Bankers’ Opinions Mixed on CPP Funds

Signature Bank of Arkansas is proud to have qualified for it; Liberty Bank of Arkansas is having second thoughts about taking it and Delta Bank & Trust said, “thanks, but no thanks” in rejecting it.

“It” is the Capital Purchase Program, authorized by the Troubled Asset Relief Program passed last October by Congress, better known as TARP.

Eight Arkansas banks have received a total of $264.5 million from the CPP since December in exchange for preferred stock that pays the U.S. Treasury a 5 percent annual dividend.

TARP has become a four-letter word to the American public, defined in the minds of many as a giveaway to the so-called greedy Wall Street barons who first robbed investors with risky bets before going on to raid the Treasury to fund their lavish corporate retreats, private jets and outsized bonuses.

Politicians have not shied away from stoking the fires of populist anger, either, and bankers continue to put those fires out today explaining how the program really works while wondering which curveball Congress will throw them next.

Unlike the original nine largest commercial bank TARP recipients, some who were considered to be near total collapse, the CPP recipients are the ones deemed healthy by the Treasury.

“I tell people every day, ‘The money isn’t free,” said Southern Bancorp CEO Phil Baldwin, whose Arkadelphia-based bank received $11 million in CPP funds in January. “The Treasury is borrowing the money at 0.25 percent [from the Federal Reserve] and lending it at 5 percent. It’s a huge income producer for the government.

“The odds are the economy will get right over time, the banks will pay the money back and the Treasury will have reaped a windfall.”

Larry Brandt, CEO of First Federal Bank of Harrison, said the Treasury has “the best deal going.”

“A 5 percent return in this day and time — you can’t get many investments that return that,” Brandt said. “There’s been billions and billions already paid back.”

Signature Bank of Arkansas received $16.8 million from the CPP Feb. 20 and CEO Gary Head said taking the funds was all about preserving its ability to make loans as a community bank.

“It’s a safety situation, at least for us,” he said. “We were proud we were strong enough to get it. We don’t have the same issues as the public institutions. We’ve always increased our loans, and we’ve been substantially increasing from a year ago.

“This is capital that’s safe and strong in most difficult times. We don’t have the luxury of some others whose ownership has unlimited funds. We’re a small bank and our job is to help our customers and survive to the other side.”

Moving Target
Tim Yeager, associate professor at the University of Arkansas and the chair of the Arkansas Bankers Association, said he initially encouraged bankers to take the CPP money as an insurance policy against a further downturn.

“As initially designed, the program had more carrots than sticks,” Yeager said. “The idea was that if you need capital or might need capital, here’s a place you can go and get funding at a pretty low cost.

“Since that time, the sticks have come out.”

On March 6, First Federal accepted $16.5 million in Capital Assistance Program funds — a variation on the CPP introduced in the American Recovery Act passed in February — and was forced to cap its dividend at 1 cent per share for as long as the Treasury holds stock in First Federal.

It paid a 16-cent dividend following the fourth quarter of 2008. Brandt, like many bankers, said rules and regulations are in constant flux.

“They change the rules every week,” Brandt said. “You have to play by the rules if you take the funds.”

Privately-held Liberty Bank has already explored the costs of repaying its $57.5 million in funds just three months after accepting them because of uncertainty over what further strings Congress may attach.

“We’ve looked at it, we certainly have,” said Liberty’s Northwest Arkansas president Howard Hamilton. “The way it’s structured, it’s really expensive to pay it back. We’ve decided at this time it’s too expensive to pay it back and that was communicated to stockholders.”

Publicly-held Simmons First National Bank of Pine Bluff was approved for $40 million in CPP funds in October, but still hasn’t decided to accept. Its stockholders approved taking the funds Feb. 27, with funding to follow 30 days later.

However, Simmons requested an extension because of questions about how quickly it could repay the funds. The regulations haven’t yet been written, and Simmons will wait until then before taking funds.

Simmons CEO J. Thomas May wrote in response to questions that changes in executive compensation were not an issue.

“The biggest change is a provision that says further changes can be made at the discretion of Congress,” May wrote. “Obviously, we do not like that provision since we do not know what will be changed. 

“However, our ability to deal with that issue is through the previously mentioned provision that allows us to pay off the Treasury at any time of our choosing. 

“Regardless, the greatest frustration comes with the rhetoric of associating CPP participants with those troubled institutions that have received extraordinary assistance from TARP. There is no similarity.”

The revised rules for banks who take Treasury funds passed in February in the ARA — a.k.a. the $787 billion stimulus bill — may have already assured that the money is going to be coming back into the Treasury sooner rather than later.

Four banks, led by Iberiabank of Lafayette, La., became the first to repay their CPP funds in March and most were very outspoken in their reasons.

They cited competitive disadvantage from abiding by the government terms, which include caps or reductions on dividends, limitations on executive pay and elimination of incentive bonuses.

Others, such as Northern Trust of Chicago, are trying to repay the money after serving as whipping boys for Congress. Northern Trust, which took $1.6 billion in CPP funds and turned a profit of $808 million in 2008, was excoriated for daring to host a golf tournament.

Bank of the Ozarks, a publicly traded company based in Little Rock, was aware the rules could change when it accepted $75 million in CPP funds in December.

Spokeswoman Susan Blair said BOZ has been forced to eliminate incentive bonuses for its top executives since the rules changed in February.

When it originally accepted the CPP funds, it decided the relatively low cost of the capital was worth the tax hit on CEO George Gleason’s total compensation of $912,336. Under the original terms, banks were only allowed to deduct up to $500,000 for executive salaries.

Unlike First Federal, BOZ does not have to reduce its dividend, but it cannot increase it from the 13 cent per share it paid during 2008.

Banks who take CPP money must pay a 5 percent dividend for the first three years and 9 percent thereafter.

“Our expectation is to repay the Treasury when it is no longer cost effective to maintain the preferred stock,” she said.

Others, such as Goldman Sachs and Wells Fargo, have chaffed at the terms imposed since being essentially forced to take TARP money and are racing to raise new capital and repay the Treasury as soon as possible.

Deploying Capital
Blair said BOZ has bought up some municipal housing bonds, which provides liquidity to the market and keeps rates low, originated a significant new volume of loans and snagged business from its competitors.

Head will roll out a home-loan purchase program with the CPP funds, offering a 4.95 percent, 3-year ARM.

Southern Bancorp of Arkadelphia has used its $11 million to fund the acquisitions of two bank holding companies, one in El Dorado and another in Blytheville. Southern paid around $6 million for Timberland Bank in El Dorado, which was given a cease-and-desist order by its regulator. Southern won’t take on the bad loans of Timberland, which had a book value of around $12 million and assets of around $140 million.

Southern Bancorp is classified as a community development financial institution, so it already had a preexisting relationship with the Treasury as an investor. CDFI’s have a social mission to serve challenged communities. Southern’s second-largest stockholder is the Walton Family Foundation, and its original board members included Hillary Clinton, Rob Walton, Mack McLarty and Walter Smiley.

“We did it for the mission of our organization,” Baldwin said of taking the CPP funds. “Last year, we had the second most profitable year ever. We budgeted to do better this year and we hit our budget in the first quarter, so I feel good about that.”