Treasury Asks First Place: Why the Rush to Sell?
YOUNGSTOWN, Ohio -- The U.S. Treasury Department is objecting to First Place Financial Corp. selling the assets of its bank to Talmer Bancorp Inc. of Troy, Mich., for $45 million, arguing the sale process “is occurring too quickly” and the bankruptcy bidding procedures First Place seeks “do not maximize the value of the bank.”
So, too, is the Official Committee of Trust Preferred Securities objecting to the sale, arguing the government stands to recover nothing and First Place Bank has been profitable the last two quarters.
The Official Committee of Trust Preferred Securities represents Treasury’s ownership of First Place Financial Corp.’s preferred stock purchased in March 2009 “to stabilize the financial system of the United States,” the objection states. The bankrupt bank holding company owes the Treasury Department $72.9 million plus interest under the Troubled Asset Relief Program, or TARP.
Both objections urge U.S. Judge Brendan L. Shannon to extend “all applicable deadlines” 90 days so First Place Financial can “properly market First Place Bank to maximize creditor recoveries.”
The sale hearing – court auction – is scheduled for Dec. 7.
The company filed Chapter 11 bankruptcy Oct. 29 in U.S. Bankruptcy Court in Wilmington, Del. At the time, First Place and Talmer said they hoped the sale would be complete by Jan. 31, and Talmer pledged to infuse as much as $205 million in capital in the bank after the sale was completed.
Talmer Bancorp’s largest investor is W.L. Ross & Co., owned by billionaire Wilbur Ross, which owns 24% of the company’s stock, according to The Wall Street Journal.
In the Treasury Department’s objection filed by U.S. Attorney Charles M. Oberly III and Assistant U.S. Attorney Ellen W. Slights, representing the U.S. Attorney’s Office for Delaware, the government argues that Talmer, acting as a stalking horse bidder, stands to be paid a $5 million fee, which “is unreasonable given the proposed purchase price of $45 million.”
Should Talmer prevail at a court auction, the government states, “Treasury may receive no recovery.”
The Treasury Department is seeking “consultation rights throughout the marketing process and the right to be present at the auction.” The four-page document, filed Nov. 20, refers to the objection also filed that day by the Official Committee of Trust Preferred Securities, and concludes many of the arguments the Official Committee raised “will be supported by Treasury.”
In its objection, the Official Committee of Trust Preferred Securities similarly asks bankruptcy court to rein the apparent haste of First Place sell its assets (the bank) to Talmer. The committee represents the holders of the $62 million in trust-preferred securities on which First Place defaulted when it declared bankruptcy.
The Official Committee’s 34-page objection, also filed by the U.S. Attorney’s Office for Delaware, argues First Place Bank today is well capitalized, its financial condition stabilized and improving. Talmer, with $2.6 billion in assets, has not agreed to assume any liabilities.
Under the TARP program, the Treasury Department advanced the $72.9 million March 13, 2009, and in return received preferred stock from First Place Financial Corp. that paid 5% annual interest with warrants.
In the Official Committee’s objection, Assistant U.S. Attorney Slights reiterates, “If the proposed procedures [to sell the assets of the bank] are approved and the bank is sold for $45 million, there is material risk that Treasury will receive no recovery.
Noting the bankruptcy trustee wasn’t appointed until Nov. 9, the Official Committee also seeks a minimum 90-day extension of all deadlines First Place has asked the court to set for the asset sale.
Despite the difficulties First Place Financial has faced over the past four years, “First Place Bank “ha[s] sufficient capital to qualify as a ‘well-capitalized’ bank,” the assistant U.S. attorney contends.
The Official Committee says the capital ratios that regulators require “have dramatically improved” at First Place Bank since January 2012 and its net income for the quarter ended June 30 was “$20 million and $25 million” for the quarter ended Sept. 30. Both “the debtor [the holding company] and the bank are not ‘melting ice cubes,’ “ the Official Committee told the bankruptcy court. “Their finances, including their capitalization levels, appear to be stable and steadily improving.”
As of Sept. 30, the Official Committee says, First Place Bank is well capitalized. To be regarded as well capitalized, a bank must have a total risk-based capital ratio of at least 6%. First Place Bank had 10.6%. Regulators require a Tier 1 risk-based capital ratio of at least 5%; First Place had 9.3%. For a Tier 1 core capital ratio, 5% is needed; First Place had 6.1%.
