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Treasury Department Provides Updated Information

October 31, 2008

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On October 31, 2008, the Treasury Department issued a press release with updated information about the TARP Capital program.  Specifically, the Treasury Department provided additional documents for publicly traded financial institutions applying for TARP Capital.  These documents include:

More analysis to follow this weekend, but we did want to highlight two points of information.

1.  Update for Privately Held Banks. The Treasury’s press release specifically states that the Treasury will post an application form and term sheet for privately held eligible institutions at a later date and establish a reasonable deadline for private institutions to apply.

2.  Redemption Right on Warrants. The Securities Purchase Agreement gives the right (Section 4.9) for the Company to repurchase the warrants (or the common stock underlying the warrants) from the Government at their then current market value once the Government no longer holds the preferred stock.  This provides participating institutions with the ability to know that the Government’s investment, and the resulting limitations on executive compensation, can be terminated by the participant no later than 3 years after the initial investment (assuming sufficient capital to support the redemption of the preferred and warrants).

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Last Minute Halloween Costume

October 31, 2008

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Last Minute Halloween Costume

October 31, 2008

Authored by: Robert Klingler

  1. Get a dropcloth or old tablecloth
  2. Put it over your head
  3. Pin a dollar bill to the front (or make a fake $700-billion dollar bill)
  4. Now you’re the TARP program.

Warning #1:  If you’re attending a party with non-bankers/non-lawyers, people may just think you’re a ghost with your cab fare pinned to you in case you get drunk.

Warning #2:  Once you tell them who you are, you may find yourself in the “nerd corner” having an exclusive party of your very own.

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Reputation Risk May Cut Both Ways

October 30, 2008

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Reputation Risk May Cut Both Ways

October 30, 2008

Authored by: Robert Klingler

In a CEO alert published by the ABA on October 29, 2008, the ABA specifically addresses the possible reputation risk of participating, and the steps ABA is taking to address that risk.  For the ABA analysis, see the full ABA CEO Alert.

What Will My Customers Think? If a bank receives a capital investment from Treasury, will its customers call it a bailout?  This is an enormous concern that we’ve raised with Secretary Paulson.  Perception is still reality, and in the eyes of many customers and the media, it’s a bailout, no matter how many times Treasury says that the capital is for healthy institutions.  Most banks have never made a single subprime loan. They’ve watched Wall Street boom and bust and receive handouts.  Many banks will not participate in the CPP if it continues to be perceived by their customers as a bailout for troubled institutions.  Yet it’s also possible that if a banker doesn’t participate and competitors do, customers or the media might think they were turned down.

This is a voluntary program, and there are good business reasons why a bank may choose to participate.  This is a message we’ll be hammering in the media, just as we are pressing Treasury and the regulators to do.

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Hovde Suggests Combining TARP Capital with Private Equity

October 30, 2008

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On October 28, 2008, Hovde Private Equity Advisors circulated an email specifically addressing whether institutions should seek to combine TARP Capital with private equity.  For more information, or to explore the available capital partnerships, contact Joe Thomas, Managing Director of Hovde Private Equity Advisors, at JThomas@Hovde.com or 202.261.0845.

Although we have experienced unprecedented legislative and regulatory changes in the banking industry that may provide near-term systemic support, the implications for community banks remain unclear.  To ensure continued success in this challenging operating environment, we believe that banks must now look to obtain the necessary mix of new capital in order to address credit losses and to also capitalize on strategic opportunities.  We believe that the Treasury’s TARP Capital Purchase Program (CPP) represents a compelling source of inexpensive Tier 1 capital.  Without this one-time support from the government, your institution may find itself at a strategic disadvantage amidst a severe credit cycle and radical consolidation phase in the banking industry.

If your bank is eligible to participate in the TARP CPP, then you might consider a private equity investment in 2009 in order to achieve a reduction in the proposed 15% warrant coverage on the senior preferred shares (which participating financial institutions must issue to the Treasury).  If you have concerns about your institution’s eligibility, then we believe that a concurrent private equity investment could help your bank gain access to the Treasury’s CPP.   Based on our recent discussions with banking regulators, we believe that those banks with CAMEL ratings of 3, 4 and 5 which are experiencing increasing levels of credit and capital deterioration, may not be approved for participation without a concurrent private equity investment.

Co-investing with private investors is a “win win” for the Treasury, as it allows the federal government to stabilize banking institutions while deploying fewer taxpayer dollars.  While the cost of private equity capital exceeds the Treasury’s cost of capital, the blended cost of capital–via private equity and a government injection–is far lower than it will be if an institution applies for and does not receive Treasury support.

To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.

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Stifel Analysis regarding Leveraging TARP Capital

October 30, 2008

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On October 29, 2008, Stifel, Nicolaus & Company published their November 2008 edition of The Bank Investor, which discusses the need to leverage TARP Capital to generate reasonable returns.  Here is an excerpt from the Stifel report:

As we noted earlier, some institutions may use the program to facilitate M&A activity.  PNC Financial Services Group, Inc. announced a $7.7 billion participation in the program and at the same time announced the purchase of National City Corporation.  However, those institutions not employing the capital for M&A activity may find that that the investment needs to be levered significantly in order to generate a reasonable return on the preferred stock.  At the end of the second quarter of 2008, the average Tier 1 Leverage Capital ratio for all FDIC insured community institutions was roughly 9.9%.  While it may not be necessary to lever at the current industry average of roughly 10:1, institutions will likely need to grow the balance sheet significantly to achieve a healthy ROE and level of income sufficient to cover the dividend payment requirement for the preferreds.

