U.S. Treasury auctions off TARP shares in Signature Bank

Signature Bank’s holding company White River Bancshares was among six remaining  TARP participants to see their shares auctioned by the U.S. Treasury Department last month.

The Treasury has been trying to unwind its $205 billion investment over the past few years now that the banking crisis is over and profits are returning to financial institutions helping them shore up their own capital levels.

The Troubled Asset Relief Program (TARP) was 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. As of July 3, the U.S. Treasury has collected $225.84 billion from its $204.9 billion Capital Purchase Program. There were still 56 banks left in the program as of the last report to Congress dated June 10. 

The Treasury since priced the auctions of six more banks, including Fayetteville-based Signature Bank (White River Bancshares). The June 20 auction was completed netting the Treasury aggregate gross proceeds of $64.3 million. The lot of preferred shares in the recent auction were discounted 0.11% in aggregate.

Signature Bank and its holding company have missed 14 quarterly payments totaling $3.2 million in uncollected proceeds for the Treasury. However, that did not deter investors from paying a premium for the shares.

White River Bancshares Series A Cumulative Perpetual Preferred stock with a face value of $16.8 million was priced at a $1,063.21 per $1,000. The premium paid for the preferred shares reflects a 6.32% reduction in yield for the new investors, according to the government report. The new yield for investors at the higher price is still 8.4%.

A smaller issue of Series B Cumulative Perpetual Preferred Stock with a face value of $840,000 was priced at $1,205.55 per $1,000 reducing the 9% yield to 7.4%.  Among the six banks in the recent auction roughly half of the shares were sold at a discount and half at a premium.

Gary Head, CEO of Signature Bank, said in December the bank agreed to the terms of the auction.

“They recently notified us and we agreed to be part of the June auction. Three different investment houses bought our shares. We were told that these are active investors in the TARP auctions,” Head said. “They have no voting rights and we have not heard anything from them yet. For us it’s business as usual.”

Jacob Asset Management acquired 12,500 shares, OSK LLC purchased 3,000 shares and Hildene Capital bought 1,300 shares of the Series A preferred stock. OSK LLC also purchased the entire lot of 840 shares of the Series B Preferred issue. The dividend yield on these preferred shares started out at 5%, but was increased to 9% in the fall of 2013. The new investors in Signature Bank will likely have to be patient for their dividends as the bank’s enforcement order does not allow it make dividend payments. They also will collect lower yields because of the premiums paid.

That said, many investors are chasing higher yields in this nearly 0% interest rate climate that is expected to continue for two more years. The dividends in preferred stock accrue even when they are not being paid. Community banks are also generally deemed lower risk investments relative to other high yield choices like sub-prime auto loans or non-rated corporate bonds.

Michael Nichol, a portfolio manager at Hildene Capital, recently told SNL Financial that pricing has become competitive in the auctions as more investors are looking for higher yielding opportunities. He said investors don’t mind paying a premium for the preferred shares even though there are missed dividend payments because with the improving economic climate they believe the back interest could trickle through in the next year or so, after which they hope the issuer will redeem at par.

The only area bank that remains in the Treasury’s TARP program is Chambers Bank, with $19.817 million still outstanding as of the June report.

The Treasury Department reports a $25 million loss on its investment in Metropolitan Bank, which has now been merged into Simmons First National. First Community Bank of Harrison also had its preferred shares auctioned by the Treasury Department earlier this year.

Banking professor and analyst John Dominick said the public perception about TARP is negative, but in reality it is one of the few government bailout programs to ever turn a profit. Dominick is a board member at Signature Bank.