So the Official Committee asserts that seizure by the Office of the Comptroller of the Currency, the federal regulator of the bank, is not imminent and the holding company “seeks to sell the bank at what seems to be a fraction of its net worth through an impossibly hurried and absurdly hamstrung [bankruptcy] sale process that will inevitably leave the Committee’s constituents significantly impaired.”
Far from seeking potential buyers last December once the holding company decided to take that route, the Official Committee contends First Place Financial took “nearly a year in its own leisurely and apparently half-hearted process to canvass the marketplace.”
Citing First Place documents, the Official Committee stated, “It was not until June 2012 that [First Place Financial] ‘began an intensified process to market the bank,’ begging the question what transpired for those seven months.”
Talks with Talmer began a little “over three months ago,” the Official Committee’s objection states, “now [First Place Financial] seeks to impose a weeks-long process on [potential] competing bidders.”
Indeed, the Official Committee contends First Place and Talmer have rigged the process to discourage competing bids. “The timeline for bidding, obtaining regulatory approval and being prepared to close are so burdensome that they effectively prevent any other bidder from participating,” the Official Committee asserts.
The objection also argues that while First Place Financial has provided the Official Committee with more than 100 documents related to the Chapter 11 filing that cover more than 20,000 pages, “Much of it is so heavily redacted [blacked out] as to be nearly useless.”
It should be noted that the 34-page document available to the public in which the Official Committee makes its case to the court contains considerable redactions, including blacking out the names of the three First Place directors who would serve on the Talmer board should the sale go through, because First Place has identified them, Sam Roth, nonexecutive chairman of First Place, Don Cagigas and Jeff Rossi.
When First Place and Talmer announced their agreement Oct. 29, First Place said its investment banker, Keefe, Bruyette & Woods, identified 44 potential buyers, 15 of whom expressed interest. Twelve conducted due diligence and four of the 12 went so far as to visit Warren, headquarters of First Place. Only one bidder, Talmer, was willing to acquire the entire franchise of the bank, First Place chief financial officer David Gifford said at the time, noting that its bid of $45 million “exceeds the value of all other alternatives [the First Place board] considered.”
The U.S. Attorney’s office questions whether First Place efforts to find another bidder beyond Talmer were “fair and reasonable. Instead [First Place] simply asserts that it was,” the objection states, followed by eight lines of blackened out text.
Talmer agreed to be a stalking horse should any other companies reconsider and extend a higher bid.
Upon review of the assets purchase agreement, the Official Committee determined “the terms of the stalking horse bidder’s [agreement] are so fundamentally unfavorable to the estate [of First Place Financial] that the entire process use to select the stalking horse and negotiation of the [purchase agreement] warrant closer inspection.”
Assistant U.S. Attorney Slights cited the “no-shop provision” that, among other things, does not require First Place “to do anything proactively” should a prospective bidder express interest,” an oppressive break-up fee … that provide no benefit to [First Place Financial],” and an “unreasonable topping bid” of $1 million. The Official Committee seeks to have that reduced to $500,000.
Also arguing against the agreement First Place and Talmer reached, Slights says, is the $45 million purchase price falls well short of the $62 million the Official Committee’s clients are owed “and it wipes out other stakeholders.”
She also wants “discovery to be conducted into the true value of the assets,” which the Official Committee contends is well above $45 million. The improving condition of the bank speaks to the $45 million being low, the objection notes.
The assistant U.S. attorney strongly suggests First Place Financial will not get the $45 million price agreed to. “Inexplicably,” she states, “the purchase agreement gives Talmer the right to both pre-sale revenue (almost six months’ worth) and all tax refunds even if owed to [First Place] for the pre-closing periods. It should also be noted that the purchase price is substantially less than the more than $161 million of tangible equity (and the more than $69 million of loan loss reserves) of the bank as reported in the bank’s most recent regulatory filings.”
The purchase agreement would give Talmer all proceeds from contracts from June 30, Slights says, calling this aspect of the agreement “unfathomable” because the would-be purchaser does not own the assets and is not financing either the holding company or the bank.
And the agreement allows Talmer to receive all tax refunds “despite not owning the assets when the tax liabilities and payments were made.” Further, the holding company, not the bank, should receive any refunds, Slights says, adding that the size of the refunds was not disclosed.
Last, should the sale go through as written, First Place Financial would not see a penny of the up to $205 million in additional capital Talmer says it would invest as needed so the bank would meet regulatory minimums, the objection states.
Copyright 2012 The Business Journal, Youngstown, Ohio.