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.

Treasury acknowledges that the majority of the remaining banks will not be in position to repay within the next 12 to 18 months … or in the foreseeable future.  For these institutions, Treasury is focused on restructuring or selling the TARP investment.

Treasury will continue to accept proposals, typically in connection with mergers or plans to raise capital, to restructure its investment; “but only if the terms represent the best deal for taxpayers under the circumstances.”  Treasury indicates that it has approved 20 of these restructurings, and anticipates continuing to do so “in limited cases.”

When looking to sell its TARP investment, Treasury indicates that it will continue to use the auction process.  Treasury indicates that the results of the first six auctions were in line with what the Treasury had estimated. However, the Treasury also indicates that they will only sell above a pre-set reserve price in order to best protect taxpayer value.  Future auction sales will include individual investments as well as pooled securities, conducted over time in stages.  Treasury notes that it will continue to evaluate its strategies as it proceeds.

Although may of the same reasons may exist for the Treasury to desire to exit TARP’s Community Development Capital Initiative (CDCI), the Treasury specifically indicates that Treasury currently intends to continue to hold onto its CDCI investments and make disposition decisions regarding that program at a later date.

Related posts:

1. Treasury Looking to Exit TARP
2. Treasury Updates TARP Missed Dividend Report
3. Treasury Announces First TARP Auctions

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.

Overall, 184, or 53.2%, of the remaining institutions are current on their dividends, while 162, or 46.8%, have deferred one or more dividend payments.  From a dollar perspective, $7.0 billion, or 67.5%, in principal is current on dividend payments, while $3.4 billion, or 32.5%, is in dividend deferral.  Looking exclusively at the 296 smaller investments, the condition of the remaining investments is in worse shape.  Of the 296 investments of less than $35 million remaining, 152, or 51.4%, are current on dividends, with 144, or 48.6% in dividend deferral; by dollar, $1.47 billion, or 49.0%, is current, while $1.53 billion, or 51.0% is in deferral.

The vast majority of the remaining portfolio represents investments in bank holding companies, and therefore cumulative investments.  Based on our calculation, it appears that 299 of the remaining investments (or 86.4%) representing $10.1 billion (or 97.2%) is in the form of a cumulative instrument.  However, 47 institutions, or 13.6%, appear to have non-cumulative investments under the TARP CPP program, representing $289 million (or 2.8%).  While smaller, the non-cumulative instruments also appear to be in greater distress, as 75.8% of the non-cumulative investments are currently not current in their dividend payments.  This additional deferral could, however, represent the additional dividend restrictions placed on banks compared to bank holding companies.

Related posts:

1. Treasury Provides Guidance on Redeeming TARP Capital Investments
2. Six Months of TARP Capital Purchase Program Investments
3. Treasury Expands TARP Program for CDFI's; Contemplates Private Matching Investments

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%.

Each auction is expected to close on or about April 3, 2012, subject to customary closing conditions.

In each case, Treasury elected to sell its entire investment.  Given the modified dutch auction structure, presumably Treasury could have elected to sell only a portion of its investment at a higher per share price, but apparently decided it was preferable to completely exit the TARP investments.

Institutions that had indicated that they were authorized and intended to bid on their own portfolios resulted in smaller discounts.  MainSource and Wilshire sold for a weighted average discount of 6.2%, while the other four institutions sold for a weighted average discount of 12.4%.  This relationship could be directly related to the institution’s respective bids, or may simply be indicative of the greater relative strength of these institutions.  MainSource and Wilshire each generally had a lower NPA% and a higher tangible common to tangible asset ratios than the other four institutions.

As one would expect, Investors generally appear focused on both asset quality and capital ratios in assessing the value of the TARP investments.  At 1.9% NPA’s and 8.95% tangible common equity, Wilshire has the smallest discount at 5.6%.  At 2.8% NPA’s and 7.86% tangible common equity, MainSource experienced a discount of 6.9%.  By comparison, a 9.5% tangible common equity ratio at Banner was apparently insufficient to overcome its 4% NPA ratio, resulting in a discount of 11.5%, while a 1.4% NPA ratio at First Financial was insufficient to overcome its 6.7% tangible common equity ratio, resulting in a discount of 12.6%.  Seacoast generally was the most troubled of the six, with a 5.7% NPA ratio and a 5.6% tangible common equity ratio, which resulted in an 18.0% discount.

