Did TARP Miss Mark? Arkansas Banks Belie Program’s Bad Rap

TARP is not a four-letter word.

Contrary to popular perception, not all the banks that received government — i.e. taxpayer — money under the Troubled Asset Relief Program in 2008 and 2009 were sinking under the weight of poor investment decisions and outrageous executive perks that had financial markets on the brink of collapse.

In fact, many of the nation’s strongest banks benefited from the first program enacted under the TARP umbrella. The Capital Purchase Program let the U.S. Treasury buy preferred stock in healthy banks in return for a 5 percent annual dividend.

Eleven banks based in Arkansas received a total of $302.7 million through the CPP, and few are in a hurry to buy back their shares. Gary Head, CEO of Signature Bank of Arkansas, said many people don’t understand the money banks received through the program is capital, not a loan or handout.

The $16.8 million Signature Bank received through CPP in February 2009 “was a very important part of our capitalization,” he said.

“We’re very happy that we had that opportunity to participate in that program and remain in that program,” Head added, “and we may remain in that program for some time.”

Even when the Treasury dividend rises to 9 percent in 2013, that’s still a bargain, he said.

“It’s a purchase of your stock, so there’s no promise to pay anything back. It’s up to our board to decide whether to leave [the Treasury] as partners or buy back the stock if we want to,” he said.

“I’m not interested in trying to figure out how to get it back to them when the cost to replace it would be higher.”

First Federal Bank of Harrison received $16.5 million through CPP in March 2009, and CEO Larry Brandt said the transaction has worked out well.

The extra capital allowed the publicly traded bank to make additional loans in its market, he said.

As to what First Federal will do with the CPP money when the dividend rate jumps to 9 percent, Brandt said he couldn’t comment.

But for now, he said, “I think all the banks are finding that it’s a good source of capital.”

Chambers Bank saw its $19.8 million in CPP funds as a safety net when it got the money in May 2009, CEO John Chambers said.

“It just gave us a comfort level to feel like if things got worse, we’d be in a position to weather adverse conditions,” he said.

The Danville-based bank plans to hold onto the capital for the time being, Chambers said, but will likely pay it back within the next two years — before the dividend rate goes up — if not sooner.

“It has been an expensive insurance policy, but I’ve never regretted taking it,” he said. “It gave us a cushion to weather a real challenging market.”

 

‘Successful Stopgap’

Conceived to shore up the nation’s nine largest commercial banks in October 2008 after the failure of Lehman Bros., TARP was authorized by Congress to spend up to $700 billion to accomplish this. Initially, $145 billion went to the nine distressed banks in a highly criticized “bailout.”

But focus quickly shifted to supporting financially sound banks by buying equity in them. Through CPP, one of 13 TARP programs, the 707 qualifying banks that applied got a total of $205 billion by the time disbursements ended in December 2009.

Tim Yeager, an associate professor of finance at the University of Arkansas and former assistant vice president with the Federal Reserve Bank of St. Louis, said the CPP helped stabilize the banking system at a crucial time.

“It was very successful as a stopgap during the banking crisis,” he said. “All the big banks have paid back the funds with interest and the government has made a profit on that.”

“There should be no second-guessing as to whether they did the right thing” in taking part in the program, said Yeager, who also holds the Arkansas Bankers Association Chair in the university’s Sam M. Walton College of Business.

“As for Arkansas banks, which are much smaller, in terms of fairness, if the large banks were given access to this form of capital, it’s only fair that community banks be given the same opportunity,” he said.

The Congressional Oversight Panel, set up to oversee TARP, defines small banks as those having total assets of less than $100 billion.

The 11 Arkansas banks that took part in CPP have combined total assets of $14.8 billion. To date, only two of these banks have repurchased their stock from the Treasury: Little Rock-based Bank of the Ozarks and Arkadelphia-based Southern Bancorp.

Yeager said banks are doing nothing wrong by holding onto the extra capital.

“This is equity financing,” he said. “The banks aren’t breaking any rules. As long as they’re making their dividend payments, they are honoring their contract.”

 

Health Program

Bank of the Ozarks was not only the first Arkansas bank to receive CPP funds, but it also got the lion’s share. The publicly traded company got $75 million in December 2008.

The bank repurchased all of its shares less than a year later, in November 2009.

CEO George Gleason, named Community Banker of the Year in 2010 by trade publication American Banker, said in its Dec. 2 edition the decision to participate in TARP was the toughest of his career, and that he abstained from the board vote.

“It was a very expensive source of capital, as it turned out, and in retrospect it was a mistake to take it,” he said in the article, which added that public sentiment against the program factored in the decision to buy back its stock from the Treasury.

Susan Blair, an executive vice president and spokeswoman for Bank of the Ozarks, said the board made the decision to take part in CPP using the best information it had at the time, “not knowing what the economic conditions in 2009 might be or what opportunities there might be for expansion.”

“Because we were a healthy bank and had the capital to continue normal operations, we didn’t feel a great sense of urgency to take the money,” she said. “But we did know our participation would perhaps benefit the program, and thought the Treasury needed healthy banks to take part in the program.”

Blair said the bank was able to repay the CPP investment and accrued interest because of its strong earnings and ample capital position, without raising other capital.

In a different scenario, Southern Bancorp’s repurchase of the $11 million in stock it sold to the government in January 2009 was actually a swap. The bank returned the CPP funds last August after receiving $34 million under a newer TARP program, the Community Development Capital Initiative.

CDCI funding is available to community development banks, such as Southern Bancorp, as well as thrifts and credit unions. With a 2 percent dividend rate for eight years, the program was more attractive to eligible institutions than CPP.

Southern Bancorp serves rural communities in Arkansas and Mississippi that suffer from high rates of poverty and unemployment. It also supports a network of nonprofit affiliates that aims to create jobs and improve education in these areas.

“We didn’t need a bailout, we needed to expand our mission to fill a void left by the recession,” said Dominik Mjartan, a senior vice president and spokesman in Southern Bancorp’s Little Rock office.

Both CPP and CDCI helped the bank accomplish this, he said.

“Because we had the capital base, we were able to continue to do what we’d been doing and expand when most of the large banks were pulling back because their capital was so low and nonperforming loans were so high.

“A lot of customers came to us when other banks wouldn’t work with them. It was a great deal for our communities and our customers.”

Backed up by the extra capital, Southern Bancorp bought a distressed bank in El Dorado and a bank holding company in Blytheville. Besides allowing the bank to further its mission of reaching economically disadvantaged communities, the programs also proved profitable for the company, which doubled in size and saw its assets top $1 billion.

Mjartan said the Treasury-injected capital succeeded on several fronts.

“It’s much better than the government giving us $34 million and telling us to make $34 million in loans,” he said. “It works in multiples, so it’s a very good program for taxpayers, with an excellent return on investment.”