Credit & Risk

By: Prince Varma Hello. My name is Prince Varma and I’ve spent the better part of the last 16 years helping financial institutions (FI) successfully improve their in business development, portfolio growth and client relationship management practices. So, since the focus of this blog is to speak to readers about risk management, many of you are probably wondering what a “sales and business development” guy is doing writing a piece related to mitigating and managing risk? Great question! The simple fact is that the traditional or prevailing sentiment or definition related to risk management – mitigating credit risk -- is incomplete. A more accurate and comprehensive approach would be to recognize, acknowledge and address that “risk” cuts across the entire client relationship spectrum of: client penetration/growth; client retention; and client credit risk mitigation. How do penetration and retention count as “risk factors”? (this is where the sales guy stuff comes in) From a penetration perspective, the failure to recognize potential opportunities either within the existing client base or in the operating market, introduces revenue growth risk (meaning we aren’t keeping our eye on the top line). Ultimately it impacts the FI’s ability to add assets (either deposits or loans) and also has a direct affect on efficiency and deposit to loan ratios. From a retention perspective, the risk is even more obvious. Our most valued clients are the ones that we must continuously engage in a proactive manner. Let’s face it. In even the smallest markets, there are no less than four to six other institutions waiting to jump on your client in the event that you grow complacent. There is a huge difference between selection and satisfaction. And, if we aren’t focused on keeping a client after securing them, our net portfolio growth targets will be impossible to achieve. Considering the current market environment, now more than ever, effectively managing these three elements of “risk/exposure to the FI” is crucial to an institutions success both practically and pragmatically. Everyone internally at the bank is focused on the “credit risk mitigation” piece. The conversations that are occurring outside of the bank’s walls however are focused on the “L” word or liquidity and getting credit flowing again. How many times have we read or more frankly been beaten with this comment from business owners “…there’s no one making loans anymore…” or “…its impossible to get credit…?” That should be read as … penetration and retention Striking a balance between effective and appropriate credit risk exposure and deepening or growing the portfolio has been a challenge facing those of us in the front office for as long as I can remember. The “sales revolution” is effectively over. We’ve learned the critical lesson that we need to evolve beyond being strictly a credit officer (you did learn that right??!!). And, you didn’t/shouldn’t become a “banking products generalist” with no analytical depth. Knowing all this, it is important that we return to the guiding principles of effective lending which include: - evaluating the scope of the opportunity; - isolating the risk and identifying a reasonable and realistic recovery/mitigation remedy; - determining what other alternatives the borrower might be considering; and - being willing to let the “bad deals” walk. In subsequent blogs, I’ll provide you with specific tactics aimed at optimizing penetration and retention efforts and implementing effective and practical client management strategies. After all what would you expect from a business development guy…

By: Tom Hannagan   Part 5 This continues the updated review of results from the Uniform Bank Performance Reports (UBPR), courtesy of the FDIC, for 2008. The UBPR is based on the quarterly required Call Reports submitted by insured banks. The FDIC compiles peer averages for various bank size groupings. Here are some findings for the two largest groups, covering 494 reporting banks. I wanted to see how the various profit performance components compare to the costs of credit risk discussed in my previous post. It is even more apparent than it was in early 2008 that banks still have a ways to go to be fully pricing loans for both expected and unexpected risk. Peer Group 2 (PG2) consists of 305 reporting banks between $1 billion and $3 billion in assets. PG2’s Net Interest Income was 5.75 percent of average total assets for the year. This is also down, as expected, from 6.73 percent in 2007. Net Interest Expense also decreased from 3.07 percent in 2007 to 2.31 percent for 2008.  Net Interest Margin, also declined from 3.66 percent in 2007 to 3.42 percent in 2008, or a loss of 24 basis points. These margins are 31 bps or 10 percent higher than found in Peer Group 1 (PG1), but the drop of .24 percent was much larger than the .05 percent decline in PG1. As with all banks, Net Interest Margins have shown a steady chronic decline, but the drops for PG2 have been coming in larger chunks the last two years -- -24 basis points last year after dropping 16 points from 2006 to 2007. Behind the drop in margins, we find loans yields of 6.53 percent for 2008, which is down from 7.82 percent in 2007. This is a decline of 129 basis points or 16 percent. Meanwhile, rates paid on interest-earning deposits dropped from 3.70 percent in 2007 to 2.75 percent in 2008. This 95 basis point decline represents a 26 percent lower cost of interest-bearing deposits. Again, with a steeper decline in interest costs, you would think that margins should have improved somewhat. It wasn’t meant to be. We see the same two culprits as we did in PG1. Total deposit balances declined from 78 percent of average assets to 77 percent which means again, that a larger amount had to be borrowed to fund assets. Secondly, non-interest bearing demand deposits continued an already steady decline from 5.58 percent of average assets in 2007 to 5.03 percent. This, of course, resulted in fewer deposit balances relative to total asset size and a lower proportion of interest-cost-free deposits. Check my next blog for more on an analysis of Peer Group 2’s fee income, operating expenses and their use of risk-based pricing.  

