June 28, 2012
Authored by: Robert Klingler
On June 27, 2012, Treasury completed its third round of individual auctions for TARP CPP banks, further solidifying the $19 billion positive return recognized by Treasury on the TARP CPP program. As discussed further below, this third round also brought the best results to Treasury.
Summary results (along with links to the Treasury Press Releases announcing pricing) are presented below:
- Round 1 – 6 Institutions – $411 Million Liquidation – $367 Million Gross Proceeds – 10.6% Discount
- Round 2 – 7 Institutions – $281 Million Liquidation – $249 Million Gross Proceeds – 11.3% Discount
- Round 3 – 7 Institutions – $224 Million Liquidation – $208 Million Gross Proceeds – 7.5% Discount
Treasury also stated that it intends to announce additional individual auctions of TARP CPP stock, with those auctions taking place in late July and including investments in privately held institutions. Treasury confirmed that it intends to commence a series of pooled auctions this fall.
Looking on an aggregated basis at the 20 institutions that have been sold by Treasury in the individual auctions, on average the Treasury has recognized a 10% discount in order to move the positions. Overall, these 20 institutions were healthy, well-capitalized, profitable financial institutions, and all were current on their TARP dividends.
Specifically, the 20 institutions had:
- an average positive return on assets of 0.61%;
- a positive return on equity of 6.1%;
- an average tangible equity to tangible assets ratio of 9.01%;
- an average Tier 1 risk-based ratio of 15.08%;
- an average modified Texas ratio of 36%;
- non-performing loans of 4.42% of their loan portfolios; and
- non-performing assets of 3.71% of their total assets.
The range of discounts has ranged from 1.9% to 26.0%. The lowest discount was for MetroCorp Bancshares in Round 3, who had just raised capital almost equal to their outstanding TARP securities, and had strong numbers even prior to that capital raise. The highest discount was for Farmers Capital Bank in Round 2. Farmers Capital Bank was profitable (0.69% ROAA, 8.31% ROAE) and had relatively strong capital levels (8.34% TE/TA and 16.88% Tier 1 risk-based), but was burdened by relatively high levels of non-performing assets (65.4% Texas ratio, 7.54% NPL’s and 6.38% NPA’s).
Looking at the discounts and characteristics of each institution involved in the auctions, the asset quality measures had the strongest correlation (by a large margin) to the discounts taken. For the seven institutions with NPA’s less than 3.0%, the average discount was only 7.55%; for the eight institutions with NPA’s between 3.0% and 5.0%, the discount was 8.9%, and for the five institutions with NPA’s between 5.0% and 7.0%, the discount was 15.9%. Profitability measures were the next most correlated with discounts, while capital levels (and particularly the Tier 1 risk-based ratio) were the least correlated.
The higher prices (or lower discounts) recovered in the third round are largely supported by the financial characteristics of the banks included in the pool, particularly when you take into consideration MetroCorp’s capital raise. However, the pricing may also be indicative of the relative scarcity of the individual auctions. Based on SNL data, there are only 59 banks left with more than $25 million in liquidation value TARP CPP securities (representing 72% of the remaining outstanding liquidation value). 90% of the remaining liquidation vale of TARP CPP securities is held by approximately 47% of the banks remaining in the Treasury’s portfolio (those holding $10 million or more). When you take into consideration the aggregate asset quality and dividend deferral state of the remaining portfolio of TARP securities, it is easy to see (a) the remaining pool of strong, dividend paying, TARP participants is dwindling, and (b) the discounts that Treasury may see going forward is likely to increase significantly.