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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 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

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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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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FIG Partners' Analysis of TARP Capital

On October 24, 2008, FIG Partners published an alert analyzing the opportunities for community banks under the TARP Capital plan.

We view the TARP Capital Purchase Program as an excellent opportunity for the banking industry to secure some much needed capital at relatively inexpensive and mildly dilutive terms. The opportunity is particularly attractive at a time when outside capital is extremely difficult to find. As such, we at FIG would like to urge any and all banks and thrifts to seriously consider participating in the program. Some of the immediate benefits of the initiative are:

  • Improves capitalization ratios
  • Provides capital for future growth, organic and M&A
  • Solidifies the institution’s balance sheet and puts it in a position to take advantage of failed institutions/assisted transactions
  • Implies that the institution received the “blessing” of Treasury/regulators – investors are likely to perceive the companies taking advantage of the TARP Capital Program as survivors

Again, we believe that all banks and thrifts should utilize the TARP Capital Purchase program, and since the November 14th deadline is fast approaching, we urge you to explore the program and familiarize yourself with all the details sooner rather than later.

Read FIG Partners’ full alert on the TARP Capital program.  To see all Investment Banker reports on this site, please see all posts tagged Investment Banker.

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Silverton's Overview of TARP Capital

Silverton Bank has prepared an Overview of the TARP Capital Purchase Program.

Silverton Capital Corporation, the investment banking subsidiary of Silverton Bank, can provide an analysis for your institution that addresses your cost of capital and the effect that participation in the TARP Capital program would have on your earnings per share and book value per share.  For more information, contact Frank Brown at fbrown@silvertonbank.com or (770) 805-2152.

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

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