Categories : Capital Issues TARP


Well not exactly recapitalizing.

I was looking at the bank's income statement for 2011 and I noticed that Professional and Legal expenses did not go down, and I wondered why.  Well here is why: The bank was preparing for this stock offering regarding the Treasury's TARP investment.

The bank is offering for sale 20,600 shares of preferred stock and wants to authorize and additional 311,492 shares of common stock. 

The purpose of offering the preferred shares for sale appears to me to be to buy back the US Treasury's preferred shares that it holds in the bank. 

The common share situation is murky, at least to me, and I'm not sure I understand it.  I believe the bank is making these shares available to be purchased by the Treasury at $9.92 per share.  This has to do with the Warrants obtained by the US Treasury along with the preferred shares it obtained a few years ago.  If I'm right, the US Treasury can purchase these 311,492 shares at $9.92 (~$3.1M), and the bank is just making these shares authorized to be purchased.

A brief aside:  As I understand from reading the S-1 filing, the US Treasury has a 10 year option to purchase the 311,492 shares at the $9.92 price.  Does it make financial sense for the US Treasury to purchase 311,492 shares at $9.92 per share when the book value of the shares is around $3 per share?  From an economic standpoint, you'd have to say, no it does not make sense, but if they have up to 10 years to make that decision, maybe it will make sense in the future if the bank can get back on its feet. 

I believe this is what the bank is trying to do.  I assume they will talk more about this at the annual meeting on May 8.

Effectively, the result would be to eliminate the US Treasury as a preferred shareholder, though it could still own the 311K common shares, and be a major common share holder in the bank.

As I see it, this is a good news/bad news situation for shareholders. 

  • The good news is that the bank will have paid back most of the TARP money and eliminated the US Treasury as a Preferred shareholder.
  • The bad news: 
    • There will still be preferred shareholders who have preferential rights to we common shareholders
    • The US Treasury (as I understand things) could still have an investment stake in our bank as a common shareholder.
    • There will still be over $1M in cash walking out the door every year as a preferred dividend.  This $1M does not show up on the income statement as an expense.
    • The bank still does not have the financial strength to pay back the Treasury in its entirety without going to the capital markets and selling more preferred shares.

The bank is selling the preferred shares at $1,000 per share, and probably want to sell it in blocks of 100.  So if you have $100,000 laying around and you want a 5% dividend, and you're not worried that the bank will turn off its preferred dividend in the future, you might consider this.  I'd be worried that the the bank will turn off the dividend.

I'll opine about the bank's financial statements in the next few days.  I think it's important that anyone interested get more input to be able to ask good questions at the annual meeting next week.  Sorry I've been rather tardy.

 Posted on : April 29, 2012
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