Add Independent Bank Corp. in Ionia, Mich., to the list of companies that have successfully renegotiated the Treasury Department's investment under the Troubled Asset Relief Program.
The $3 billion-asset Independent announced Monday it had struck a deal that would ultimately allow it to convert the preferred shares held by the Treasury Department into common stock.
The conversion is part of the company's capital restoration plan, said Robert Shuster, Independent's chief financial officer.
Independent is not operating under a regulatory order that requires the conversion or addition of capital. Yet Shuster said the board of directors had adopted the capital plan that will require higher capital ratios — 8% leverage and 11% total risk-based capital — and change how Independent's capital is allocated, moving a larger percentage into common ownership.
The allocation change is largely designed to rebalance the company's capital following more than $180 million in losses over the past two years, which reduced the percentage of common equity that makes up Tier 1 capital.
"At the holding company it is the losses we incurred in the last couple of years; the balance between common, trust-preferred shares and preferred has become far too small," Shuster said in an interview. He said that regulators preferred that the largest piece of capital come from common equity because it is not attached to regularly scheduled dividend or interest payments.
At Dec. 31, Independent's bank unit was considered "well capitalized" with 10.36% total risk-based capital.
So far, only a handful of Tarp participants have converted the Treasury's investment. Most have chosen to convert to trust-preferred securities that have similar terms to the original preferred shares and still are considered Tier 1 capital.
One exception is Midwest Banc Holdings Inc. in Melrose Park, Ill., which in March announced it was converting its preferred shares to mandatory convertible preferred stock. The deal is similar to Independent's agreement with the Treasury.
In Independent's case, the Treasury agreed to exchange $72 million in preferred shares and $2.3 million in accrued dividends for new shares of the company's fixed rate, cumulative mandatorily convertible preferred stock. Independent expects to complete the deal in the next 30 days.
The new shares have similar terms as the preferred shares held by the Treasury, except they are convertible to common stock. The Treasury can convert the shares at any time, and Independent can compel the Treasury to convert before the seven-year maturity date if it meets certain conditions.
Those conditions include raising at least $100 million in common equity and converting at least $40 million of outstanding trust-preferred securities to common.
If Independent can meet the conditions before the seven-year maturity date, then the conversion would occur at a 25% discount.
Once converted, the Treasury will have a sizable stake in Independent.
"They wouldn't own a majority, but they would certainly likely own more than 10%," Shuster said. "Depending on where everything settles, it is going to be somewhere between 10% and less than 50% if all these other things occur."