On May 3, the Treasury Department announced (via blog post) its intentions with regard to the 343 banks that remain in the TARP Capital Purchase Program. Specifically, Treasury identified three approaches: (1) allow repayments over the next 12-18 months; (2) limited restructurings in the context of mergers or capital raises; and (3) auctioned sales of the TARP securities, either for individual banks or in pools. These intentions are flexible and sufficiently vague to allow Treasury to moderate from these plans, particularly if political pressures necessitate. However, they also provide a road map (at least a current road map) of the path that Treasury anticipates using.
Treasury invested a total of $245 billion under the TARP bank programs, and has already recovered $264 billion through repayments and other income. This represents a $19 billion positive return, without providing any value to the remaining investments. Every additional dollar recovered is an additional return for the US taxpayers.
Of the 364 remaining investments, Treasury notes that most are smaller, community banks. Treasury is careful to point out that these banks have just as much desire to repay TARP, but have generally found it harder to raise funds from private investors in the capital markets and have often been particularly hard hit by troubled real estate loans.
Notably, Treasury now indicates that it intends to continue to hold the TARP securities of those banks that Treasury believes will have the ability to repay over the next 12 to 18 months. This could suggest that those banks that Treasury believes could obtain regulatory approval to repay will not be provided the opportunity, at least in the short term, to participate in a public auction (and therefore repurchase their securities at a discount to par value). The Treasury also indicates that they will communicate “regularly” with the group of banks that they think can repay over the next 12 to 18 months and will share with them Treasury’s “expectations” for repayment. Treasury has expressly indicated that its expectations regarding which banks will be able to repay may change over time.
As of the April 18, 2012 Daily TARP Update, the Treasury disbursed a total of $204.9 billion under the TARP Capital Purchase Program, and has since received a total cash return of $216.2 billion. Accordingly, without event taking into account the remaining CPP investments or the potential ramifications to the economy had the CPP program not been implemented, the TARP CPP program has been a financial success, resulting in an investment profit of over $11.2 billion to U.S. taxpayers.
However, according to the April 17, 2012 TARP Transactions Report, a total of 346 institutions still have an aggregate of $10.4 billion in TARP CPP investments outstanding, with the 14 largest remaining CPP participants representing over half of the remaining dollar investment. Specifically, the 14 largest remaining investments represent 50.2% of the outstanding CPP funds, with an average investment of $373.9 million each. The remaining 332 investments represent just under $5.2 billion of the remaining investment, for an average investment in these institutions of $15.6 million.
The top 50 remaining investments represent $7.4 billion of the $11.2 billion still outstanding. (The cut-off to be included in the top 50 remaining investments is $35 million.) The other 296 investments total $3 billion, representing an average investment of just over $10 million per institution.
On March 29, 2012, the Treasury announced the pricing of the public offerings of TARP preferred stock in six banks. In aggregate, the Treasury took a 12% discount to move the TARP investments off the books of the Treasury, selling preferred stock with an aggregate liquidation value of $411 million for $362 million.
While Treasury took a loss on these six investments (at least partially because of Treasury’s desire to go ahead and move the investments rather than hold them for future payment), it is important to remember that the total TARP CPP portfolio has already returned a profit to taxpayers. Including the results of these auctions, Treasury has recovered $260 billion from repayments, dividends, interest and other income, compared to the $245 billion initially invested.
Details of each of the six auctions are provided below.
- Banner Corporation, Walla Walla, WA – Auction proceeds of $108 million against an original investment of $124 million. The discount to the liquidation value of the shares was 11.5%.
- First Financial Holdings Inc., Charleston, SC – Auction proceeds of $56 million against an original investment of $65 million. The discount to the liquidation value of the shares was 12.6%.
- MainSource Financial Group, Inc., Greensburg, IN – Auction proceeds of $52 million against an original investment of $57 million. The discount to the liquidation value of the shares was 6.9%. MainSource had previously indicated that it intended to place one or more bids itself, and was ultimately successful in repurchasing 36.9% of its TARP preferred stock in the auction. Specifically, MainSource redeemed $21 million in liquidation value preferred stock for $19.6 million, and will still have approximately $36 million outstanding, now in the hands of private parties.
- Seacoast Banking Corporation of Florida, Stuart, FL – Auction proceeds of $40 million against an original investment of $50 million. The discount to the liquidation value of the shares was 18.0%.
- Wilshire Bancorp, Inc., Los Angeles, CA – Auction proceeds of $58 million against an original investment of $62 million. The discount to the liquidation value of the shares was 5.6%. Wilshire had previously indicated that it intended to place one or more bids itself, and was ultimately successful in repurchasing 96.5% of its TARP preferred stock in the auction. Specifically, Wilshire redeemed $60 million in liquidation value preferred stock for $56.6 million, and will still have approximately $2.2 million outstanding, now in the hands of private parties.
