Capital Standards and Balance Sheet Strategies

Transcription

1 Capital Standards and Balance Sheet Strategies Ryan Henley, CFA Managing Director Head of Financial Institutions Strategies

2 TIER 1 COMMON EQUITY (CET1) Regulatory Capital Definitions Common Equity Tier 1 Capital (CET1) Minimum ratio of 4.5% of total risk weighted assets Classification requirements: Paid-in and is most subordinated claim No maturity Cash dividend paid out of net income and retained earnings Classified as equity under GAAP Trust Preferreds and Cumulative Perpetual Preferred Securities both disqualified (as well as from Tier 1 capital) Still could count towards Tier 2» 3 Mo bps to 300 bps Phase out table begins 10% per year Small Bank Holding Company Exemption - $500mm STERNE AGEE FIXED INCOME STRATEGIES 2

3 CET1 IMPLICATIONS SAMPLE BANK Common Equity Tier 1 (CET1) Capital (000) (000) + Qualifying common stock instruments and related surplus $77,055 + Retained earnings $51,070 + AOCI $3,882 + Qualifying common equity tier 1 minority interest $0 - Gains / Losses on Cash Flow Hedges related to items that are not fair valued $0 - Goodwill and other intangibles (other than MSAs) $8,803 - DTAs arising from operating loss and tax credit carryforwards $0 - Change in fair value of financial liabilities $0 - Investment in institution's own CET1 capital instruments and reciprocal holdings $0 - Securitization gain on sale $0 - Non-significant investments in the form of common stock $0 $0 - Regulatory deductions due to insufficient additional tier 1 $0 Mortgage Servicing Assets (MSAs) $15,945 DTAs arising from temporary timing differences $0 Significant investments in the form of common stock $0 - Deductions due to 15% threshold $0 - Minimum MSA deduction (10% of FV of MSAs) $0 = Common Equity Tier 1 Capital $119,579 CET1 Composition Core capital difficult on certain existing capital structures Current Capital Structure: Tier 1 Capital $230mm Core Capital $77mm Retained Earnings $51mm TARP $46mm Trust Preferred s of $58mm STERNE AGEE FIXED INCOME STRATEGIES 3

4 TRUST PREFERRED PHASE OUT SCHEDULE $15 Billion and Under Phase Out As explained previously, under the proposed eligibility criteria for additional tier 1capital instruments, trust preferred securities and cumulative perpetual preferred securities would not qualify for inclusion in additional tier 1 capital. However, many of these instruments could qualify for inclusion in tier 2 capital under the proposed eligibility criteria for tier 2 instruments. Specifically, there would be no limit on the amount of tier 2 capital that could be included within a banking organization s total capital. Likewise, existing limitations on term subordinated debt, limited-life preferred stock and trust preferred securities within tier 2 would also be eliminated. STERNE AGEE FIXED INCOME STRATEGIES 4

5 TRUPS AND PREFERREDS: TIER 1 TIER 2 Sample Institution Tier 1 Capital (000) (000) + Additional tier 1 capital instruments plus related surplus $46,902 + Tier 1 minority interest not included in CET1 capital $0 Non-qualifying tier 1 capital instruments subject to phase-out $58,342 - Investment in institution's own tier 1 capital instruments and reciprocal holdings $0 - Significant investments in additional tier 1 instruments $0 - Non-significant investments in additional tier 1 instruments $0 $0 - Regulatory deductions due to insufficient tier 2 capital $0 = Tier 1 Capital $166,481 Tier 2 Capital (000) (000) + Tier 2 capital instruments $7,158 + Total capital minority interest that is not included in tier 1 capital $0 + Estimated ALLL includable in tier 2 $24,747 - Investments in institution's own tier 2 capital instruments and reciprocal holdings $0 + Non-qualifying tier 1 capital instruments includable in tier 2 $58,342 - Significant investments in tier 2 instruments $0 - Non-significant investments in tier 2 instruments $0 $0 = Tier 2 Capital $90,247 Reclassification : Cumulative Perpetual Preferreds of $46mm now Additional Tier 1 Capital (TARP grandfathered despite Cumulative) Trust Preferreds of $58mm now Tier 2 Capital STERNE AGEE FIXED INCOME STRATEGIES 5