By: Tom Hannagan Part 4 Let’s dig a bit deeper into why Peer Group 1’s margins didn’t improve. We see two possible reasons: Total deposit balances declined from 72 percent of average assets to 70 percent. This means that a larger amount had to be borrowed to fund their assets. Secondly, non-interest bearing demand deposits declined from 4.85 percent of average assets to 4.24 percent. So, fewer deposit balances relative to total asset size, along with a lower proportion of interest-cost-free deposits, appear to have made the difference. Fee income Non-interest income, again as a percent of average total assets, was down to 1.12 percent from 1.23 percent in 2007. This was a decline of 9 percent. For Peer Group 1 (PG1), fees have also been steadily declining relative to asset size, down from 1.49 percent of assets in 2005. A lot of fee income is deposit based and largely based on non-interest bearing deposits. So, the declining interest-free balances, as a percent of total assets, are a source of pressure on fee income and have a negative impact on net interest margins. Operating expenses Operating expenses constituted more bad news as they increased from 2.63 percent to 2.77 percent of average assets. Most of the large scale cost-cutting didn’t get started early enough to favorably impact this number for last year. Historically, this metric has moved down, irregularly, as the size of the largest banks has grown. This number stood at 2.54 percent in 2006, for instance. We saw increase in both 2007 and again in 2008. As a result of the decline in margins and the larger percentage decline in fee income, while operating costs increased, the Peer Group 1 efficiency ratio lost ground from 57.71 percent in 2007 up to 63.70 percent in 2008. This 10 percent increase is a move to the bad. It means every dollar in gross revenue [net interest income + fee income] cost them almost 64 cents in administrative expenses in 2008. This metric averaged 55 cents in 2005/2006. The total impact of changes in margin performance, fee income, operating expenses and the 2008 increase in provision expense of 87 basis points, we arrive at a total decline in pre-tax operating income of 1.23 percent on total assets. That is a total decline of 80 percent from the pre-tax performance in 2007 of 1.53 percent pre-tax ROA to the 2008 result for the group of only .30 percent pre-tax ROA. It would appear that banks have not been utilizing pricing enough credit risk into their loan rates.  This would be further confirmed if you compared bank loan rates to the historic risk spreads and absolute rates that the market currently has priced into both investment grade and below-investment-grade corporate bonds. These spreads have decreased some very recently, but it is predicted that more credit risk is present than bank lending rates would indicate.

Here are a few more frequently asked questions. 1. Am I a “creditor” under the rule? The term “creditor” has the same meaning as under the Equal Credit Opportunity Act (ECOA) and is defined as a person who regularly participates in credit decisions, including, for example, a mortgage broker, a person who arranges credit or a servicer of loans who participates in “workout” decisions. The term “credit” is defined, as in the ECOA, as the right granted by a creditor to defer payment for goods or services. It is important to note that commercial, as well as consumer, credit accounts may be covered by the Rule. 2. We are an insurance company that uses credit reports to underwrite insurance. Does the Red Flags Rule apply to us? The Red Flag Rule applies to creditors and depository institutions and should not apply to an insurer when engaged in activities related to insurance underwriting. To the extent that you extend credit, however, you may be covered. For example, you may wish to examine whether you permit consumers to finance their premiums; whether you extend credit to vendors, independent agents or other business partners; or whether you extend credit in connection with your investment activities, including real-estate investments. 3. I am an auto dealer. Does the rule apply to me? If the business extends auto credit to consumers or arranges auto credit for consumers, the Red Flag guidelines may apply.  

