On July 9, 2012, the U.S. Treasury announced its intent to commence the fourth round of individual auctions of TARP CPP securities, commencing July 23, 2012.  In this fourth round, Treasury has identified 12 institutions holding a total of approximately $346 million of TARP CPP securities.

Specifically, the fourth round will include:

  • First Western Financial, a privately traded bank holding company in Denver, Colorado, with approximately $21 million in TARP CPP securities (preferred stock).
  • CBS Banc-Corp, a privately traded bank holding company in Russellville, Alabama, with approximately $26 million in TARP CPP securities (preferred stock).
  • Exchange Bank, a privately traded bank in Santa Rosa, California, with approximately $47 million in TARP CPP securities (noncumulative preferred stock).
  • Market Street Bancshares, a subchapter S bank holding company in Mount Vernon, Illinois, with approximately $21 million in TARP CPP securities (subordinated debt).
  • Fidelity Financial Corp, a privately traded bank holding company in Wichita, Kansas, with approximately $38 million in TARP CPP securities (preferred stock).
  • Marquette National Corp, a privately traded bank holding company in Chicago, Illinois, with approximately $39 million in TARP CPP securities (preferred stock).
  • Premier Financial Bancorp, a publicly traded bank holding company in Huntington, West Virginia, with approximately $22 million in TARP CPP securities (preferred stock).
  • Diamond Bancorp, a subchapter S bank holding company in Washington, Missouri, with approximately $21 million in TARP CPP securities (subordinated debt).
  • Park Bancorporation, a privately traded bank holding company in Madison, Wisconsin, with approximately $24 million in TARP CPP securities (preferred stock).
  • Trinity Capital Corporation, a privately traded bank holding company in Los Alamos, New Mexico, with approximately $39 million in TARP CPP securities (preferred stock).
  • First Community Financial, a privately traded bank holding company in Joliet, Illinois, with approximately $24 million in TARP CPP securities (preferred stock).
  • Commonwealth Bancshares, a subchapter S bank holding company in Louisville, Kentucky, with approximately $21 million in TARP CPP securities (subordinate debt).

The prior individual TARP auctions have only included publicly traded bank holding companies, but the fourth round will include only one publicly traded bank holding company along with seven privately traded bank holding companies, three subchapter S bank holding companies, and one privately traded bank.  The results of these auctions may provide further guidance as to the relevant market value for much of the remaining TARP portfolio, which largely consists of privately traded holding companies and banks (as well as subchapter S institutions).  These institutions may trade at greater discounts, either because of reduced information available about the institutions, or because of the different terms of the various instruments.

Terms of CPP Securities

The terms of the TARP CPP securities are generally comparable for privately traded bank holding companies.  However, privately traded institutions, in lieu of issuing warrants to purchase common shares, issued additional shares of preferred stock to Treasury with a liquidation value equal to 5% of Treasury’s investment.  These additional preferred shares, generally referred to as “Warrant Preferred” will likely be included in these auctions, but are not reflected in Treasury’s investment spreadsheet (as Treasury did not pay anything additional for the shares).  The Warrant Preferred generally operate on the same terms of the regular TARP CPP preferred stock, except that the dividend rate associated with the Warrant Preferred Stock has been 9% since issuance.  See the Privately Traded CPP Term Sheet for additional information.

Privately traded banks (i.e., those without a holding company) issued TARP CPP securities in the form of noncumulative perpetual preferred stock.  In other  words, the dividends from any deferred periods are permanently waived, and do not need to be made current before redeeming the instrument (or commencing dividend payments to more junior securities).

Subschapter S institutions issued subordinate debentures rather than another class of equity.  To reflect the tax differences with interest/debt versus dividends/stock, the subordinated debt had an initial rate of 7.7%, which increases to 13.3% five years after issuance.  The subordinated debt can be deferred up to 20 quarters, but deferred interest does cumulate. See the Subchapter S CPP Term Sheet for additional information.

Characteristics of Institutions in the Fourth Round

The institutions in the fourth round of the TARP auctions, on average, are smaller, less profitable, have less capital, and have worse asset quality then the institutions that participated in the first three rounds.  All of the institutions are presently current in their dividend/interest payments, although three institutions previously deferred dividends for a period of time.

The average size of the TARP investment for the institutions in the fourth round is approximately $29 million,  versus $68 million in the first round, $40 million in the second round, and $32 million in the third round.  However, the participants in the fourth round are still larger than the average remaining TARP CPP investment, which is approximately $25 million. (About 70% of the remaining institutions with TARP CPP investments have investments of less than $25 million, and 50% of the remaining institutions have investments of less than $10 million.)

The average ROAA and ROAE, through the first quarter of 2012, for institutions in the fourth round is 0.24% and 2.93%, respectively, and a few reported losses for the first quarter.  This compares with an average ROAA for the first three rounds of 0.63%, 0.59% and 0.60%, and average ROAE of 5.63%, 6.09% and 6.50%

The average tangible equity/tangible assets ratio for the institutions in the fourth round is 7.83%, compared to 9.55%, 9.00%, and 8.56% in the earlier rounds.

The average non-performing loans as a percentage of total loans is 5.18% versus 3.82%, 5.26%, and 4.10% in the earlier rounds.  The average non-performing assets as a percentage of total assets is 4.96% versus 2.94%, 4.38%, and 3.71% in the earlier rounds.  The reduced capital levels and elevated asset quality ratios is also reflected in the fourth round having, on average, the highest Texas ratio of 56%, compared with earlier rounds of 27%, 42% and 37%.

Conclusion

Based on the first three rounds, the asset quality and Texas ratio numbers have been most strongly correlated with the amount of the discount recognized by Treasury on the sale.  Given the privately traded nature of eleven of the participants in the fourth round, the terms of such investments, and the average characteristics of the participating institutions, it appears likely that the average discount experienced by Treasury in the fourth round will be materially greater than the 10% average for the first three rounds.