- WSFS Financial Corporation, Wilmington, DE – Auction proceeds of $47 million against an original investment of $53 million. The discount to the liquidation value of the shares was 8.5%.
As it had previously indicated, on March 26, 2012, the Treasury Department announced the commencement of a modified dutch auction for the sale of the preferred stock it holds in six institutions:
- Banner Corporation, Walla Walla, WA (“Banner”)
- First Financial Holdings Inc., Charleston, SC (“First Financial”)
- MainSource Financial Group, Inc., Greensburg, IN (“MainSource”)
- Seacoast Banking Corporation of Florida, Stuart, FL (“Seacoast”)
- Wilshire Bancorp, Inc., Los Angeles, CA (“Wilshire”)
- WSFS Financial Corporation, Wilmington, DE (“WSFS”)
The link to each institution takes you to the preliminary prospectus on file with the SEC.
MainSource and Wilshire have both indicated that they have received regulatory approvals to submit one or more bids in the auction, while Banner, First Financial, Seacost and WSFS have each indicated that they do not intend to bid in their respective auctions.
On March 14, 2012, Treasury issued a press release announcing its intent to sell the preferred TARP CPP interests in six financial institutions on or about March 26, 2012. Specifically, the Treasury plans to sell its preferred stock positions in Walla Walla, Wash.-based Banner Corp., Charleston, S.C.-based First Financial Holdings Inc., Greensburg, Ind.-based MainSource Financial Group Inc., Stuart, Fla.-based Seacoast Banking Corp. of Florida, Los Angeles-based Wilshire Bancorp Inc. and Wilmington, Del.-based WSFS Financial Corp.
Consistent with prior discussions, Treasury is commencing activities to exit the federal government’s involvement in the TARP CPP program, with an initial focus on large investments in relatively healthy, public institutions. The Treasury’s results in this initial round of auctions is likely to influence policy and expectations going forward. If Treasury is only able to get 70 to 80 cents on the dollar in the auctions for these relatively healthy and public institutions, its appetite to engage in further sales could be severely limited (while the willingness/ability to settle individual TARP investments for a discount – either directly by Treasury or via a third party purchaser – may significantly increase).
The TARP investments selected by Treasury are each among the largest 50 TARP investments that currently remain outstanding, and represent approximately 2.5% of the currently outstanding TARP CPP investments. All six financial institutions selected by Treasury are presently current in their dividend payments (although Seacoast Financial had previously deferred its TARP dividends).
On March 12, 2012, Treasury released its February 2012 Dividends and Interest Report providing an updated look at the status of TARP CPP funds, including the first update following the February 2012 dividend due date under the terms of the TARP CPP investments. As of February 29, 2012, there were 163 TARP recipients that had missed at least one dividend payment (excluding any TARP recipients that have filed bankruptcy or who have been placed into receivership).
As a result of the missed dividends, Treasury has appointed a total of 13 directors to eight different institutions. In addition, the Treasury has appointed observers to an additional 39 institutions.
Although the Treasury has the right, under the terms of the TARP investments, to appoint two directors once a TARP recipient misses six dividend payments, Treasury has focused its efforts on the largest recipients. This likely partially reflects that it is not necessarily easy to identify qualified individuals who are willing to serve as directors of troubled financial institutions. Directors appointed by Treasury have the same rights and responsibilities as all other directors, and are not provided any additional legal or financial protection or benefit due to their appointment by Treasury. Treasury has only appointed one or more directors at institutions that have now missed at least nine quarterly dividend payments, and event amongst that group, have generally focused on the larger recipients, with a focus on those who are behind over $3 million in dividend payments. Based on the Treasury appointees that we’re aware of, the Treasury has identified highly qualified independent bank directors, that can act as a real benefit to the institution they’re being appointed to. As a general matter, they tend to be well-credentialed outside directors, frequently former bank executives that understand the condition of the bank. Technically, Treasury only has the right to appoint the directors at the holding company level, although we understand that Treasury has requested that they also be appointed to any subsidiary bank boards – and that most TARP recipients with appointed directors have done so, perhaps reflecting the quality of the appointed directors.
Over the last several months, we have become aware of a number of changes to various regulator’s frequently asked questions. These changes are frequently made without any public announcement, and, in some cases, without any notation that the FAQ’s have been modified at all. Frequently, banks are made only made aware of the change when they (a) aren’t aware of the initial FAQ, and (b) subsequently ask the question and are directed to the FAQ.
On November 1, 2011, the FDIC updated its Frequently Asked Questions regarding the “High-Rate Area” exception to the market rate caps for less than well-capitalized institutions. Previously, institutions relying on a “high-rate area” designation had to re-apply every calendar year to maintain the designation. However, late in 2011, the FDIC determined that institutions that had received a high-rate determination from the FDIC would no longer be required to submit an annual high-rate determination request. Instead, the high-rate area designation will automatically renew until and unless the FDIC notifies the institution that it is no longer operating in a high-rate area. In light of continued historically low interest rates, the current national rate caps have not proven to generally be difficult for banks to comply with, but this modification (if it isn’t changed again) could provide welcome relief if/when rates rise.
