Crunch time is near for banks that still owe funds from the Troubled Asset Relief Program.
Next month, a number of banks will complete their fifth year in the Treasury Department program. The anniversary is important because Tarp gets more costly: dividends spike to 9% from 5%.
Some banks, including Broadway Financial (BYFC) in Los Angeles, have scrambled to refinance Tarp, allowing them to avoid higher dividend payments. Some banks, like 1st Financial Services (FFIS) in Hendersonville, N.C., found a buyer that will become responsible for the funds. Still others plan to just hang tight.
Institutions that have struggled are feeling the heat to do something about their Tarp balance before the rate spikes, says Chip MacDonald, a lawyer at Jones Day. Theyre feeling pressure on a number of fronts, he says.
Other banks are taking their time to act. Reliance Bancshares (RLBS) in Frontenac, Mo., faces a rate spike on Feb. 14. Reliance is balancing the fact that it could probably find cheaper capital with a desire to use any new funds for expansion, says Tom Brouster, the $1 billion-asset companys chairman. The Treasury auctioned Reliances Tarp shares last month to 10 private investors.
The private investors dont have voting control of Reliance, Brouster says. Wed like to think that they looked at us . . . and the progress weve had and thought it was a good investment. I think their interest involves riding the train as a passive investor.
Blue Valley Ban Corp (BVBC) in Overland Park, Kans., will reach the five-year mark on Dec. 5. It will take an extra quarter before the higher rate kicks in, so Blue Valley will not have to pay a higher rate until mid-May, says Mark Fortino, the $636 million-asset companys chief financial officer.
In addition to its original $21.8 million in Tarp, Blue Valley has deferred dividends, accruing roughly $4.6 million in unpaid dividends. The Treasury has included Blue Valley on a list of eight institutions set for its next Tarp auction.
Blue Valley may decide, after consulting with regulators, to keep the funds, even if the shares are sold, Fortino says.
Although 9% is not cheap, its not overly expensive compared to other capital thats out there, Fortino says. We have always believed this to be a very good source of capital and its difficult for small community banks to go out and get capital.
Broadway was set to reach its five-year mark in mid-November. Broadway in August closed on a complicated refinancing of its $15 million in Tarp shares, along with other debt. The transactions allowed Broadway to avoid a higher dividend payment, says Wayne-Kent Bradshaw, the $345 million-asset companys president and chief executive.
Included in the refinancing was Broadways accumulation of nearly $2.3 million in deferred Tarp dividends. As part of its recent agreement with the Treasury, all other preferred shareholders were required to participate in the conversion, Bradshaw says.
The $692 million-asset 1st Financial is the first bank set to reach its fifth year in Tarp. The company, which owes its entire, original Tarp, agreed to sell itself to First Citizens BancShares (FCNCA) in Raleigh, N.C. The $21.3 billion-asset First Citizens agreed to pay $10 million, with $8 million of the total going to the Treasury to allow 1st Financial to exit Tarp.
The sellers original $16.4 million Tarp was unpaid, as of Treasurys most-recent transactions report. The company also had accrued $2.4 million in unpaid Tarp dividends, at June 30.
A First Citizens spokesman declined to comment. Michael Mayer, 1st Financials CEO, did not return calls seeking comment. Treasury representatives were unavailable because of the federal government shutdown.
Severn Bancorp (SVBI), an $840 million-asset company in Annapolis, Md., will soon owe its Tarp balance to a private investor. The Treasury auctioned Severns preferred stock last month. The original investment was about $23 million; Severn has deferred dividend payments totaling $1.5 million, at June 30.
We look forward to working with the new owner of the shares for . . . both of our interests, Alan Hyatt, Severns president and CEO, said in a Sept. 11 statement. He could not be reached for additional comment.
When a private investor buys Tarp shares at auction, they are entitled to the same dividends that were owed to Treasury. Some Tarp participants have not publicly disclosed detailed their plans for disposing of their Tarp stock.
Porter Bancorp (PBIB) in Louisville, Ky., owes $35 million; it stopped paying dividends in late 2011, accruing about $3 million in unpaid dividends. Porter, which brought in a new CEO in July after extended struggles with credit quality, and has said it plans to raise capital. Porter did not return calls seeking comment.
Banks will be required to pay the higher 9% Tarp dividend, even if they have deferred past dividend. Christy Romero, special inspector general for Tarp, has criticized Treasury for not working with participants to postpone the rate hike.
If theyre not able to pay the 5% dividend, theyre not going to be able to pay the 9%, Romero said in June.
The $36.7 billion-asset Popular (BPOP), in San Juan, Puerto Rico, owes $935 million, the most of any remaining Tarp institution. Popular is current on dividend payments. We are certainly closer to exiting, Richard Carri-n, Populars chairman and CEO, said during a July 18 conference call. This is an ongoing dialogue . . . with the regulatory authorities as to when is the right moment. It is not exactly a symmetrical conversation.
The regulators are naturally a little more conservative than probably we would like them to be, Carri-n added later in the call when an analyst asked about the timing of Tarp repayment.
A Popular spokeswoman declined additional comment.