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Still holding stakes in some 325 banks, the Treasury is expected to accept bigger discounts as it works to unwind the bailout-era program.
July 3 -
The Treasury Department plans to auction pools of securities in nearly two-thirds of the banks left in the Troubled Asset Relief Program, its most aggressive move yet to get small banks out of the program.
June 19 -
Joseph Stilwell said in a regulatory filing that he could start pushing the thrift's management to put stashed away capital to work.
September 24
Umberto Fedeli is a lone investor, but he has flagged a problem facing scores of banks that participated in the Troubled Asset Relief Program.
Fedeli, the chief executive of insurance firm Fedeli Group in Cleveland, has pressed LNB Bancorp (LNBB) in Lorain, Ohio, for several years to redeem preferred shares it issued to the government in December 2008. He wants it done long before the five-year anniversary of the federal aid, when LNB would have to start paying 9% dividends on the shares; it pays 5% now.
The pressure on LNB remains elevated even though the Tarp shares are now in private hands. Fedeli, who owns 9% of LNB's common stock, says he bought a "small amount" of the Tarp holdings when the Treasury Department auctioned the shares in June. Though Fedeli would benefit from the payments, he worries that the higher payments could deplete LNB's earnings - and hurt his overall investment.
LNB represents hundreds of community banks that must decide between a dilutive capital raise to avoid a dividend-rate jump or letting the rate reset and eat away at hardscrabble profits.
"Companies have to determine whether a preferred instrument with a fixed dividend rate is going to be better or worse in the long term," says Rob Klingler, a partner at Bryan Cave who has tracked Tarp closely. "A capital raise might be very dilutive, but they have to decide if it is more dilutive than paying 9%."
Fedeli is pushing LNB to quickly develop a plan to redeem the former Tarp shares before the dividend rate jumps in December 2013.
Despite the ticking clock, Daniel Klimas, LNB's chief executive, "appears to feel no urgency to address the Tarp dilemma," Fedeli wrote in a Sept. 18 letter to Klimas and the company's board. Fedeli warned that LNB will face "more competition" if it waits another year to try and redeem the preferred stock while lots of other banks surely will be seeking to raise money.
Fedeli included the letter as an exhibit in a late September filing with the Securities and Exchange Commission.
LNB is not positioned to redeem the Tarp shares on its own right now, analysts say. Its tangible common equity ratio was 5.75% at June 30; analysts typically prefer a ratio of at least 7%. With LNB's common stock trading at about 55% of its tangible book value, a capital raise would likely be highly dilutive.
A 9% rate on LNB's former Tarp shares would increase annual dividend payments to about $2.3 million from the current level of roughly $1.3 million. Excluding preferred stock dividends, LNB earned $2.9 million though the first six months of 2012; it earned $5 million in 2011.
Some banks might decide that paying a bigger dividend is acceptable until they can redeem the stock with retained earnings, Klingler says. "Maybe that is better for the long term," he says.
Others predict that the dividend hike and lack of access to affordable capital could be a driver of bank acquisitions in the next couple of years.
"As management teams work out their budgets for 2013 and 2014, they are already recognizing that this is a challenging environment, so when you add on the increased dividend, it could be enough to tip the scale," John Barber, an analyst at Keefe, Bruyette & Woods (KBW), said. "It could be a catalyst for consolidation."
Barber referred to the dividend hike as a worry for LNB when he began covering the company in May.
LNB's profitability is improving, he says, noting that his estimates for 2013 put net income at 75 cents a share, up 25% from his 2012 estimates. However, he is concerned about the company's ability to repay before the rate rises.
"The increase in the dividend is a significant event, and I think it leaves all strategic options on the table," he said. Those options could include a sale, but could also include working with the new Tarp holders on an alternative structure.
Klimas declined to comment for this story, but in a July interview with The Plain Dealer, a Cleveland publication, said he would like to avoid an increased dividend — but not at the risk of a heavily dilutive capital raise.
"The real question is what is the alternative source of capital and what would it cost for us. For a community bank, 9% capital is not necessarily a bad price," Klimas was quoted as saying. "If we had to raise capital at 60% of our book value, I don't believe that would be in the best interest of our shareholders."
In March, as the Treasury prepared to auction LNB's $25.2 million of preferred shares, Fedeli approached management about the possibility of providing enough capital for LNB to buy back the shares itself. Though the deal's structure was to be determined, the investment would have been made in a way that was either non-dilutive or "not significantly" so, Fedeli said. LNB rebuffed the offer, he said in an interview Tuesday.
Treasury sold its stake in LNB for $22 million in June; it has auctioned the Tarp shares of about 40 banks this year.
The Tarp situation is just one of several issues Fedeli has urged the company to address. The board should be shrunk and board members should hold larger stakes in the company, he advises. He has also called for a board member who has significant banking experience to be made chairman.
"I'd rather be a happy, passive investor, but I'm getting very frustrated and I'm looking at my options," Fedeli said. "We've gotten nowhere in two-and-a-half years. Nothing has changed."
