“Clawback Provision”

An exemplar of the procedure of the clawback provision. Clawback provision will make the existing shareholders of the bank accountable for any losses incurred in the existing loan portfolio which will lessen the existing value of the allowance for loan loss and leases as of the effective date for the investment of fresh capital. On the date of closing the new investors are going to get percentage ownership based on the new invested cash and tangible book value of the bank.

One of the important factors to keep in mind is to make sure, that with the infused new capital the bank should become well capitalized by all regulatory measures. In case not the regulators can ask for infusion of more capital which will further complicate the ownership.

Well Capitalized


Well Capitalized

Adequately Capitalized


Tier I Leverage

Tier I/Total Average Assets



Tier I Risk Based

Tier I/Total RBA



Total Risk Based

(Tier I+ALLL)/Total RBA



For example if the tangible book value of the bank, on the day of investment $3 M and the loan loss allowances of $3M and new investor groups put in $6 M. The investor should receive approximately 67% of the total authorized, issued and outstanding capital stock of the bank.

Assuming that the ALLL of the bank is $3 M on the effective date of closing or date of new investment. A claw back provision will trigger assuming the losses attributable to the existing loan portfolio of the bank after the date of new capital infusion reduces from its present value in foreseeable future. The new investor in those circumstances will receive additional shares in the bank to the extent that they will inject additional capital to replenish the reserve. The theory is basically that the existing shareholders should only receive value to the extent of the value existing as of the date of new capital infusion and to the degree that the value changes as a result of deterioration in the loan portfolio, that the burden is shared by existing shareholders, as opposed to the new investors.

New investor should also keep in mind what will be the breakeven point for the bank in terms of asset size and where the economy is heading. A five years business plan should well augment this point and give some good ideas. Some of the critical aspect of the business plan, while keeping in view the claw back provision and ALLL should also include; plans regarding

  • · Assets- What amount of additional capital will be required to support the existing assets, and what amount of capital will be required for future growth? What are the earnings projections for the coming year? What kind of loan mix percentages is the bank want to keep in terms of commercial, consumer and other loans? Also, to keep in mind, how the present non-accruals will perform and if there are any chances of their returning to earning assets, in some form, over what period of time.
  • · Liabilities-deposit mix, demand, MMDA, savings, CD’s, core, brokered, public funds. What should be the right mix?
  • · Capital- 12%. More the better
  • · Staffing –loans, deposits, compliance, I/T, back room
  • · Technology –Latest e-business and m-commerce solutions
  • · Branches –how many branches if planned and capital required.

The concept of keeping the surprises to the minimum should be the goal. As being said, without a goal, there can be no plan; without a plan, there are no chances of success.

Robin Trehan, can be reached at www.businesscreditfunding.com or www.CreditCapitalFunding.com