Capital Purchase Program for Financial Institutions

Financial institutions applying for government funding under the TARP Capital Purchase Program for Financial Institutions will soon find that they will need to independently value the separate components of the Senior Preferred Stock plus: the Common Stock Warrants (for Public companies) and the Warrant Preferred Shares (for Private companies). Additionally for S-Corp's the Subordinated Debentures and the Warrant Debentures may need to be valued separately.For purposes of TARP CPP, Public Financial Institutions are those companies which meet both of the following, however, the U.S. Treasury has given some leeway for public financial institutions that do not meet this criteria, the option to participate under either the Public or Private TARP CPP Program:

• The company's securities are traded on a "national securities exchange" (click here for exchange listing), and

• The company is required by federal securities laws to file Form 10-K and Form 10-Q reports with either the Securities and Exchange Commission or its primary federal bank regulator.

We recommended that the valuation of the Preferred Stock should be based on the Net Present Value of its associated cash flows, using a prevailing discount rate for a similar security. For public companies, the Common Stock Warrants should be valued using the Black Scholes model. For private companies the value of the Warrant Preferred is assumed to be the difference between the preferred liquidation preference and the exercise price of the warrant since the warrants are immediately vested and will be immediately exercised.

While relatively new to the scene, the treatment for S-Corp's appears to follow a similar treatment as private banks - Net Present Value of the Subordinated Debentures and a quasi intrinsic value for the Warrant Debentures.

To assist with the selection and documentation of a reasonable Discount Rate for the Preferred Stock, you may download a list of Financial Institution Preferred Equity Issuances for 2008 (click here).

Once the relative values have been determined for each TARP component, the proceeds can be allocated accordingly.

Six Excel spreadsheet models have been developed for your use which contain an integrated Black Scholes model based upon the logarithm contained in the Stock Informatics software and a Net Present Value calculation based on Excel's XNPV formula. The TARP Preferred/Warrant calculators allow you to select varying estimated redemption terms for the TARP Preferred Stock - you may choose 5, 10, 15, 20 or 25 years. While actual TARP CPP interest calculations are based on actual/360, the XNPV Excel formula uses actual/365 - differences in the present value of these interest payments should be immaterial.

The six complimentary versions of the TARP Preferred/Debenture/Warrant calculators are as follows:

PUBLIC FINANCIAL INSTITUTIONS

• A Public Bank version containing all associated cash flows (both the "in flow" or receipt of TARP CPP Preferred proceeds as well as the "out flows" of interest payments and the Preferred redemption) can be downloaded by clicking here (107 KB).

• A Public Bank version containing only cash out flows (only the interest payments and the Preferred redemption) can be downloaded by clicking here (107 KB).

PRIVATE FINANCIAL INSTITUTIONS

• A Private Bank version containing all associated cash flows (both the "in flow" or receipt of TARP CPP Preferred proceeds as well as the "out flows" of interest payments and the Preferred redemption) can be downloaded by clicking here (111 KB).

• A Private Bank version containing only cash out flows (only the interest payments and the Preferred redemption) can be downloaded by clicking here (111 KB).

S-CORP FINANCIAL INSTITUTIONS

• An S-Corp Bank version containing all associated cash flows (both the "in flow" or receipt of TARP CPP Preferred proceeds as well as the "out flows" of interest payments and the Preferred redemption) can be downloaded by clicking here (114 KB).

• An S-Corp Bank version containing only cash out flows (only the interest payments and the Preferred redemption) can be downloaded by clicking here (114 KB).

(Note: to properly run the XNPV formula in the spreadsheet calculators, the Excel Analysis ToolPak add-in must be installed.)

Please contact us if you have any questions regarding the calculators, and please feel free to share them with your colleagues and clients. Your comments and suggestions are much appreciated and have assisted with developing each enhancement.

Additionally, we provide services for independent review and preparation of your TARP allocation calculations. Please let us know if we may be of assistance.