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Hovde Suggests Combining TARP Capital with Private Equity

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 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

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

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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Federal Reserve Clarification of Tier 1 Treatment for TARP Capital

Recognizing that the cumulative nature of the preferred stock to be issued under the TARP Capital program by bank holding companies could limit the preferred stock’s inclusion in Tier 1 regulatory capital, the Federal Reserve issued an interim final rule to amend its capital regulations, effective October 17, 2008. Under the revised rule, the Senior Perpetual Preferred Stock purchased under TARP “may be included without limit in the Tier 1 capital of bank holding companies.”

The rule’s broadening of the definition of Tier 1 regulatory capital is limited to the preferred stock purchased by the Treasury under the TARP Capital program and does not otherwise modify the regulatory capital rules for bank holding companies. No regulatory modifications were required for banks without holding companies, as the Treasury intends to purchase noncumulative perpetual preferred from stand-alone banks, which would be treated as Tier 1 capital under existing standards.

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ABA Provides Some Clarification for Non-Public Companies

October 29, 2008


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

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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Requesting Additional FDIC Debt Guarantee

We’ve received some inquiries regarding the circumstances under which a bank with no or limited senior unsecured debt outstanding at September 30, 2008 might be eligible to issue guaranteed senior unsecured debt under the FDIC’s Temporary Liquidity Guarantee program through June 30, 2009.  Based on the FDIC’s interim rule relating to the program and informal discussions with FDIC representatives, we believe that this will be possible, but that prior FDIC approval will be necessary in order for the guarantee to apply.

At this time, there is no application form or specific procedural guidance, but we have been told that you should contact your primary FDIC regulatory contact to request coverage if you plan to issue senior unsecured debt, would like for it to be guaranteed, but did not have any outstanding at September 30, 2008 or did not have sufficient debt outstanding to guarantee the full amount of the new proposed issuance.  The FDIC will review each request individually and may want you to show how guaranteeing your new debt will be consistent with the FDIC’s public policy of supporting the strength and liquidity of the banking system through next June.

We believe this guidance applies both to banks with a temporary zero balance at September 30, 2008 (i.e., those with a Fed Funds purchased position that day but with sold positions on other days) and to those with a zero balance that they have sustained for a long period of time.  We’ll publish more specific guidance as it becomes available.

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FDIC TARP Capital Application Supplemental Ratios

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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Seeking Confidential Treatment for Portions of the TARP Application

What Should be Confidential?

Although the TARP Capital application form itself is simple and does not generally request information that is not otherwise publicly available or that is sensitive in nature, there are some aspects that you should consider for confidential treatment.  A few examples are listed below.  The first item listed (M&A and capital plan) is requested in the application, and the regulators may request the others supplementally.

  • Description of anticipated mergers, acquisitions or other capital plans
  • Projections, if requested by the regulators
  • Contemplated use of proceeds
  • Discussions of CAMELS ratings or other exam-related information
  • Data that raises customer privacy concerns

How Do I Keep Information Confidential?

The TARP Capital program application form contains the following instructions:

Any applicant desiring confidential treatment of specific portions of the application must submit a request in writing with the application.  The request must discuss the justification for the requested treatment.  The applicant’s reasons for requesting confidentiality should specifically demonstrate the harm (for example, loss of competitive position, invasion of privacy) that would result from public release of information (5 U.S.C. 552). Information for which confidential treatment is requested should be:  (1)  specifically identified in the public portion of the application (by reference to the confidential section); (2) separately bound; and (3) labeled “Confidential.”  The applicant should follow the same procedure when requesting confidential treatment for the subsequent filing of supplemental information to the application.

The applicant should contact the appropriate regulatory agency for specific instructions regarding requests for confidential treatment.  The appropriate regulatory agency will determine whether the information will be treated as confidential and will advise the applicant of any decision to make available to the public information labeled as ‘Confidential.’

What Should My Request Include?

When requesting confidential treatment, a separate letter dealing with that issue specifically should be attached to the application.  The letter should:

  • reference your bank and its application;
  • state that you are requesting confidential treatment of the information identified in the request under the Freedom of Information Act (5 U.S.C. 552);
  • identify the nature (but not specific content) of the information for which confidential treatment is requested;
  • state why confidential treatment of the identified information is necessary (see below for typical grounds); and
  • repeat the identification and explanation for other categories of confidential information covered in the request.

How Do I Support My Request?

While the specific issues will vary depending on each bank’s situation, the typical grounds for confidential treatment involve competitive harm, adverse legal or regulatory consequences, or violations of privacy that could be suffered if the information were disclosed.  Examples include:

Acquisition discussions: Disclosure would result in competitive harm because a fundamental competitive aspect of the bank’s strategic plan would be made public.  Third parties could interfere in the negotiations, and premature disclosure could adversely affect both parties’ ability to consummate the transaction and/or the market for their stock.  Disclosure will in any event likely be prohibited under a confidentiality agreement or terms of a letter of intent or definitive agreement.

Capital transactions: Disclosure would result in competitive harm because competitors would be in a position to evaluate the bank’s current and prospective capital position and future performance prospects.  Competitive harm could also result from public disclosure of privately negotiated transaction terms with identified investors.  Additionally, a prior public announcement of a private placement could trigger “general solicitation” concerns under federal securities laws.

Projections: Disclosure would result in competitive harm because this information reflects the bank’s own internal evaluation of its resources, future prospects and operating and growth strategies.

Use of Proceeds: Disclosure would result in competitive harm because the bank’s intended use of capital provides valuable insight into its future plans regarding acquisitions, branching, product and service expansion, and other elements of its strategic plan.

CAMELS and Exam Information: This information is required to be kept confidential under banking regulations.

Customer or Account Data: Disclosure would violate existing statutory and regulatory privacy protections and would also damage the bank’s existing and potential customer relationships.

These are just general illustrations—the key is to think about the harm that disclosure could do and describe it briefly.

Is this Really Necessary?

Applications submitted in draft form are not available publicly, so the confidential treatment request is not as critical at that stage.  For final applications, it’s possible that all information will be treated as confidential under the regulators’ supervisory powers (as opposed to the applications process), but until this is confirmed, it would be prudent to request confidential treatment.

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TARP Capital Recipients

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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