Bankers say the regulatory and operating environments have been a one-two punch pushing many of them to sell. Now, the Troubled Asset Relief Program is adding another blow to the fight.
Tarp has developed a mixed reputation since its 2008 inception, with people calling it a bailout, a savior and a scarlet letter. Well into its fifth year of issuance, preferred stock sold to the Treasury Department is becoming a more expensive form of capital as the dividend jumps to 9% from 5%.
For small banks like Provident Community Bancshares in Rock Hill, S.C., that are still trying to earn their way out of the economic downturn, the increased dividend isn't helping. The $323 million-asset company agreed earlier this month to sell itself to Park Sterling (PSTB) in Charlotte, N.C., for $6.5 million in cash. The Treasury will receive $5.1 million of the proceeds to address its Tarp investment.
The higher dividend "was absolutely a factor" in Provident's decision to sell, rather than try and build capital through retained earnings and other initiatives, says Dwight Neese, the company's chief executive. "We've had this inability to get our leverage ratio to 8% and the increase wasn't going to make it any easier," Neese says.
"In early '09, we didn't think we needed it, we didn't want it, but our primary regulator told us we better take it," he adds. "We thought we could pay it back, but the downturn was longer and deeper than we thought and no one imagined it would go into five years."
The Treasury still holds stakes in 76 of the 707 banks that received Tarp funds and all of those are facing the increase. The agency has also auctioned off its holdings in another 168 banks. The terms of the original investment, including dividend rates, carry over to the new investors. It is unclear how many of those banks still have the investment, though.
The increased payout is just another point of contention in an already challenging earnings environment.
"It is one more headwind for these companies in their effort to defend their independence," says Catherine Mealor, an analyst at Keefe, Bruyette & Woods. The higher dividend adds to "a lot of other headwinds like low loan growth, low interest rates, access to capital and regulatory costs."
Mealor's comments were part of a conversation about the $1.8 billion-asset Farmers Capital Bank (FFKT) in Frankfort, Ky. She recently included Farmers on a list of potential sellers, saying that a higher Tarp dividend factored into her rationale.
Farmers has $30 million of Tarp that is owned by private investors. Lloyd Hillard, Farmers' chief executive, agrees that a higher dividend makes it harder to defend the company's independence, though he says the company has a plan. Farmers disclosed in its annual report with the Securities and Exchange Commission that it plans to redeem an undisclosed portion of the stock with retained earnings.
"We feel confident that a partial redemption would offset the impact of the increase that took place on" Feb. 15, Hillard says. "We have to get regulatory permission to do it, but we're cautiously optimistic."
Some industry experts, including Jeff Gerrish, chairman at Gerrish McCreary Smith Consultants, do not expect to see a lot of banks sell because of increased Tarp dividends. Rather, he says most of the banks are now looking to find a way to refinance the investment, if they can't get out of it completely. Many of those banks had a good reason to procrastinate, Gerrish says.
"Up until now they were only paying 5%," Gerrish says. "It was the cheapest capital you get at the time, so a lot of them decided to kick the can down the road."
The $2 billion-asset NewBridge Bancorp (NBBC) announced Monday that it had issued $16 million in subordinated debt to allow it to pay off its remaining $15 million of Tarp capital. The Greensboro, N.C., company initially had $52 million in Tarp funding, but redeemed $37 million of it after an auction last year. The debt has a 7.25% interest rate, but debt service is paid before taxes, while dividends are paid after taxes.
"With the tax deduction it takes [the effective rate] down to just below 5%," says Ramsey Hamadi, NewBridge's chief financial officer. "We get to keep the added cushion but on better terms."
Finding replacement capital might be a solution for larger community banks but smaller institutions assert that they lack the necessary access to capital markets. Under that scenario, an inability to exit Tarp by raising capital could make a sale more palatable.
HomeTrust Bancshares (HTBI) announced last month that it would buy the $129 million-asset Bank of Commerce (BONC) in Charlotte for $10.1 million in cash while also redeeming the seller's $3.2 million in Tarp.
HomeTrust was looking for a Charlotte beachhead, says Wes Sturges, Bank of Commerce's CEO. At the same time, Bank of Commerce was feeling the effects of increased regulatory scrutiny, a tough operating environment and a fast-approaching dividend increase.
"The cost of business has gone up and the dividend was one more factor," Sturges says. "Thank God we had it. We needed the capital at the time, but there was no capital market to take us out."