The queue of regional banks lined up to exit Tarp just got a bit shorter — and perhaps a bit less orderly.
On Monday both Huntington Bancshares Inc. and First Horizon National Corp. announced plans to repay the government's investment through the Troubled Asset Relief Program.
Both companies had pledged to shareholders and analysts that they would repay the government support as quickly as feasible, but they were not among the earlier waves of companies that paid off the assistance with regulators' approval. That they are leaving now indicates both the progress of the companies' stabilization efforts and that regulators are less determined to use the program's strictures to distinguish between healthy and unhealthy banks.
"Clearly the Fed is more willing to allow banks to repay Tarp," said Allen Tischler, a senior credit officer at Moody's who believes the Federal Reserve Board is using a return to sustained profitability as a qualifier to exit the program.
The structure of the deals are quite different. First Horizon will pay back $866 million in Tarp funds and $103 million in Treasury-owned trust-preferred shares by issuing $250 million in stock and covering the remainder with debt issuance and money passed upstream from its banking subsidiary. The market reacted warmly to the plan, which will leave First Horizon with an 8.6% tangible common equity ratio, sending the company's stock up 2.7%, to $10.92, on Monday.
Huntington's plan, meanwhile, relies far more on raising common equity, leaving the company with an expected Tier 1 common equity ratio of 7.9%. Of the $1.4 billion it will repay the government, the company will raise $920 million from the sale of equity, using debt and other funds only to cover the remainder.
Huntington shares dropped 2.7%, to close at $6.66. While Huntington's approach is significantly more dilutive to existing shareholders, it comes after a 80% year-to-date run-up in the company's share price — and was pitched by the company in the context of a coming hike in regulatory capital requirements.
"While the new regulatory capital thresholds have not yet been definitively interpreted by the banking regulators, we are comfortable with our pro forma capital," Huntington's chief executive, Stephen Steinour, said in the company's press release.
Analysts suggested that the two companies' announcement could reflect a changing standard for Tarp. In a note issued Monday, Barclays PLC analyst Jason Goldberg said that the terms of the two regionals' exit suggested that the government is "shifting from a penalty of having to issue 47% of Tarp in common [stock] to get out to more of a capital ratio approach."
The first indication of that shift came from Comerica Inc., Goldberg wrote. Allowed to repay Tarp in March with a less dilutive mix of equity and debt than previous banks, "it appeared to get credit for its above-average capital ratios and possibly signaled a shift from a focus on a penalty tax to capital ratios," he said. Huntington and First Horizon "appear to confirm this shift."
It is also possible, Goldberg wrote, that regional banks not subject to oversight through the second round of stress tests under the Federal Reserve's Supervisory Capital Assessment Program might have more freedom to exit Tarp and start paying dividends before larger competitors still wrapped up in the testing process.
"It appears non-SCAP banks are moving forward," he wrote.
Earlier rounds of exits from the program were often viewed as clear confirmation that the company leaving the program was stronger than peers who remained in Tarp. But some of the banks with Tarp still outstanding are viewed as relatively healthy players.
M&T Bank Corp., for instance, steadily accrued Tarp beyond its initial $600 million through its acquisition of troubled banks, first Provident Bancorp in 2008 and, more recently, Wilmington Trust Corp. Yet the banking company remained profitable throughout the crisis. While it has publicly stated its interest in paying back Tarp, it appears to have made other strategic choices a priority.
Moody's Tischler suggested in a report released Monday that simply being out of the program might not provide as much freedom as management would like.
While "banks that are not approved to repay Tarp could face a challenging environment," he wrote, relatively weaker institutions that have been permitted to leave the program will likely still continue to be subject to restraints on capital actions.