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Pluris Study Finds Banks Paying Fair Price for TARP Warrants

Pluris Study Finds Banks Paying Fair Price for TARP Warrants
January, 7 2010

Espen Robak
Pluris Valuation Advisors LLC

David P. Kowal, APR
Kowal Communications, Inc.

NEW YORK, N.Y., July 13, 2009 – A new study by Pluris Valuation Advisors LLC, a provider of market-based valuations of illiquid securities, finds that bank buybacks of TARP warrants from the U.S. Treasury have been increasingly trending toward fair value.

“Some media and industry experts have claimed that banks are underpaying for their warrants,” Pluris President Espen Robak said.  “That was true at first.  However, our study shows that recent repurchases have been in line with accurate valuations of the warrants.”

The study, which was developed to provide guidance for future TARP warrant sales, compiles data from all 265 public banks that received funds from the Troubled Asset Relief Program (TARP).  Funds were awarded by the U.S. Treasury in exchange for warrants and shares of preferred stock.  To exit TARP, banks must repurchase their warrants. “If banks underpay, taxpayers lose out,” Robak said.  “If they overpay, banks and their shareholders lose out.  As such, the success of TARP depends on fair valuations.”

Pluris used data from arm’s-length transactions in illiquid warrants from the secondary market to value the warrants of all 265 banks, including the 12 banks that have bought out their TARP warrants to date.  Such real-world valuation data yields significantly better results than theoretical models alone.  According to Robak, “the commonly used Black-Scholes model was never designed for non-tradable instruments like warrants.  It’s a helpful input, but on its own it falls short as an analytical technique.”

The most recent repurchase, and the first by a major TARP recipient, was by State Street Corp. on July 10.  Pluris found an estimated fair value of $65,147,488 for State Street’s warrants, while State Street paid $60 million in the repurchase, a 7.9 percent discount from fair value.  This is in line with recent trends for the repurchases.

Comparing its own market-based warrant valuations with what the 11 other banks paid to repurchase them, Pluris found that Old National Bancorp (ONB), the first bank to repurchase its warrants, underpaid significantly.

ONB paid $1.48 per warrant ($1.2 million total), but Pluris valued them at $3.15 per warrant, so ONB underpaid by 53 percent.  Iberiabank Corporation (IBKC), the second bank to buy out of TARP, paid $8.66 per warrant ($1.2 million total), compared with Pluris’ valuation of $10.19, an underpayment of 15 percent.

Since then, amounts paid have been within 12.8 percent of the valuation price in all cases, with three banks paying more than the price calculated by Pluris.  FirstMerit Corporation (FMER), the third bank to buy out of TARP, paid $5.28 per warrant ($5,025,000 total), while Pluris valued the warrants at $4.68 each, an 12.8 percent difference.  Berkshire Hills Bancorp, Inc. (BHLB) paid $4.60 per warrant, compared with a valuation of $4.09, an overpayment of 12.5 percent.  HF Financial Corp. (HFFC), the most recent bank to repurchase warrants, paid $2.15 ($650,000 total), compared with a valuation of $2.11, an overpayment of 1.8 percent.

The three most recent warrant repurchases have all been within 2 percent of the Pluris valuation.  In addition to HFFC, Somerset Hills Bancorp (SOMH) paid $1.69 ($275,000 total), compared with a valuation of $1.70, and First Niagara Financial Group (FNFG) paid $2.83 ($2.7 million total), compared with a valuation of $2.86.

The Pluris survey, which was compiled through data published by the Treasury, plus public stock market data as of July 1, 2009, analyzes the fair market value of all TARP warrants, providing guidance for prices the warrants might bring if they were auctioned by the Treasury.  The survey also provides guidance to both the banks and the Treasury by identifying values realistically achievable when prices are negotiated to repurchase TARP warrants.

The valuation model used for Pluris’ analysis is based on transaction data of secondary market sales of illiquid warrants similar to TARP warrants.  The data represents several years’ worth of transactions recorded in the LiquiStat™ database, an ongoing record of transactions involving illiquid assets that is maintained by Pluris.

Warrants are similar to call options in that they can be exercised to create new shares of stock.  However, warrants are illiquid and, as a result, are worth less than liquid options.  How much they are discounted depends on the volatility of the underlying shares, the size of the block, time to expiration, the size of the issuer and the “moneyness” of the warrant.  “Moneyness” is a measure of the degree to which an option is “in the money” (the difference between the stock price and the exercise price) as of the measurement date.

The Pluris TARP warrant study and a white paper, “Discounts for Illiquid Shares and Warrants: The Liquistat™ Database of Transactions on the Restricted Securities Trading Network,” can be downloaded from the Pluris Web site at

About Pluris Valuation Advisors LLC

Pluris Valuation Advisors LLC of New York, N.Y., is a full-service valuation firm specializing in the valuation of restricted securities of public companies, auction-rate securitiesbankruptcy claimslimited partnerships and other financial instruments that lack liquidity.  Pluris valuations are used for financial reportingtax purposesbusiness transactions and litigation support.  Our proprietary LiquiStat™database enables Pluris to value even the most illiquid assets based on market data, in compliance with both U.S. Generally Accepted Accounting Principles (GAAP) or IFRS.  Pluris clients include public reporting entities, hedge funds, private equity funds, high net-worth clients and their advisors worldwide.

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