Uneasy Money

REVIEW SUMMARY
Segment. Community banks
Issue. TARP funding
Key. Bank's ability to pay back loans under government rules

The federal Troubled Asset Relief Program may have proven to be both a blessing and a curse for community banks.

On one hand, the smaller banks welcomed TARP money to keep branches open, make loans to small-business clients and maintain growth plans. On the other, they are in a far less advantageous position than their larger competitors when it comes to paying quarterly dividends on the money.

Eight community banks in Florida — including two based along the Gulf Coast — are running behind on dividend payments by nearly $7.4 million, according to data furnished by SNL Financial. Their delinquency could put them in a position to be controlled by the U.S. Department of the Treasury at least, or sold to a more solvent bank at most.

“It is a burden to the smaller regional-type banks,” says Donald Flagg, finance professor at the University of Tampa. Reasons for this struggle may include a lack of ability to sell shares the way big banks can, no benefit from the trading profits and commissions big banks enjoy, and limited capital resources or tougher capital controls, he says.

TARP has had plenty of critics over the last two-and-a-half years since it was initiated, from political pundits to banking industry executives. Bill Isaac, a former chairman of the Federal Deposit Insurance Corp. who now lives on Longboat Key, terms TARP as a colossal mistake.

“It has been very painful for the banks,” says Isaac, who wrote a book titled “Senseless Panic: How Washington Failed America” (Business Review, Sept. 10, 2010). He adds that there is no clear mechanism for repaying TARP early if banks choose to do so, and those that declined the funds are now glad they did.

Cash for preferred stock

Initiated in October 2008 near the end of President George W. Bush's second term, TARP was intended to help relieve the nation's banks of troubled assets, particularly bad real estate loans. Although it aimed to free up commercial lending, many major banks used the money instead to clean up their balance sheets.

Banks receiving TARP funds were required by the Treasury to issue preferred stock in exchange. A 5% annual dividend was assigned to those shares until the banks bought them back.

The TARP program appears to have succeeded, with most major banks already having repaid their money. The program was declared profitable March 30 after Atlanta-based SunTrust Banks Inc., which has a substantial presence along the Gulf Coast, paid off the nearly $5 billion it borrowed from the government.

It isn't likely the Treasury is worried about TARP repayments from smaller banks, because they make up a small amount of the industry's overall debt obligation. But it does raise the question of whether the federal government wants to be in the small-bank business when some of those are falling behind in payments.

According to Treasury figures compiled by the Wall Street Journal, $223 million was issued to 18 Florida banks under TARP, of which the eight delinquent banks originally borrowed $114 million. Most of those delinquent banks are only a few payments behind as of the latest scheduled dividend payment due Feb. 15.

The state's biggest laggard, Stuart-based Seacoast Banking Corp. of Florida, is eight payments and $5 million behind, according to SNL Financial. Seacoast originally received $50 million through TARP.

Once a bank misses six scheduled dividend payments, the Treasury Department has the right to elect two directors to the bank's board. So far, no Treasury directors have been appointed to Seacoast's board, though it has sent representatives to board meetings.

Repayment by merger

Among Gulf Coast banks, First Community Bank Corp. of America, based in Pinellas Park, was reportedly behind three payments totaling $400,700. First Community, which is in the process of merging with Lakewood Ranch-based Community Bank & Co., said March 11 it will buy back $10.7 million worth of stock and warrants issued under TARP, thereby settling with Treasury in full.

Ken Cherven, president and CEO of First Community, was given the option of joining Community Bank, but he declined in exchange for a $300,000 payout, according to Securities and Exchange Commission documents. Cherven did not return calls for comment.

Also along the coast, Tampa-based Florida Bank Group Inc. was reportedly behind two payments totaling $557,900. Florida Bank, which holds $20.5 million in TARP, announced last summer it would merge with Anderen Bank of Palm Harbor, but canceled the deal in January citing a “very restrictive regulatory environment.”

Banks possessing TARP funds and keeping current on dividend payments liken the program to an interest-only loan, with no set time limit as to when the government should be repaid. It also doesn't detract from a bank's image that it has TARP money in its vaults.

“It is the least expensive capital in the marketplace,” says Greg Bryant, president and CEO of Tampa-based Bay Cities Bank, which has $9.5 million in TARP on its books. “We still view TARP as an extremely good deal for us.”

Taxpayers not hurt

Bay Cities raised $21 million in new capital last year and was in a solid position to take over Tampa-based Progress Bank of Florida from the FDIC last October. Bryant says TARP funding has allowed his bank to simultaneously cushion its reserves while making loans to small businesses.

Bryant points out that it isn't necessarily bad news if community banks fall a few dividend payments behind, since they may actually be instructed by banking regulators to skip a quarter or two in order to keep up capital requirements. However, he says it is something current and prospective customers should keep tabs on in making upcoming transaction decisions.

UT's Flagg also notes that lagging banks shouldn't wait too long to repay TARP, since the interest rate on those dividends will jump to 9% after the program's fifth anniversary in October 2013. Those that can't settle up with Treasury by that time could be forced to make other equity arrangements, or merge with another bank, he says.

“Any burden from this will be on the small banks and their investors, and not really the Treasury or the taxpayer,” he says.