6 TRUST PREFERRED: CAPITAL RATIO IMPACT Conservation Buffer Maximum Payout n/a n/a n/a No Limit No Limit 60% 40% Leverage Ratio 9.97% 9.65% 9.33% 9.01% 8.69% 8.41% 8.15% Common Equity Tier 1 Capital Ratio 6.47% 6.39% 6.24% 6.16% 6.09% 5.95% 5.95% Tier 1 Capital Ratio 11.50% 11.13% 10.63% 10.27% 9.90% 9.45% 9.16% Total Capital Ratio 13.40% 13.33% 13.11% 13.04% 12.97% 12.78% 12.78% Capital Conservation Buffer 1.66% 1.59% 1.45% 1.45% STERNE AGEE FIXED INCOME STRATEGIES 6

7 BALANCE SHEET STRUCTURE THOUGHTS Loan Surrogates Corporate Debentures STERNE AGEE FIXED INCOME STRATEGIES 7

8 BALANCE SHEET STRUCTURE THOUGHTS Loan Surrogates Collateralized Loan Obligations STERNE AGEE FIXED INCOME STRATEGIES 8

9 AVAILABLE FOR SALE INCLUSION AFS Unrealized Gains/Losses within CET1 Under the agencies general risk-based capital rules, unrealized gains and losses on AFS debt securities are not included in regulatory capital, unrealized losses on AFS equity securities are included in tier 1 capital, and unrealized gains on AFS equity securities are partially included in tier 2 capital. 54 As proposed, unrealized gains and losses on all AFS securities would flow through to common equity tier 1 capital. This would include those unrealized gains and losses related to debt securities whose valuations primarily change as a result of fluctuations in a benchmark interest rate, as opposed to changes in credit risk (for example, U.S. Treasuries and U.S. government agency debt obligations). STERNE AGEE FIXED INCOME STRATEGIES 9

10 AFS INVESTMENT PORTFOLIO EFFECTS ON TCE/CET1 Stand-alone impacts of 3/31 AFS portfolio (assumed 2.18 eff dur) on TCE illustrated below: Investment Portfolio Effects on TCE Shocked Effects on the Tangible Common Equity Position Via Other Comprehensive Income Existing Position UP 100 UP 200 UP 300 UP 400 Market Value $367,373,000 $359,364,269 $351,355,537 $343,346,806 $335,338,074 Book Value $361,844,000 $361,844,000 $361,844,000 $361,844,000 $361,844,000 Portfolio Unrealized Gain/Loss $5,529,000 ($2,479,731) ($10,488,463) ($18,497,194) ($26,505,926) Portfolio Unrealized Gain/Loss (post tax) $3,593,850 ($1,611,825) ($6,817,501) ($12,023,176) ($17,228,852) Tangible Common Equity $196,765,000 $191,559,325 $186,353,649 $181,147,974 $175,942,298 Change in Tangible Common Equity Position ($5,205,675) ($10,411,351) ($15,617,026) ($20,822,702) TCE Ratio 6.97% 6.80% 6.63% 6.45% 6.28% Tangible Book Value $6.59 $6.41 $6.24 $6.07 $5.89 In the +300 bps scenario, TCE declines $15.6mm from existing position, resulting in a 52 bp decline in the TCE ratio to 6.45%. This results in 52 cents/share reduction in TBV. * Assumes 35% statutory tax rate 10

