently-
announced Small Business Lending Initiative.

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

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

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

* The Treaeury Department Press Release on President Obama's Announcement of New Small
Business Lending Initiatives is located at:

humped Suny firancialsrabiliny gov /la 24 lun}, and the accompanying fact shect on the
President's Small Business Lending Initiatives ie located at

bum./ js wlnichouse.gov /assets/documencs/emall bnsinest finalpaf.