By: Tom Hannagan Part 3 I believe it is quite important to compare your bank or your investment plans in a financial institution to the results of peer group averages. Not all banks are the same, believe it or not. In this column, we use the averages. Again, look for the differences in your target institution. About half of them beat certain performance numbers, while the other half are naturally worse. It can tell a useful story. This continues the updated review of results from the Uniform Bank Performance Reports (UBPR), courtesy of the FDIC, for 2008. The UBPR is based on the quarterly required Call Reports submitted by insured banks. The FDIC compiles peer averages for various bank size groupings. Here are the findings for the two largest groups that cover 494 reporting banks. I wanted to see how the various profit performance components compare to the costs of credit risk discussed in my previous post. It is even more apparent than it was in early 2008 that banks still have a ways to go to be fully pricing loans for both expected and unexpected risk. Peer Group 1 (PG1) is made up of the largest 189 reporting banks or those with over $3 billion in average total assets for 2008. Interest income was 5.25 percent of average total assets for the period. This is down, as we might expect, based on last year’s decline in the general level of interest rates from 6.16 percent in 2007. Net Interest Expense was also down from 2.98 percent in 2007 to 2.06 percent average for the year. Net Interest Margin, the difference between the two metrics, was down from 3.16 percent in 2007 to 3.11 percent as a percentage of total assets. It should be noted that Net Interest Margins have been in a steady, chronic decline for at least 10 years, with a torturous regular drop of 2 to 5 basis points per annum in recent years. Last year’s drop of five basis points is in line with that progression and it does add to continuing difficulty in generating bottom-line profits. To find out a bit more about why margins dropped, especially in light of the steady increase in lending over the same past decade, we looked first at loan pricing yields. For PG1 these averaged 6.12 percent for 2008, down (again, expectedly) from 7.32 percent in 2007. This is a drop of 120 basis points or a decline of 16 percent. Meanwhile, rates paid on interest-earning deposits dropped from 3.41 percent in 2007 to 2.39 percent in 2008. This 102 basis point decline represents a 30 percent lower interest expense on interest-bearing deposits. Based only on these two metrics, it seems like margins should have improved and not declined for these banks. Check my next blog for more on the reasons for Peer Group 1’s drop in margins and an analysis of the fee income and operating expenses for these institutions.

Here we are in March, 2009, four months after the Red Flags Rules deadline OR two months until the Red Flags deadline…depending on your glass-half-full / glass-half-empty view of the world.  I can say with confidence that at this point in time, the Identity Theft Red Flags 'discussion' with our clients and the market at large continues in full earnest.  That said, however, the nature of our discussions has changed substantially.  A few months ago, the needs expressed by the market centered on education around the Red Flags Rule, Red Flag compliance and it's applicability to various markets and account types. I find that the majority of my daily conversations on the subject now regard efficiencies in process and cost combined with effectiveness and customer experience. Most of our clients 'get' what they need to be doing such as identifying, detecting and responding to Red Flag conditions.  Where we are still working closely with our clients is in how they can optimize their policies and procedures to ensure that the majority of Red Flag conditions are detected and reconciled in singular automated steps.  As I've said in previous blogs, detecting these conditions is the easy part. It's how you reconcile (a.k.a. respond to) those conditions that makes the difference in your bottom line. As May 1 approaches, now is a great time to be monitoring each step in your process in an effort to identify those areas that may still have room for efficiency gains and improved customer experience.