Related posts:

1. Treasury Announces First TARP Auctions
2. Treasury Accepts 50% Discount in TARP Conversion to Common Stock
3. Treasury Commences Auction of TARP Preferred Stock of 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.

With Merrill Lynch and Sandler O’Neill acting as auction agents, the auction commenced at 8:30 a.m., New York City time, on Wednesday, March 26, 2012, and will close at 6:30 p.m., New York City time, on Wednesday, March 28, 2012. During the auction period, potential bidders for the preferred stock will be able to place bids on the offered preferred stock (in increments of whole shares) at any price per share (in increments of $0.01).  At settlement, winning bidders will be required to pay the clearing price for the preferred stock plus accrued and unpaid dividends on the preferred stock from and including February 15, 2012.  Investors may bid on individual or multiple preferred stock positions. Depending on the bids received, the Treasury has reserved the right to sell only a portion of the shares it holds, or not to sell any shares.

In addition to Merrill Lynch and Sandler O’Neill, the following brokers have agreed to be network brokers for purposes of the auction process:  BB&T Capital Markets, a division of Scott & Stringfellow, LLC, Blaylock Robert Van, LLC, Cabrera Capital Markets, LLC, Cantor Fitzgerald & Co., CastleOak Securities, L.P., CL King & Associates, D.A. Davidson & Co., FBR Capital Markets & Co., Guzman & Company, Jefferies & Company, Inc., Joseph Gunnar & Co. LLC, Keefe, Bruyette & Woods, Inc., Lebenthal & Co., LLC, M.R. Beal & Company, Muriel Siebert & Co., Inc., Samuel A. Ramirez & Co., Stifel, Nicolaus & Company, Incorporated, The Williams Capital Group, L.P., Toussaint Capital Partners, LLC, Utendahl Capital Partners, L.P., Wedbush Morgan Securities Inc. and WR Hambrecht + Co., LLC.

Related posts:

1. Treasury Accepts 50% Discount in TARP Conversion to Common Stock
2. Capital Treatment of Trust Preferred Securities and TARP CPP Preferred Stock
3. Treasury Announces TARP Capital Terms for Subchapter S Institutions

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).

Upon sale of the Treasury’s position in the TARP CPP Preferred Stock, the financial institutions will automatically be freed from the executive compensation restrictions associated with TARP.  However, if the Treasury sells its position at a discount, the Treasury’s interpretation (via the office of the Special Master) is that a portion of any “long-term restricted stock” issued in accordance with the TARP executive compensation restrictions will become permanently non-transferable.  It remains to be seen how this will be interpreted and implemented going forward.

A brief summary of the six financial institutions selected by Treasury follows:

Banner Corporation received $124 million in TARP funds, and has a current market cap on its common stock of approximately $376 million.  As of December 31, 2011, it had $4.2 billion in assets, a tangible common equity/tangible assets ratio of 9.54%, a regulatory leverage ratio of 13.44% and 4.02% of its assets were non-performing.

First Financial Holdings received $65 million in TARP funds, and has a current market cap on its common stock of approximately $170 million.  As of December 31, 2011, it had $3.1 billion in assets, a tangible common equity/tangible assets ratio of 6.67%, a regulatory leverage ratio of 12.84% and 1.37% of its assets were non-performing.

Wilshire Bancorp received $62 million in TARP funds, and has a current market cap on its common stock of approximately $329 million.  As of December 31, 2011, it had $2.7 billion in assets, a tangible common equity/tangible assets ratio of 8.95%, a regulatory leverage ratio of 13.86% and 1.88% of its assets were non-performing.

MainSource Financial Group received $57 million in TARP funds, and has a current market cap on its common stock of approximately $236 million.  As of December 31, 2011, it had $2.8 billion in assets, a tangible common equity/tangible assets ratio of 7.86%, a regulatory leverage ratio of 10.80% and 2.81% of its assets were non-performing.

WSFS Financial Corporation received $53 million in TARP funds, and has a current market cap on its common stock of approximately $326 million.  As of December 31, 2011, it had $4.3 billion in assets  and 2.14% of its assets were non-performing. (Capital ratios not available due to thrift structure.)

Seacoast Banking Corporation of Florida received $50 million in TARP funds, and has a current market cap on its common stock of approximately $171 million.  As of December 31, 2011, it had $2.1 billion in assets, a tangible common equity/tangible assets ratio of 5.63%, a regulatory leverage ratio of 10.31% and 5.67% of its assets were non-performing.  It’s subsidiary bank has been subject to a written agreement with the Office of the Comptroller of the Currency since December 2008.