On February 16, 2011, the Treasury updated its Frequently Asked Questions regarding the Capital Purchase Program changes under the American Recovery and Reinvestment Act of 2009. Without acknowledging any change to the FAQ, Treasury reduced the minimum repurchase amount to the greater of (i) 5% of the issue price of the preferred and (ii) $100,000.00 in principal amount. Previously, Treasury required institutions seeking to repurchase their TARP investment to repurchase at least 25% of the principal investment.
On February 15, 2012, Broadway Financial Corporation announced that it had reached a definitive agreement with the Treasury Department pursuant to which Treasury will exchange preferred stock in the company for new common stock valued at a discount of 50% to the aggregate liquidation preference of the outstanding shares of preferred stock held by Treasury. As previously noted, while Treasury is unwilling to consider a blanket discount on the repayment of TARP, it remains open to restructuring its investment to facilitate additional capital, so long as it is treated equitably with other investors.
Although exact terms of the agreement are not yet publicly available, the company’s press release indicates that Treasury has agreed to convert its TARP CPP investment in the company into common stock at 50% of its liquidation value and the accrued unpaid interest on such investment at 100% of the accrued amount. The conversion is condition on a number of factors, including: (i) the exchange of the Company’s other preferred stock at the same 50% discount; and (ii) at least $5 million being raised in new common equity.
The company has previously announced that it had an agreement in principal with its senior bank lender to exchange a portion of its senior line of credit, which is in default, for common stock at 100% of the face amount to be exchanged and to forgive the accrued interest on the entire amount of the senior line of credit. In the company’s 3rd Quarter Form 10-Q, the company indicated that these conversions would result in the issuance of approximately 7.5 million new shares of common stock, which in turn would constitute approximately 80% of the pro forma outstanding shares.
While the TARP CPP program has returned a financial profit, as the Treasury has recovered 103% of its investment in the form of dividends, repayments and gains on sale of warrants, about 350 banks remain in the TARP CPP program. In this election year, it appears increasingly likely to us that Treasury is seeking means to eliminate the government’s continuing investment (and resulting entanglement) in financial institutions.
According to multiple sources, Treasury is looking to exit from the TARP CPP program in the “near-term” or by mid-year 2012. As we’ve previously noted, Treasury has hired Houlihan Lokey to advise it on exit strategies, paying Houlihan Lokey $375,000 a month for advice. We understand that Houlihan Lokey has now talked with about a third of the remaining banks, and is expected to talk to the remainder over the next several weeks. These discussions have generally been cordial, and equal parts information sharing and information gathering.
We expect Houlihan Lokey to present Treasury with multiple options, including: individual auctions, pool sales, and potential restructurings.
Under the terms of the preferred stock investments, Treasury can’t require repayment, and institutions will still need regulatory approval to make a payment. We’ve separately heard that the FDIC has inquired about repayment of TARP in reviewing a bank’s strategic plan, suggesting that the bank regulators may “force” repayment in connection with approving changes to business plans, etc. Treasury has initiated off-site examination of TARP compliance programs of the remaining TARP participants, but we understand that this function is at least nominally separate from Treasury’s investment decision and not intended to motivate banks to repay the TARP funds.
Only about 1 % of principal repayment to Treasury through 2011 under the TARP Capital Purchase Program (CPP) was the result of SBLF refinancing, according to latest Quarterly Report to Congress issued by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). Though the lion’s share of Treasury’s $4 billion investment under the Small Business Lending Fund was used for this purpose, the figure constitutes only a fraction of the $186 billion in CPP principal repaid thus far. About $20 billion in CPP securities remains outstanding.
The rest of the story is that the smaller CPP participants have been much slower to repay CPP obligations, and the SBLF was a major boost for those institutions. In all, 137 institutions exited TARP by refinancing their outstanding CPP investment using SBLF funds. Through December 31, 2011, 279 banks in all had exited the CPP program either by fully repaying CPP or by virtue of Treasury’s having sold the institution’s stock. So roughly half of all exits from the CPP – the first investments under which took place in 2008 – occurred during the three months of SBLF infusion in 2011. In contrast, by the middle of 2009, ten of the largest CPP participants had already repaid $68 billion worth of Treasury investment.
The average SBLF participant exiting the CPP program used $16 million in SBLF funds to refinance CPP obligations. Compare that to the median CPP investment among the 707 recipients under that program – $10.3 million - and you can see how the SBLF closed out very little of Treasury’s overall CPP investment but was the single most successful community bank TARP exit strategy to date.
Meanwhile, Treasury continues to make its case that the SBLF has also increased small business lending among participants – $3.5 billion (September 30, 2011) over a $35.9 billion baseline (the average for the four quarters ending June 30, 2010) – or about $10 million per bank. The average SBLF recipient (332 recipients in all) received $12 million.