Federal bank ‘bailout’ turns five, bankers await auction

story by Kim Souza
ksouza@thecitywire.com

It’s been five years since the U.S. Treasury Department threw out a life line to banks as part of the Troubled Asset Relief Program in an effort to stabilize the wobbly economy, shore up bank balance sheets and spur lending.

Between October 2008 and December 2009 the Treasury invested roughly $205 billion into 707 banking institutions that met the program criteria.

John Dominick, banking professor at the University of Arkansas, said the TARP program is one of the few government interventions that has actually returned a profit, despite some negative public sentiment associated with the perceived “bank bailout.”

The Treasury reports net proceeds received through mid November total $273 billion, that equals a 11.4% return on investment over the five-year period. There have been 234 banks to fully repay the investment netting the Treasury some $200 billion.

Through October, another $3 billion has been raised from auctions as the Treasury seeks to wind down the program, opting to sell its shares at a discount to the highest bidder. Participating banks have also paid $18.92 billion in total dividends as well as $7.89 billion in warrant income through October.

The most recent auction Nov. 8, netted the Treasury $49.3 million, as it sold off shares in seven more banks. These shares were sold at a 15% discount to par, according to the government release.

“Treasury continues to make steady progress winding down the bank program through the auction process,” Assistant Secretary for Financial Stability Timothy Massad said in a statement. “TARP helped to stabilize the economy during the financial crisis and the program has already returned a significant profit to the taxpayers.

ON THE HOOK
The most recent TARP report from the Treasury indicates there were 97 banks still in the program as of Oct. 31. Those are the banks that have not repaid the investment they took nearly five years ago.

Signature Bank of Fayetteville, Community First Bank in Harrison and Chambers Bank are among Arkansas institutions still on the hook to the Treasury awaiting the auction of their preferred stock.

The Treasury began pooled auctions of their preferred TARP about a year ago and has sold off its investments in 157 banks, stating in June 2012 its plans to wrap up the program as quickly as possible.

Gary Head, CEO of Signature Bank, said he has regular conversations with potential investors, but he has no real control over when or to whom the Treasury will auction its preferred shares in Signature Bank. He said most of the interest is coming from third party organizations that hope to buy the shares at a deep discount and then sell them for a profit.

“It’s not like that they want to actually own a piece of a small community bank in Arkansas. Our hope is that whomever purchases our outstanding shares is someone that will want to partner with us for the long-term,” Head added.

It takes a minimum of $25 million to bid at Treasury TARP auctions, which takes smaller investors out of the loop. Head said the best scenario for small community banks like Signature would be if third-party investors buy the pooled shares at discount and then find local interested parties to sell them too — people that would want to hold a minority ownership in a local bank.

Signature received $16.8 million in TARP proceeds in February of 2009. Banks like Signature were asked to pay a 5% dividend on the preferred shares for the first five years. That dividend increases to 9% on the five-year anniversary.

Unable to pay dividends for several quarters as the bank came under an enforcement action in 2011, Head said the dividends are still accruing.

“I don’t know when we will be able to retire these preferred shares, whether the Treasury owns them or someone else does. We participated in TARP willingly and our bank definitely benefited from the capital infusion which helped us ride out a prolonged recovery time. We intend to pay back every cent, but we won’t put the bank in any jeopardy to do so,” Head said.

ALSO WAITING
Chambers Bank said recently that its holding company was still weighing its options on how to exit the TARP program. Chambers Bancshares received a TARP infusion of $19.817 million, of which much is still outstanding.

The Danville-based bank has paid more than $5.754 million in dividends to the Treasury since it entered the program May 29, 2009.

Community First Bank of Harrison still has $12.725 million owed to the Treasury. Since entering the program April 3, 2009, the bank has made dividend payments of $3.028 million. Dave Morton CEO at Community First Bank in Harrison, did not return messages left at his office last week.

Two other Arkansas bank also still owe the Treasury for its TARP investment — OneFinancial in Little Rock ($17.3 million) and Riverside Bancshares in Little Rock ($1.1 million), according the most recent Treasury report.

RISING COSTS
Head is fully aware of the escalating terms of not retiring debt within the five-year period as the cost via the dividend rate rises to 9% on that anniversary date — Feb. 20, 2014.

“I know 9% sound like a high rate, but the cost of raising capital today for small community banks can be triple that amount. We continue to seek advisement from an investment banker who is actively watching the TARP auctions on our behalf,” Head said.

Banking experts say a large percentage of the institutions still in the program are private community banks. Of the 97 bank active in the program, two-thirds have assets below $10 million.

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Dominick said the higher interest rate was put in place as an incentive for banks to exit within the five years, but at that time no one knew how prolonged the economic recovery would be. He said many of the banks able to exit the program are larger in size  and located in more diverse markets. Aside from higher dividend rates, the Treasury also possesses the right to occupy a board seat for banks that have missed numerous dividend payments.

But as the Treasury has begun rapidly unwinding its investment through auctions, he said the placement of board members has wained.

TOTAL DEFAULT
Metropolitan National was one of the larger banks still owing TARP obligations this year, – that was until its holding company, Rogers Bancshares filed bankruptcy in July.

Metropolitan was one of 27 TARP participants to default on their obligation via bankruptcy receivership. The TARP investment of $25 million will not be recovered, according to the Treasury.

The Little Rock-based Metropolitan has since been acquired by Simmons First National, which is not responsible for the TARP repayment. Simmons officials purchased Metropolitan National for $53.6 million through a bankruptcy auction.

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