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Who Hasn't Gotten a Bailout?

Some banks are still waiting to see if the government is going to inject capital.

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The Capital Purchase Program (CPP) of the Troubled Asset Relief Program, (TARP) closed on Nov. 14 to all public companies wishing to apply for the government bailout. We have heard from most of our coverage companies; 53 took it, seven said no, although six said they applied and have not received word; and eight have not said anything about their intentions. With news coming in every day, it is likely that as soon as you read this, it will be somewhat out of date. But we wanted to take a look at who has not gotten CPP funding, and what we and the market are suggesting is going to happen to these players.

Thanks, But No Thanks
We cover a handful of companies that simply said thanks, but no thanks when it came to applying for the government capital injection. All have strong capital bases already. Their fundamental results have largely held up so far in this downturn. Two of them are in Texas ( Cullen/Frost (CFR) and  Prosperity (PRSP)), where housing prices did not seem to reach bubble proportions and high oil prices kept the economy buzzing until recently. This outlook is changing, and we are starting to see more weakness in this state. Still, these guys are doing well and are well-positioned to take the upcoming credit problems. Commercially focused and highly conservative, we believe these banks are likely long-term survivors. However, our view appears to be in line with the market, and bargains among these types of names are basically nonexistent.

Application Received
Six companies we follow have announced that they have applied for funds, but are waiting to hear if they have been approved. While we don't see any reason for investors of three of these banks ( Astoria (AF),  Fulton (FULT), and  Texas Capital (TCBI)) to worry, the other companies really seem to need the additional capital to survive. This can be seen not only in the market prices of these stocks, but also in our fair value estimates. Publicly announcing that they are waiting to hear means that despite the Treasury's rules, investors will have to conclude these banks were rejected if they fail to receive capital by the end of the year (when the Treasury aimed to deploy $250 billion of the CPP). Consequently, in the question-mark companies, we can see they are trading at a considerable discount to our fair value estimates, but with higher uncertainty ratings reflecting this situation. Prior questionable applicants that have announced approval have seen their stock prices bounce, but are still trading at depressed levels.

No Word
Eight companies have not made any public statements about applying for the TARP funding beyond saying they were evaluating the situation, making investors wait until all the capital is deployed to figure it out. While we are not worried about a few of these companies (they could survive without the funds, and might not have applied and simply did not tell investors), we are almost positive the more distressed companies ( Flagstar (FBC),  FirstFed (FED),  First Mariner (FMAR), and  First State Financial (FSTF)) have applied and desperately need the capital. These firms are in the same situation as those distressed companies that announced they have applied. We have incorporated a meaningful chance of financial distress for each one and rate the uncertainty of our fair value estimates at extreme.

We have one mention regarding the single stock rated 5 stars right now:  Premier Financial (PFBI). We believe this company firmly falls into the doesn't-need-capital category. The company's West Virginia footprint has largely escaped the wrath of the downturn to date. However, we should warn anyone whose interest is piqued that this is a very thinly traded stock, often making entry and exit of a position difficult at best.

So What Happens Now?
This is where life gets interesting. Between now and Jan. 2 (the Treasury has 48 hours to tell investors they have put funds into a bank), we will likely continue to see a trickle of approvals come down the media pipeline. For those who receive the funding, the market will be back to assessing their long-term survivability based on the potential loss rates and capital. The more important question is: What if a company we consider to need the funding does not announce approval? Investors are likely to conclude they have been rejected. At that point, actions would come fast and furious.

First, the bank will know before the market--hopefully--although rumors do get out quickly. This should give any bank, which is basically being labeled as unsound by the government, a chance to arrange a quickie sale. The filing process for the TARP program was designed to give the banks a private heads-up if their application looked like it would fail. So, rumors of a bank going up for sale suddenly might be seen as a response to an undisclosed government rejection. The sales price is likely to be just a fraction of the long-term value of the company because the new owner would likely need to have the capital to support both its own bank and the troubled bank.

A second possibility is that the bank decides it will try to survive on its own (or raise private funds, if it can). We believe the market, and more importantly, the customers, will get highly nervous during this process. Consequently, the bank will likely lose customer deposits and might very well end up in the hands of the FDIC in very short order.

Either way, we believe that if a troubled bank does not announce TARP approval by the end of the year, its shareholders are likely to be nearly or completely wiped out. On the flip side, we can also see some of our more troubled banks eating through this new capital and ultimately ending up in the same situation as those who did not receive funding. It all depends on just how deep and long this recession of ours is going to be.

Jaime Peters does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.