Address discrepancies aren't the end of the road, but they sure can be a bump in it. One of the handful of mandatory elements in the Red Flag guidelines, which focus on FACTA Sections 114 and 315, is the implementation of Section 315.  Section 315 provides guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy.  A couple of common questions and answers to get us started: 1.  How do the credit reporting agencies display an address discrepancy? Each credit reporting agency displays an “address discrepancy indicator,” which typically is simply a code in a specified field. Each credit reporting agency uses a different indicator. Experian, for example, supplies an indicator for each displayable address that denotes a match or mismatch to the address supplied upon inquiry. 2.  How do I “form a reasonable belief” that a credit report relates to the consumer for whom it was requested? Following procedures that you have implemented as a part of your Customer Identification Program (CIP) under the USA PATRIOT Act can and should satisfy this requirement. You also may compare the credit report with information in your own records or information from a third-party source, or you may verify information in the credit report with the consumer directly. In my last posting, I discussed the value of a risk-based approach to Red Flag compliance.  Foundational to that value is the ability to efficiently and effectively reconcile Red Flag conditions…including addressing discrepancies on a consumer credit report. Arguably, the biggest Red Flag problem we solve for our clients these days is in responding to identified and detected Red Flag conditions as part of their Identity Theft Prevention Program.  There are many tools available that can detect Red Flag conditions.  The best-in-class solutions, however, are those that not only detect these conditions, but allow for cost-effective and accurate reconciliation of high risk conditions.  Remember, a Red Flag compliant program is one that identifies and detects high risk conditions, responds to the presence of those conditions, and is updated over time as risk and business processes change. A recent Experian analysis of records containing an address discrepancy on the credit profile showed that the vast majority of these could be positively reconciled (a.k.a. authenticated) via the use of alternate data sources and scores.  Layer on top of a solid decisioning strategy using these elements, the use of consumer-facing knowledge-based authentication questions, and nearly all of that potential referral volume can be passed through automated checks without ever landing in a manual referral queue or call center.  Now that address discrepancies can no longer be ignored, this approach can save your operations team from having to add headcount to respond to this initially detected condition.  

Recently we conducted an informal survey, the results of which indicate that loan portfolio growth is still a major target for 2009.  But, when asked what specific areas in the loan portfolio -- or how loan pricing and profitability -- will drive that growth, there was little in the way of specifics available.  This lack of direction (better put, vision) is a big problem in credit risk management today. We have to remember that our loan portfolio is the biggest investment vehicle that we have as a financial institution.  Yes; it is an investment. We choose not to invest in treasuries or fed funds -- and to invest in loan balances instead -- because loan balances provide a better return.  We have to appropriately assess the risk in each individual credit relationship; but, when it comes down to the basics, when we choose to make a loan, it is our way of investing our depositors’ money and our capital in order to make a profit. When you compare lending practices of the past to that of well-tested investment techniques, we can see that we have done a poor job with our investment management.  Remember the basics of investing, namely: diversification; management of risk; and review of performance.  Your loan portfolio should be managed using these same basics.  Your loan officers are pitching various investments based on your overall investment goals (credit policy, pricing structure, etc.).  Your approval authority is the final review of these investment options.  Ongoing monitoring is management of the ongoing risk involved with the loan itself. What is your vision for your portfolio?  What type of diversification model do you have?  What type of return is required to appropriately cover risk?  Once you have determined your overall vision for the portfolio, you can begin to refine your lending strategy.

By: Tom Hannagan Part 2 In my last post, I started my review of the Uniform Bank Performance Reports for the two largest financial institution peer groups through the end of 2008. Now, lets look at the resutls relating to credit cost, loss allowance accounts and the impacts on earnings. Again, as you look at these results, I encourage you to consider the processes that your bank currently utilizes for credit risk modeling and financial risk management. Credit costs More loans, especially in an economic downturn, mean more credit risk. Credit costs were up tremendously. The Peer group 1 banks reported net loan losses of .89% of total loans. This is an increase from .28% in 2007, which was up from an average of 18 basis points on the portfolio in 2006/2005.  The Peer group 2 banks reported net loan losses of .74%. This is also up substantially from 24 basis points in 2007 and an average of 15 basis points in 2006/2005. The net loan losses reported in the fourth quarter significantly boosted both groups’ year-end loss percentages above where they stood through the first three quarters last year. Loss allowance accounts Both groups also ramped up their reserve for future expected losses substantially. The year-end loss allowance account (ALLL) as a percent of total loans stood at 1.81% for the largest banks. This is an increase of almost 50% from an average of 1.21% in the years 2007/2004. Peer group 2 banks saw their reserve for losses go up to 1.57% from an average of 1.24% in the years 2007/2004. The combination of covering the increased net loan losses and also increasing the loss reserve balance required a huge provision expenses. So, loan balances were up even in the face of increased write-offs and expected forward losses. Impacts on earnings Obviously, we would expect this provisioning burden to negatively impact earnings. It did, greatly. Peer group 1 banks saw a decline in return on assets to a negative .07%. This is just below break-even as a group. The average net income percentage stood at .42% of average assets at the end of the third quarter. So, the washout in the fourth quarter reports took the group average to a net loss position for the year. The ROA was at .96% in 2007 and an average of 1.26% in 2006/2005. That is a 111% decline in ROA from 2007. Return on equity also went into the red, down from 11.97% in 2007. ROE stood at 14.36% in 2005. For the $1B to $3B banks, ROA stood at .35%. This is still a positive number, however, it is way down from 1.08% in 2007, 1.30% in 2006 and 1.33% in 2005. The decline in 2008 was 67% from 2007. ROE for the group was also down, at 4.11% from 12.37% in 2007. The drops in profitability were not entirely the result of credit losses, but this was by far the largest impact from 2007. The seriously beefed-up ALLL accounts would seem to indicate that, as a group, the banks expect further loan losses, at least through 2009.  These numbers largely pre-dated the launch of the Troubled Asset Relief Program and the tier one funding it provided in 2008. But, it is clear that banks had not contracted lending for all of 2008, even in the face of mounting credit issues and a declining economic picture. It will be interesting to see how things unfold in the next several quarters.

