N.C. banks consider options over TARP bailout debt

The (Raleigh) News & ObserverMarch 7, 2012 

The federal government's interest in ending its politically unpopular bank bailout program has Triangle community banks pondering how the government's plans might affect them.

Under the terms of the capital investments the federal government made at the height of the financial crisis, the U.S. Treasury can't force banks to repay money they received from the Troubled Asset Relief Program. But in November the Treasury sent banks with outstanding TARP debt a letter informing them that the government has hired a consultant to consider its options. It is widely assumed that the department is looking at steps such as auctioning its holdings.

"It's on a lot of people's minds," said Bill Wagner, a Raleigh-based investment banker with Raymond James.

At least five community banks with operations in the Triangle have outstanding TARP obligations, according to the U.S. Treasury. They include three Triangle-based banks: Raleigh-based Crescent State Bank, KS Bank of Smithfield and Durham-based Mechanics and Farmers Bank.

Two other North Carolina banks with branches in the Triangle also owe TARP money: Southern Community, which has a branch in Raleigh, and Yadkin Valley, which has two Cardinal State Bank branches in Durham and one in Hillsborough.

A number of national and regional banks with a Triangle presence borrowed billions in TARP money but have since repaid their debt. They include Bank of America, BB&T, PNC (which just completed its acquisition of Raleigh-based RBC Bank), SunTrust and Wells Fargo.

Raleigh-based Capital Bank also repaid its $41.3 million in TARP obligations in conjunction with being acquired by North American Financial Holdings.

In fall 2008, President George W. Bush signed into law the plan to inject $205 billion into more than 700 banks, largely as preferred stock, to help shore up their balance sheets as the financial crisis rocked capital levels and threatened liquidity.

The TARP program provided crucial dollars for some banks, while others took the money as an insurance policy in an uncertain time, Wagner said.

The banks in the latter category "are glad they took it, because the recession has been rougher than they anticipated," Wagner said.

He said that if the federal government chooses to auction its holdings, it conceivably could present banks with an opportunity to pay off their loans at a discount.

One possibility is that banks with large TARP obligations could participate in the auctions and buy back their debt at a discount.

Many expect that if the government auctions off its holdings, only the largest holdings would be auctioned off individually, meaning that might not be an option for smaller community banks. Instead, many anticipate that the smaller loans would be offered in pools.

In that case, an investor that buys the government's holdings at a discount might be willing to sell its stake in a particular bank to the bank itself at a lesser discount.

As of January, about $16.8 billion in TARP funds remained to be paid by about 370 banks, according to the U.S. Treasury.

Most of the banks that owe money are community banks.

Although the program has been controversial, various TARP programs - which include bailout funding for the auto and insurance industries - had turned a $13 billion profit as of November, according to the U.S. Treasury.

Banks that received TARP money must pay a 5 percent annual dividend for the first five years and 9 percent for the final five years.

"At 5 percent, it's an attractive cost of capital," Crescent CEO Scott Custer said. "At 9 percent, it becomes less attractive."

Custer declined, however, to discuss Crescent's plans regarding TARP. "I can't comment on what we might do in the future," he said.

Lyn Hittle, chief financial officer at Mechanics & Farmers, also declined to comment.

KS Bank CEO Harold Keen said that whatever the federal government does probably won't affect the bank's plans to pay off its debt.

"I don't see any real advantage to us paying it back right now," he said.

But, he added, KS will re-evaluate when the interest rate jumps higher.

'A defined contract'

Keen said it makes no difference whether the bank owes money to the federal government or an unknown investor that might acquire the government's holdings.

"It's a defined contract that can't be changed," he said. "Our responsibilities and conditions will be the same no matter who owns it."

Banks would, however, be freed from restrictions on executive compensation that came with the TARP money if a private investor takes over the debt.

In addition, a private investor would assume the right - now held by the federal government - to name two people to the board of directors of a bank that misses six consecutive dividend payments.

Having new directors whose chief concern is their own investment could be unsettling to banks, Wagner said.

Three of the five banks operating in the Triangle that took TARP funds - Crescent, Southern Community and Yadkin - have missed at least three dividend payments, according to data compiled by Raymond James. Crescent missed its payments prior to being acquired by Raleigh-based Piedmont Community Bank Holdings.

Southern Community CEO Scott Bauer said the bank has conserved its capital, but he is optimistic the bank's improving finances will enable it to resume its dividend payment soon.

Down the road, he hopes the bank's share price will rebound to the point that the company could raise additional capital by selling stock to pay off its TARP debt.

"We are still in great shape from a regulatory capital standpoint," he said.

Joe Towell, president and CEO of Yadkin Valley Financial, issued a statement noting that the bank is considered well-capitalized by regulators.

"Our focus has been to return the bank to profitability, which we have done for the last two quarters, and we expect that trend to continue," he said. "We are constantly evaluating all strategic options available with regard to capital, including TARP."

Given that this is a presidential election year and the TARP program has been a political lightning rod, Wagner said many in the banking industry are wondering whether the government will act before November.

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