To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.

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Treasury Announcements of TARP Recipients/Applicants

October 30, 2008

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While the Treasury Department has emphasized that it is allowing institutions to individually announce pre-approval of TARP Capital, Section 114(a) of EESA requires public disclosure of the completion of such purchases within two business days of the actual purchase.  (This is also confirmed in the Treasury’s FAQ, which provides “Treasury will provide electronic reports detailing any completed transactions, as required by the Emergency Economic Stabilization Act of 2008, within 48 hours.”)

The Treasury Department has now begun publicly announcing completed transactions.  As of October 29, 2008, the Treasury Report on Transactions listed only the original “Big 9.”

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ABA Provides Some Clarification for Non-Public Companies

October 29, 2008

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We haven’t seen any more official information directly from the Treasury Department, but according to the American Bankers Association, relief for non-exchange listed public companies, private companies, and Subchapter S companies appears to be coming.  We understand that ABA Staff members met yesterday with senior Treasury officials, and that the Treasury understands that specific action will be required by the Treasury to allow participation in the TARP Capital program by non-exchange listed public companies, private companies, and Subchapter S companies. The ABA believes that clarifications for non-exchange listed companies will be made available soon, while solutions for the others may take additional time. As noted in the American Bankers Association Letter to the Treasury Department, the ABA has requested the Treasury Department extend the application deadline and recommend an alternative investment framework that would work for all companies.

During the meetings between the ABA and Treasury, the Treasury also apparently clarified that the November 14 application deadline and public term sheet only apply to publicly traded entities, with the remaining types of institutions receiving their own term sheets and separate application deadlines in stages.

The Treasury also emphaiszed that while publicly traded institutions should apply by November 14th, they can subsequently decide whether to participate or accept any capital.

Treasury officials also acknowledged that shelf registrations may not be feasible for non-exchange listed public companies, that public companies without blank check preferred may seek shareholder approval for preferred stock following the application, and that the Treasury does not intent to alter privately held company’s private status under the federal securities laws.

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Sterne Agee Industry Report on TARP Capital

October 29, 2008

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On October 28, 2008, Sterne Agee published an Industry Report on the current status of the TARP Capital program.  We highlight below Sterne Agee’s conclusions regarding the “seemingly attractive terms” of the TARP Capital, but encourage bankers to read the entire Strene Agee Industry Report.

SEEMINGLY ATTRACTIVE TERMS. The basic terms of the CPP – up to 3% of risk-adjusted assets in preferred stock with a 5% coupon, augmented by 15% of the total in warrants – are more attractive, both in the amount of capital and its cost, than any bank can expect to find in the public markets today.  Whether to fill a hole in the balance sheet, build an acquisition war chest, or simply provide a cushion against a longer, deeper recession than anticipated, the CPP is an attractive proposition.  Any perceived stigma should be gone in light of the rush of the nation’s largest banks to participate, and managerial constraints, such as on executive compensation, do not strike us as terribly onerous.  Constraints on dividend hikes and share repurchases are entirely academic for most banks in the current environment.  The one big unknown, however – the reason why we say “seemingly” attractive terms – is the degree to which participation subjects a bank to heightened informal scrutiny of its business decisions.  Politicians are already haranguing managements for T&E expenses, and the TARP checks haven’t even cleared yet; some healthy banks will likely pass on the TARP simply to avoid such headaches.

We have separately commented on our belief that TARP Capital participation should not lead to additional regulation uniquely on participating institutions, but we agree with Sterne Agee that this is an unknown.

To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.

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FDIC TARP Capital Application Supplemental Ratios

October 29, 2008

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We understand that the FDIC is requesting that TARP Capital applicants complete (either with their application or supplementally thereafter), this Capital Ratios spreadsheet.  Regardless of whether you elect to submit the spreadsheet with your initial application, we believe completing the spreadsheet is a good exercise to understand what the federal regulators, or at least the FDIC, intends to review.

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TARP Capital Recipients

October 29, 2008

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TARP Capital Recipients

October 29, 2008

Authored by: Robert Klingler

The Wall Street Journal has compiled a database showing banks that annouced Treasury approval for TARP Capital, including the amount of capital that Treasury has committed.  As of the morning of October 29, 2008, the smallest institution to be included is First Niagra Financial Group, which had approximately $9.0 billion in assets as of September 30, 2008.

In today’s Research and Trading Thoughts, FIG Partners includes a TARP Scorecard for TARP Participants, that analyzes the warrant pricing and concludes that investor complaints about dilution should be curtailed.  The FIG Partners analysis includes an announcement by Saigon National Bank that they have been approved by the Treasury Department.  Saigon National Bank is a de novo institution located in Westminster, California with $43.2 million in assets at June 30, 2008, and is traded on the Over-The-Counter market.  We are seeking more information from management, and will update as we know more.

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