By: Tom Hannagan Part 1 It may be quite useful to compare your financial institution's portfolio risk management process or your investment plans , to the results of peer group averages. Not all banks are the same -- believe it or not. Here are the averages. You should look for differences in your target institution. About half of them beat certain performance numbers and the other half may be naturally worse. As promised, I have again reviewed the Uniform Bank Performance Reports for the two largest peer groups through the end 2008. The Uniform Bank Performance Report (UBPR) is a compilation of the FDIC, based on the call reports submitted by insured banks. The FDIC reports peer averages for various bank size groupings and here are a few notable findings for the two largest groups that covers 494 reporting banks. Peer group 1 Peer group 1 consisted of 189 institutions over $3 billion in average total assets for the year. Net loans accounted for 67.31% of average total assets, which is up from 65.79 % in 2007. Loans, as a percent of assets, have increased steadily since at least 2004. The loan-to-deposit ratio for the largest banks was also up to 96% from 91% in 2007 and 88% in both 2006 and 2005. So, it appears these banks were lending more in 2008 as an allocation of their total asset base and relative to their deposit sources of funding. In fact, net loans grew at a rate of 9.34% for this group, which is down from the average growth rate of 15.07% for the years 2005 through 2007.  The growth rate in loans is down, which is probably due to tightened credit standards. However, it is still growth. And, since total average assets also had growth of 11.58% in 2008, the absolute dollars of loan balances increased at the largest banks. Peer group 2 Peer group 2 consisted of 305 reporting financial institutions between $1B and $3B in total assets. The net loans accounted for 72.96% of average total assets, up from 71.75% in 2007. Again, the loans as a percent of total assets have increased steadily since at least 2004. The loan-to-deposit ratio for these banks was up to 95% from 92% in 2007 and an average of 90% for 2006 and 2005. So, these banks are also lending more in 2008 as a portion of their asset base and relative to their deposit source of funding. Net loans grew at a rate of 10.48% for this group in 2008 which is down from 11.94% growth in 2007 and down from an average growth of 15.04% for 2006 and 2005. And, since total average assets also had growth of 10.02% in 2008, the absolute dollars of loan balances also increased at the intermediate size banks. Again here, the growth rate in loans is down, probably due to tightened credit standards, but it is still growth and it is at a slightly more aggressive rate than the largest bank group. Combined, for these 494 largest financial institutions, loans were still growing through 2008 both as a percentage of asset allocation and in absolute dollars. Tune in to my next blog to read more about the results shown relating to credit costs, loss allowance accounts and the impacts on earnings.