Related posts:

1. Treasury Announces Results of First TARP Auctions
2. Treasury Announces TARP Capital Terms for Subchapter S Institutions
3. Treasury Accepts 50% Discount in TARP Conversion to Common Stock

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.

For those institutions where Treasury has yet to place director appointees, Treasury has frequently requested (and received approval) to allow a Treasury employee to observe board meetings.  Based on the February 2012 report, it would appear that Treasury currently appoints observers once an institution has missed at least five dividend payments and the aggregate dividend deferral exceeds $1 million.  These observers tend to be silent telephonic attendees at board meetings.

To address its practices with regard to directors and observers, Treasury has published a Fact Sheet, Director FAQ and Board Observer FAQ.

As Treasury continues the pursuit of exiting TARP, the Treasury is likely going to have to recognize a relatively large discount to place its investment in the dividend-deferring institutions.  When transitioned to a third party, the Treasury will lose the ability to appoint directors, as well as the practical need to appoint observers.

On the the other hand, third party acquirers of the TARP CPP investments will gain the contractual right to appoint directors, subject only to any necessary regulatory non-objections to the individual director appointees.  I don’t see any reason, other than potentially practicality,  that a third party acquirer would continue the Treasury’s practice of utilizing observers rather than directors or of focusing only on the largest investments.  However, although the TARP CPP investments are generally non-voting, third party acquirers may risk being deemed in “control” of the underlying institution due to the nominal size of the equity investment and the ability to appoint two directors.  As “control” could lead to a bank holding company determination as well as an obligation to act as a source of financial strength, we expect that the Federal Reserve may offer a form of passivity agreement to minimize these concerns.

Related posts:

1. Stealth FAQ Updates from Treasury and the FDIC
2. Treasury Updates TARP Status
3. Treasury Updates TARP Capital 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 November 4, 2011, the Treasury also updated its Frequently Asked Questions on the Compensation and Corporate Governance for TARP participants. The new questions and answers address certification and disclosure requirements with respect to the fiscal year during which the TARP period ends, the Treasury’s application of the restricted stock transfer restrictions in the context of TARP restructurings, and the permissibility of transferring vested restricted stock units to pay taxes.

Related posts:

1. FDIC Updates FAQ on Temporary Liquidity Guarantee Program
2. Treasury Updates TARP Capital FAQ
3. Treasury Updates TARP Status

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.

The Company has a total of $15 million in TARP CPP funds, and, as of January 31, 2012, had $1.1 million in accrued unpaid dividends on the preferred stock.  In addition, the company has approximately $2.5 million in other preferred shares, a $5 million fully-drawn line of credit, and $6 million in trust preferred securities.  Before conversion, the company had approximately 1.7 million shares of common stock outstanding, and closed at $1.50 per share on February 15, 2012 (the day the company announced its agreement with Treasury), or approximately 39% of book value.  Assuming the company is able to raise capital at that $1.50 price and that the conversion is done at the same price (both of which are significant assumptions) and that half the line of credit is converted to equity, the new shareholders would break-down accordingly:

• Existing Common Shareholders – 1.7 million shares – Approximate Value – $2.6 million – 13% Ownership
• New Investors – 3.3 million shares – Approximate Value – $5.0 million – 25% Ownership
• Treasury – 5.7 million shares – Approximate Value – $8.6 million – 43% Ownership
• Other Preferred Investors – 0.8 million shares – Approximate Value – $1.3 million – 6% Ownership
• Bank Lender – 1.7 million shares – Approximate Value – $2.6 million – 13% Ownership

Based on this analysis, while a 50% discount is significant, it is also clear that the dilution this restructuring will cause for  existing common shareholders means that they will also share substantially in the losses the company has experienced, and become significantly limited in their participation in any recovery the company may be able to achieve.

For other institutions looking at requesting comparable exchanges with Treasury, I think it’s also appropriate to look at Broadway Federal Bank’s financial condition.  As of year-end, the bank had retained relatively strong capital levels (although as a small bank holding company Broadway was able to downstream all of the cash at the holding company as Tier 1 capital for the bank), with a leverage ratio of 8.23% and a total risk-based ratio of 12.83%.  However, the bank had also encountered significant asset quality constraints, with non-performing assets exceeding 15% of the bank’s total assets and a Texas ratio of 124%.   In that respect, one of the more surprising aspects of the Treasury’s acceptance of the transaction is that the company need only raise $5 million in additional capital (compared to $35 million in existing Tier 1 capital at the bank level).  If the bank only raises $5 million, and asset quality otherwise remains the same, the pro forma Texas Ratio of the bank is likely to only fall to about 108%.  (Of course, this assumes that Broadway is able to find new investors that are willing to invest at these levels.)