11 AVAILABLE FOR SALE INCLUSION Alternative Proposed The agencies seek comment on alternatives to the proposed treatment of unrealized gains and losses on AFS securities, including an approach where the unrealized gains and losses related to debt securities whose valuations primarily change as a result of fluctuations in a benchmark interest rate would be excluded from a banking organization s regulatory capital The agencies also seek comment on whether unrealized gains and losses on general obligations issued by states or other political subdivisions of the United States should receive similar treatment, even though unrealized gains and losses on these obligations are more likely to result from changes in credit risk and not primarily from fluctuations in a benchmark interest rate. STERNE AGEE FIXED INCOME STRATEGIES 11

12 AVAILABLE FOR SALE INCLUSION Duration Selection (Phase in Consideration) Hedging Considerations (HTM, CF Hedge?) STERNE AGEE FIXED INCOME STRATEGIES 12

13 CASH FLOW HEDGE ADJUSTMENT AFS Unrealized Gains/Losses within CET1 Consistent with Basel III, the agencies are proposing that unrealized gains and losses on cash flow hedges that relate to the hedging of items that are not recognized at fair value on the balance sheet (including projected cash flows) be excluded from regulatory capital. However, the agencies recognize that in a regulatory capital framework where unrealized gains and losses on AFS securities flow through to common equity tier 1 capital, the exclusion of unrealized cash flow hedge gains and losses might have an adverse effect on banking organizations that manage their interest rate risk by using cash flow hedges to hedge items that are not recognized on the balance sheet at fair value (for example, floating rate liabilities) and that are used to fund the banking organizations AFS investment portfolios. STERNE AGEE FIXED INCOME STRATEGIES 13

14 REMEDY PROPOSED HEDGE OF FUTURE BORROWINGS Deferred Start - Pay Fixed Interest Rate Swap FHLB 3m Libor Bank Fixed Swap Rate 3m Libor Swap Counterparty Debt Swap Locks in historically low fixed rate for term of swap Qualifies for favorable accounting treatment Changes in Market Value of Swap are recorded within Equity (Other Comprehensive Income- OCI) -- not earnings. *Assumes bank cost of short term borrowings = 3m Libor 14

15 PROPOSED STRUCTURES & RATES In order to stagger deferral periods and maturities, we divided the strategy into 2 individual swap structures ( buckets ): Bucke t Notional Term Fixed Rate 1 $20,000,000 In 4 for % 2 $35,000,000 In 5 for % $55,000, % rates as of 5/23/13 *For example, 6 year term begins at end of 4 year deferral period 15

16 IMPLIED FORWARDS/IMMEDIATE STATE/ DEFERRED START 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 05/01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ /01/ Mo Libor 10 yr Pay Fixed In 4 for 6 Implied Libor Rate vs. Immediate Start vs. Deferred Start Given a realization of the implied forward path, all are cumulatively equivalent in cost yet unique in timing. 16

17 SWAP STRATEGY EFFECTS ON TCE TCE impact of $55mm notional of deferred swaps (terms as described on previous slide): Combined Effect of Investment Portfolio & Swap Strategy Shocked Effects on the Tangible Common Equity Position Via Other Comprehensive Income Existing Position UP 100 UP 200 UP 300 UP 400 Swap Value $2,283,699 $4,453,083 $6,293,974 $7,845,978 Swap Value (post tax) $1,484,404 $2,894,504 $4,091,083 $5,099,886 Tangible Common Equity $196,765,000 $198,249,404 $199,659,504 $200,856,083 $201,864,886 Changes in Tangible Equity Position $1,484,404 $2,894,504 $4,091,083 $5,099,886 TCE Risk Investment Portfolio TCE Accretion Deferered Swaps Net TCE Impact (Portfolio and Swaps) Offset Ratio ($5,205,675) ($10,411,351) ($15,617,026) ($20,822,702) $1,484,404 $2,894,504 $4,091,083 $5,099,886 ($3,721,271) ($7,516,847) ($11,525,943) ($15,722,816) 29% 28% 26% 24% Resulting TCE Ratio 6.97% 6.85% 6.72% 6.59% 6.45% Resulting Tangible Book Value $6.59 $6.46 $6.34 $6.20 $6.06 The deferred swap strategy provides the ability to maintain TCE ratio of 6.59% in a +300 bps scenario * Assumes 35% statutory tax rate 17

