Treasury asks banks to submit TARP repayment plans

Seven banks in Arkansas are still on the hook to the Treasury Department for more than $93 million they took as part of a government initiative in early 2009 known as the Troubled Asset Relief Program or TARP.

Metropolitan National, Signature Bank of Fayetteville and Chambers Bank are among the local statewide institutions that have yet to repurchase the preferred stock they issued to the Treasury under the TARP’s Capital Purchase Program. (See charts below.)

Elsewhere in the state, Community First of Harrison, One Financial and Riverside Bank in Little Rock and Corning Savings and Loan round out the balance of Arkansas-based banks being asked to step up repayment plans.

NO PAY BACK REQUIREMENT
While the funds were designed to help stabilize a wobbly financial sector, many of the smaller community banks who took part have not been able to repay the funds. The seven Arkansas banks are among 380 institutions to recently get notice from the Treasury Department about its new effort to wind down the Troubled Asset Relief Program.

In November Sloan Deerin, director of the Capital Purchase Program, sent a letter to institutions saying the Treasury hired investment advisory firm Houlihan Lokey Capital to explore options for the management and ultimate recovery of the remaining CPP investments. There were 720 banks that originally took part in the program.

Gary Head, president of Signature Bank, said he recently received a phone call from a representative from the advisory firm wanting know more about the bank’s plan for repayment. Head has no regrets that his bank participated in the capital purchase program, he said the 5% interest rate on the preferred dividends is cheap money the bank is still using.

“There is no requirement to buy back the shares issued to the Treasury, we will do so when it’s most feasible for us to spend the money,” Head said.

Garland Binds, a banking attorney with Dover DIxon and Horne in LIttle Rock, said the Treasury cannot require banks to repay their TARP investments, especially since regulators have to first give the okay.

He echoes Head’s comment that the 5% dividend rate is ridiculously cheap for equity capital. That rate will escalate to 9% by the fall of 2013. Binns said that could provide impetus for banks to work on settling their tabs with the Treasury.

Mike Donnell, chairman of Chambers Bancshares, deferred comments to Binns, the bank’s council. Chambers Bank received $20 million in TARP funds and had an outstanding balance of $19.81 million as Jan. 10. Chambers has not missed the regular quarterly dividend payments, despite a $17.8 million net loss in 2010. Through three quarters of 2011 Chambers Bank posted a net profit of $462,000.

TARP CRITICISM, PROFITS
John Dominick, banking professor and analyst at the University of Arkansas, said TARP has taken on a negative connotation being linked to a Wall Street bank bailout, when in reality it offered a capital boost to hundreds of community banks. He said the problem with the program was summed up nicely in recent report by the TARP’s special inspector general.

The report criticized the Treasury for not having a exit path for small and medium-size banks, which comprise the majority of the institutions still in the program. One concern voiced in the report was for banks to put in place an exit strategy before the dividend hike next year. As of Jan. 10, the Treasury reports nearly half of the community banks in the program are already not paying the 5% dividend.

Dominick said the Treasury has already turned a profit for its TARP investments. So far the Treasury’s $250 billion investment into the banking sector has been recouped with $258.44 billion in total payments, according to the Treasury’s monthly report to Congress dated Jan. 12.

METROPOLITAN, SIGNATURE
Little Rock-based Metropolitan National Bank has missed nine quarterly payments on the $25 million the bank received from the Treasury in January 2009. The bank owed more than $3.06 million in unpaid dividends at the end of 2011. Because the bank missed six consecutive quarterly payments, the Treasury put one representative on the bank’s board of directors last year.

Metropolitan has been under a regulatory order to raise capital since 2008. Without the $25 million capital infusion from TARP analysts say the bank would have likely failed.

Binns said banks with capital enforcement actions would first have to get regulator approval to repay the money.

“Regulators are not going to let a bank jeopardize its soundness just to repay the Treasury for their investment. I think it will take some banks a few more years to generate enough profits to totally exit the program,” Dominick said.

Metropolitan National posted net losses of $5.35 million in the first three quarters of 2011, the final year results will not be made public until early February. Metropolitan spokeswoman Susie Smith declined comment on the bank’s status.

Signature Bank also elected to skip the last four quarterly dividend payments to the Treasury. The bank has $915,600 in unpaid dividends through 2011 on the $16.8 million investment the government made in February 2009. Like Metropolitan, Signature is under an enforcement action that would require regulator approval before the bank could spend free cash to buy back shares.

Signature returned a profit of just over $1 million for 2011, according to bank records.