By: Tom Hannagan This post is a feature from my colleague and guest blogger, John Robertson, Senior Process Architect in Advisory Services at Baker Hill, a part of Experian. Years ago, I attended a seminar at which the presenter made a statement that struck me as odd, but has proven to be quite prophetic.  He simply stated, “margins will continue to narrow … forever!” He was spot on. At that time, a variety of loan products (such as mortgage loans) were becoming commoditized and this emerging market acted as an intermediary for needed cash to provide banks the wherewithal to continue to lend in their respective locales. The presenter continued by making a call for a systematic and effective pricing methodology then and “forever”. Pricing loans in a competitive market does not necessarily translate into smaller yields. Nor should banks be willing to accept smaller yields for less than quality loans. There are several viable options to consider when loan pricing in a market where the margins continue to shrink. Cutting operating expenses Generally, a financial institution’s first reaction to narrowing margins is to cut operating expenses. Periodically the chaff does need culling, but most banks run efficient shops by depending heavily on technology to create those efficiencies and for risk management. They continually measure themselves with efficiency ratios which, in part, help to drive their strategic operating decisions. So, when the edict comes from above to cut operating expenses, there aren’t too many options. So, why is a bank’s first reaction usually an all-out call to cut operating expenses? Generally, it’s because these operating expenses are more easily identifiable and banks still lack effective tools to measure the value of their customers and relationships. Couple that with the perception that there is no control over a competitive market with narrowing margins. As a result, banks price accordingly -- just to get the deal. Consequently, their efficiency ratios may look good, but what about the potential impact on yield, service and internal morale? Community banks, in particular, pride themselves on customer service and, in fact, site it as one of their strengths against larger banks. Do you give up that advantage? Relationship management To price effectively in a market where margins have narrowed, the bank has to also consider the relationship’s value. The value of deposits should be measured and included to allow for more competitive pricing. The influence of deposits on the relationship allows the bank to be more aggressive in its loan pricing or can enhance the relationship yield itself. Loan pricing in a competitive market does not have to translate into smaller yields and/or credit quality. The key to staying ahead of competition is measuring the value of the relationship and applying any or all of the outlined effective risk-based pricing methodologies to position the bank to win the deal and still meet the targeted return objectives. While the phrase “margins will continue to narrow … forever” may seem to hold true, banks can counter by using the “power of pricing” to offset the impact to earnings …forever!

At which stage of the application process does the Red Flags Rule apply? The Red Flag Rule would apply whenever you detect a Red Flag in connection with an application. This could occur as soon as you receive an application, for example: if the application appears to have been altered or forged; or the consumer’s identification appears to be forged or is inconsistent with the information on the application. Is the social security number (SSN) check a requirement? No, but an invalid SSN may be a Red Flag – i.e., an indicator of possible identity theft – and obtaining and verifying a SSN may be a reasonable means of application risk management to detect this Red Flag when opening accounts. You may be able to utilize your existing procedures under your Customer Identification Program under the USA PATRIOT Act.  

After reviewing more details around the "The President's Identity Theft Task Force Report" (September 2008), and some of the activities surrounding it, I find myself again pondering how all of this may be impacting our clients.  Does heightened consumer awareness around both identity theft Red Flags rules and government initiatives (like the task force report) put more pressure on various industries to have buttoned up identity theft prevention programs that are not only effective, but also "marketed" to consumers?  Are consumers now expecting to see more blatant identity theft prevention measures in place each time they transact with a service provider…any service provider?Lots of questions here, so let me know if you are feeling residual pressures from your consumer base as a result of any of the latest initiatives or reports.  I can say that we do have some clients that believe effective identity theft measures matter to their customers and use their protection measures as marketing messages.  For example, the use of knowledge-based authentication questions during an application or transaction approval process is not only effective in preventing fraud, but also leaves customers with a sense of security and an understanding that their financial institutions are working to combat identify theft..

What to do when you see a Red Flag. Your Identity Theft Prevention Program should include appropriate responses when you detect a Red Flag. You must assess whether the Red Flag evidences a risk of identity theft. If so, your response must be commensurate with the degree of risk posed. Depending on the level of risk, an appropriate response may include contacting your applicant, not opening a new account or even determining that no response is necessary.  

By: Tom Hannagan Part 2 There is one rather interesting clause that appears to represent an open-ended business porfolio risk management decision for the future. It is one small paragraph, named Amendment, in the middle of Article V - Miscellaneous, just ahead of governing law (which is federal law, backed up by the laws of the State of New York). Amendment begins normally enough, requiring the usual signed agreement of each party, but then states: “provided that the Investor may unilaterally amend any provision of this Agreement to the extent required to comply with any changes after the Signing Date in applicable federal statutes.” Wow. My understanding of this is that if Congress in the future, enacts anything that Treasury finds (or Congress requires Treasury to find) applicable to any aspect of the previously signed TARP Agreement, the bank is bound to adhere. Forget about the non-voting aspect of the preferred shares issued to the Treasury. Once the TARP Agreement is executed by the bank, management is not only bound by what’s in the document to begin with, it is in addition, subject to future federal law as long as the TARP shares are held by the government. So, this new major owner does have a voice. The Purchase Agreement covers what the new owner wants now and may decide it wants in the future. This a form of strategic business risk that comes with accepting the capital infusion, along with the various financial implications of the funding.