Treasury to auction its TARP investment in community banks

by The City Wire staff ([email protected]) 142 views 

Four local banks still on the hook for TARP payments may soon have the preferred shares now owned by the U.S. Treasury Department pooled and auctioned to the highest bidder in the coming months.

Signature Bank, Chambers Bank, Community First and Metropolitan National are four local institutions out of the seven Arkansas banks that have not yet repaid the federal government for the investment it made in 2009 as part of the Capital Purchase Plan, a TARP initiative.

While there is no deadline for repayment, the Treasury Department has made no secret it’s ready to rid itself of those investments, which have yielded about $19 billion in profits to date.

In a June 19 letter, the Treasury informed about 200 banks that they are being considered for a series of pooled auctions, the first of which will take place in fall.

Gary Head, CEO of Signature Bank, said he got the letter that detailed the Treasury’s intentions earlier this week.

“It doesn’t matter to me if they sell or not. We do not regret taking the TARP money it was a very cheap cost for capital at 5% and I am in no hurry to buy back those shares with the uncertainty mounting in world’s financial markets,” Head said.

The Treasury said in a statement the 200 banks receiving the letters this week represent about $2 billion in outstanding shares owned by the federal government. He said these banks are smaller institutions that find more difficulty raising private capital.

“Prior to the pooling of the securities, banks will have the opportunity to go ahead and redeem their shares at a discount. Or banks can allow investors of their choice to bid at discount on their behalf, which would also eliminate all TARP like those on executive compensation," said Garland Binns, banking attorney with Dover Dixon and Horne in Little Rock.

It is important to note that banks would have to get regulatory approval to bid on their own shares.

That might be difficult for Signature, Chambers, Metropolitan National and One Bank & Trust as each bank is under strict enforcement actions with federal regulators since taking the capital in 2009.

The Treasury said banks that opt-out of the pooled purchases and still designate a single outside investor to bid on their remaining shares must do so by Aug. 6, and they will be subject to a minimum bid set by the Treasury.

The auctions are the Treasury’s best chance to unwind TARP in a timely manner. Banks were asked earlier this year to submit plans for repayment, which it says can still be considered if received in the near term.

Treasury has recovered $264 billion from repayments, dividends, interest and other income, a $19 billion gain over the federal government's initial investment, according to forms filed by Treasury each month. There was still $11.617 billion in outstanding stock owned by the Treasury as of May 31.

Some 203 banks deferred their dividend or interest payments to the federal government in the recent quarter.

While the Treasury did not release a list of banks who got the recent letter, analysts speculate many of them were banks who continue to defer the payments because of ongoing capital restraints.

The shares of non-paying banks will not carry the street value of those with steady payment schedules, but could carry more upside potential if the bank does eventually repurchase the shares and makes good on the past deferred dividends, which are cumulative in most cases.

Metropolitan National has missed 11 quarterly payments with $3.756 million owed in past due dividends on the $25 million in deferred shares it issued to the Treasury Department in 2009. The bank received a stern notice from the Office of the Comptroller of the Currency in April about its capital deficiencies, which are an estimated $35 million short of what regulators have mandated. The bank made $738,021 in dividend payments on its TARP obligation prior to June 2009, but nothing since.

Metropolitan National continues to post net losses which further erode its capital base. The Treasury Department has appointed two directors to Metropolitan’s board as required by the terms of the contract when repetitive dividend deferments take place.

Signature Bank has missed six quarterly payments deferring some $1.373 million in cumulative dividends as of May 31. The bank paid $1.589 million in dividends before electing to defer last year in accordance with an enforcement action by the Federal Deposit Insurance Corp.

Signature Bank has returned to profits in the past two quarters, but says it will continue to defer repayment until the economy is stronger.

The Treasury noted in the May report that Signature Bank continues to decline its request to have a representative sit in on its board meetings. But after six consecutive deferments the Treasury can appoint one representative to the board, according to the original TARP guidelines.

One Bank & Trust of Little Rock, also recently deferred one quarterly payment of $351,000 in May. The bank has made $3.782 million in quarterly payments since 2009. One Bank & Trust has $17.3 million in deferred shares out to the Treasury and is also operating under a Cease and Desist enforcement action from the OCC.

Chambers Bank came under an enforcement action earlier this year but has not missed any payments. As of May 31, Chambers had made dividend payments of $4.923 million with $19.81 million in shares outstanding to the Treasury.

Community First Bank of Harrison also is current on its quarterly payments, with dividends of $2.161 million paid to date on the Treasury’s investment of $12.52 million.

The Treasury has $1.1 million invested in Riverside Bank of Little Rock, for which $276,870 has been paid in dividends to date. The bank is current with its quarterly payments.

Corning Savings & Loan is also current with its quarterly payments which total $113,228 as of May 31.