18 SUMMARY: TCE & TBV/ SHARE IMPACT Combined Effect of Investment Portfolio & Swap Strategy Shocked Effects on the Tangible Common Equity Position Via Other Comprehensive Income Existing Position UP 100 UP 200 UP 300 UP 400 Securities Portfolio- post tax unrealized loss ($5,205,675) ($10,411,351) ($15,617,026) ($20,822,702) Deferred Swaps- post tax unrealized gain $1,484,404 $2,894,504 $4,091,083 $5,099,886 Offset Ratio 29% 28% 26% 24% TCE Ratio Securities Portfolio Effects Only 6.97% 6.80% 6.63% 6.45% 6.28% Combined Effect Including Swap 6.97% 6.85% 6.72% 6.59% 6.45% Variance 0.05% 0.10% 0.14% 0.17% Tangible Book Value/Share Securities Portfolio Effects Only $6.59 $6.41 $6.24 $6.07 $5.89 Combined Effect Including Swap $6.59 $6.46 $6.34 $6.20 $6.06 Variance $0.05 $0.10 $0.14 $0.17 The inclusion of the swap creates a 26% offset ratio in +300 bps scenario, resulting in the preservation of 14 bps of TCE and 14 cents/share of TBV 18

19 DISCLOSURE The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Your decision to invest in any security or instrument, liquidate or hold a current position should be made after consultation with legal, tax and accounting professionals in light of your own profile, investment strategy, and risk tolerance. All materials, including proposed terms and conditions, are indicative and for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation and will be evidenced by a formal agreement. Opinions expressed are our present opinions only and are subject to change without further notice. The information contained herein is confidential. By accepting this information, the recipient agrees that it will, and it will cause its directors, partners, officers, employees and representatives to use the information only to evaluate its potential interest in the strategies described herein and for no other purpose and will not divulge any such information to any other party. Any reproduction of this information, in whole or in part, is prohibited. Except in so far as required to do so to comply with applicable law or regulation, express or implied, no warranty whatsoever, including but not limited to, warranties as to quality, accuracy, performance, timeliness, continued availability or completeness of any information contained herein is made. Opinions expressed herein are current opinions only as of the date indicated. Any historical price(s) or value(s) are also only as of the date indicated. We are under no obligation to update opinions or other information. Sterne, Agee & Leach, Inc. does not provide accounting, tax or legal advice, however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and or counsel. The materials should not be relied upon for the maintenance of your books and records or for any tax, accounting, legal or other purposes. In addition, we mutually agree that, subject to applicable law, you may disclose any and all aspects of any potential transaction or structure described herein that are necessary to support any U.S. federal income tax benefits, without Sterne Agee & Leach, Inc. imposing any limitation of any kind. Sterne, Agee & Leach, Inc. shall have no liability, contingent or otherwise, to the user or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the data or formulae provided herein or for any other aspect of the performance of this material. In no event will Sterne, Agee & Leach, Inc. be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using the data provided herein or this material, even if Sterne, Agee & Leach, Inc. has been advised of the possibility of such damages. Sterne, Agee & Leach, Inc. will have no responsibility to inform the user of any difficulties experienced by Sterne, Agee & Leach, Inc. or third parties with respect to the use of the material or to take any action in connection therewith. The fact that Sterne, Agee & Leach, Inc. has made the materials or any other materials available to you constitutes neither a recommendation that you enter into or maintain a particular transaction or position nor a representation that any transaction is suitable or appropriate for you. Sterne, Agee & Leach, Inc. is a member of the NYSE / FINRA / SIPC. STERNE AGEE FIXED INCOME STRATEGIES 19