Related posts:

1. Treasury Looking to Exit TARP
2. Capital Treatment of Trust Preferred Securities and TARP CPP Preferred Stock
3. Impressive Returns for Treasury in TARP CPP Program

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.

If the TARP CPP investments are sold by Treasury, the general terms of the security will remain the same; the instruments will still generally have a 5% dividend rate (increasing five years after the initial investment) and will still be callable by the institution (subject to regulatory non-objection).  However, the purchaser would stand in the shoes of the Treasury in having the right to select two directors after six missed dividend payments (and Treasury would lose the right and any TARP directors would automatically cease to be directors upon action by the new owner).

Certain provisions applicable to TARP CPP recipients contained in the Securities Purchase Agreement are only effective while Treasury retains its investment.  Specifically, the limitations on increasing dividends on common stock or repurchasing common stock would be eliminated if the Treasury no longer owns the investment.

Under existing Treasury guidance, the executive compensation restrictions would also be lifted.  This is consistent with the terms of the Securities Purchase Agreement, but the under the American Recovery and Reinvestment Act of 2009, the TARP executive compensation restrictions are required by law to remain in place so long as the TARP investments “remain outstanding.” Treasury is taking the position that for purposes of the definition of “TARP period” in §30.1 (Q-1), an obligation is treated as no longer outstanding upon Treasury’s transferring the obligation to a third party that is not a federal government entity (nor an entity organized by Treasury or another federal government entity to hold interests formerly held by Treasury).

To facilitate banks’ ability and interest in repurchasing TARP CPP investments, we understand that Treasury has approved a reduction in the minimum amount that a bank may repurchase from Treasury (with regulatory approval).  Previously, Treasury would only approve redemptions of at least 25% of the institution’s TARP preferred stock, but under the reduction, Treasury will accept repurchases of amounts equal to the greater of 5% of the institution’s TARP investment or $100,000.  (See the updated FAQ from the Treasury Department, question number 4.)

We understand Treasury has no current plans to extend the 5% rate beyond its original five year term, and no plans to offer another program like SBLF to provide a means to refinance the investment.  (A new program like SBLF would further require legislative action to provide additional funding, and there appears to be no appetite in Congress for such legislation.  The Treasury has also consistently indicated that it will not accept a repurchase offer at less than 100% of par value.

However, we believe the Treasury remains open to potential restructurings whereby new investors are only willing to invest if Treasury takes a discount. In analyzing such options, we believe the Treasury considers a number of factors, including: the condition of the bank, the risk of receivership, whether the new investment will be sufficient to bring the bank back to health, and whether all parties (Treasury, existing investors and the new investors) are being treated equitably. As a general matter, proposed terms for a restructuring need to be proposed to Treasury, as Treasury is reluctant to suggest structures or engage in hypotheticals.

If Treasury sells in individual auctions (which I would expect it to do only for the largest investments), the bank (and the bank’s other investors) will likely be allowed to participate in the auction (or given an opportunity to match the winning bidder).   If Treasury sells in pools, it is more difficult to see how Treasury could offer bank’s an opportunity to match for their own portion of the pool.  In choosing between individual auctions and pools, we would expect Treasury to consider a number of factors, including: size of the bank and the Treasury’s investment, geography, market conditions, and credit quality. I would envision only the largest remaining TARP investments being sold in individual auctions, but could see a variety of means for the Treasury to select participants in various pools.  For example, I could envision pools consisting of only performing investments, only investments in dividend deferral, pools of certain states, or different regions and sizes.

Based on the time frames involved, we understand that Treasury and Houlihan Lokey are recommending that any bank looking at trying to negotiate a restructuring with Treasury should be in contact with Treasury ASAP.

Related posts:

1. Treasury Confirms TARP Exit Plan(s)
2. Treasury Announces Results of First TARP Auctions
3. Treasury Updates TARP Missed Dividend Report

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.

Related posts:

1. Treasury Extends SBLF Application Deadline for C Corporation Banks
2. TARP Capital and Community Banks
3. TARP Extension – Capital for Community Banks?