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Banks That Said No
Not all banks are jumping at the chance to have the U.S. Treasury as an investor, as several banks have notified investors that they won't seek capital under the Capital Purchase Program (CPP) announced October 14.
The CPP was authorized by The Emergency Economic Stabilization Act of 2008 and allows the U.S. Treasury to invest up to $250 billion in preferred stock in banking institutions that apply by November 15. The capital investment is limited to a minimum of 1% of total risk-based assets and a maximum of either 3% of risk-based assets or $25 billion, whichever is lower. The preferred stock pays a 5 percent dividend, and the government gets warrants to purchase stock in the participating banks equal to 15% of the preferred investment.
Several Large Regional Banks Have Applied
These include Regions Financial (NYSE:RF), which if accepted will receive $3.5 billion; and Fifth Third Bancorp (Nasdaq:FITB), which will receive $3.4 billion.
Others Have Declined
Cullen/Frost Bankers (NYSE:CFR) released a statement that the bank was "well capitalized" and had "sufficient capital" to grow its business. Dick Evans, chairman and CEO, said, "After careful consideration, we have made a business decision that Cullen/Frost will not seek federal CPP funds." The bank reported a Tier I capital ratio of 10.3% and a total risk-based capital ratio of 12.7% on September 30.
UMB Financial (Nasdaq:UMBF), a bank headquartered in Kansas City, also decided not to apply for funds. J. Mariner Kemper, chairman and CEO, cited the bank's 13.9% Tier 1 capital ratio and its low non-performing loans percentage of 0.16%.
"This level of capital enables UMB significant flexibility to make acquisitions, extend credit and execute against all of our growth strategies," Kemper said. "Furthermore, UMB maintains a high level of liquidity and has experienced strong loan growth as evidenced by our record loan balances reported in the third quarter." (Thinking about investing in financial institutions? Read Analyzing A Bank's Financial Statements.)
Buyback Plan
First Financial Northwest (Nasdaq:FFNW), a small bank serving the Pacific Northwest, not only turned down any CPP funds, it announced a plan to buy back 10% of its outstanding shares. Where did all this capital come from? One year ago, the bank raised $200 million when it converted from mutual ownership to stock, leaving it with a total risk-based capital ratio of 25.18%.
"As a result of our strong capital position, we are not participating in the TARP Capital Purchase Program and believe we are well positioned for the future without the need for TARP capital,'' said Victor Karpiak, CEO.
Plenty Of Capital
American River Bankshares (Nasdaq:AMRB), a bank located in ground zero of the housing bust in California, also turned down the CPP. The thought process was very simply put by CEO David Taber: "We have looked at it briefly, and at this time it doesn't look like it's something that we would want since we don't need the capital; we've got plenty." The company reported a total risk-based capital ratio of 11.1% in its most recent quarter.
Bottom Line
Although the government and media pundits have portrayed the CPP as the savior of the U.S. banking system, many banks have strong capital and low non-performing assets, and they simply don't need any capital injections. (For further readings on the banking system troubles, check out A Nightmare On Wall Street. If you want more on what capital adequacy means for a bank, see The Industry Handbook: The Banking Industry.)
The CPP was authorized by The Emergency Economic Stabilization Act of 2008 and allows the U.S. Treasury to invest up to $250 billion in preferred stock in banking institutions that apply by November 15. The capital investment is limited to a minimum of 1% of total risk-based assets and a maximum of either 3% of risk-based assets or $25 billion, whichever is lower. The preferred stock pays a 5 percent dividend, and the government gets warrants to purchase stock in the participating banks equal to 15% of the preferred investment.
Several Large Regional Banks Have Applied
These include Regions Financial (NYSE:RF), which if accepted will receive $3.5 billion; and Fifth Third Bancorp (Nasdaq:FITB), which will receive $3.4 billion.
Others Have Declined
Cullen/Frost Bankers (NYSE:CFR) released a statement that the bank was "well capitalized" and had "sufficient capital" to grow its business. Dick Evans, chairman and CEO, said, "After careful consideration, we have made a business decision that Cullen/Frost will not seek federal CPP funds." The bank reported a Tier I capital ratio of 10.3% and a total risk-based capital ratio of 12.7% on September 30.
UMB Financial (Nasdaq:UMBF), a bank headquartered in Kansas City, also decided not to apply for funds. J. Mariner Kemper, chairman and CEO, cited the bank's 13.9% Tier 1 capital ratio and its low non-performing loans percentage of 0.16%.
Buyback Plan
First Financial Northwest (Nasdaq:FFNW), a small bank serving the Pacific Northwest, not only turned down any CPP funds, it announced a plan to buy back 10% of its outstanding shares. Where did all this capital come from? One year ago, the bank raised $200 million when it converted from mutual ownership to stock, leaving it with a total risk-based capital ratio of 25.18%.
"As a result of our strong capital position, we are not participating in the TARP Capital Purchase Program and believe we are well positioned for the future without the need for TARP capital,'' said Victor Karpiak, CEO.
Plenty Of Capital
American River Bankshares (Nasdaq:AMRB), a bank located in ground zero of the housing bust in California, also turned down the CPP. The thought process was very simply put by CEO David Taber: "We have looked at it briefly, and at this time it doesn't look like it's something that we would want since we don't need the capital; we've got plenty." The company reported a total risk-based capital ratio of 11.1% in its most recent quarter.
Bottom Line
Although the government and media pundits have portrayed the CPP as the savior of the U.S. banking system, many banks have strong capital and low non-performing assets, and they simply don't need any capital injections. (For further readings on the banking system troubles, check out A Nightmare On Wall Street. If you want more on what capital adequacy means for a bank, see The Industry Handbook: The Banking Industry.)
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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