Tarp Funds Handcuff Small Banks by Accident

By Davis, Paul | American Banker, May 25, 2010 | Go to article overview

Tarp Funds Handcuff Small Banks by Accident


Davis, Paul, American Banker


Byline: Paul Davis

Community banks are finding it extremely difficult to check out of the 18-month-old Troubled Asset Relief Program.

While all of the big banks have repurchased or converted preferred stock, and two-thirds of the regionals have followed suit, community banks are expected to hold the vast majority of unpaid Tarp funds on their balance sheets by the program's two-year anniversary.

Considering these perhaps unintended results, questions are mounting about whether injecting capital into the smaller banks was a good idea since it has done little to boost lending and could cost these institutions dearly in the long run.

"Given the difficulty of getting out, I am sure there are a lot of bankers asking themselves, 'Why did I take it?'" said Blake Howells, the director of research at Becker Capital Management in Portland, Ore.

D. Anthony Plath, finance professor at the University of North Carolina at Charlotte, put it more blunty: "All we've done is created a bunch of zombie banks. It's not humane to those banks to give them false hope for survival."

The smaller the bank, the more likely it is still in the program. Roughly 81% of the banks that received $50 million to $1 billion in Tarp funds remain in the program, according to recent Treasury Department statistics. The number jumps as high as 97% for banking companies that received $10 million or less.

For now, bigger banks still owe a majority of the remaining Tarp funds, though their portion fell to 51% of the investment at May 18, from more than 87% at the program's height, the Treasury data says. Only six banks have individual Tarp commitments exceeding $1 billion, and analysts expect many of those to repay by early 2011. For example, Kevin Kabat, Fifth Third Bancorp's chairman and chief executive, said during a conference last week hosted by Barclays Capital that he expects the Cincinnati company to repurchase its $3.4 billion in preferred stock later this year.

Executives at a number of community banks are reluctant to characterize the program as an outright yoke, though most acknowledge a desire to exit. Obstacles range from erratic capital markets to regulatory impediments, they said.

"It is a little harder for the smaller banks to raise capital," said Kirk Bailey, the chairman, president and CEO of Magna Bank in Memphis, which is paying its $13.8 million in Tarp funds in installments so it can use retained earnings rather than selling stock. Magna, which repaid $3.5 million in November and is looking at a similar payment "in the not-so-distant future," hopes to be out of Tarp completely in the next 12 to 15 months, he said.

Donald Mullineaux, a University of Kentucky finance professor, noted that for a small bank, selling common stock is very cost-prohibitive. He said the typical investment bank wanted a minimum offering of $50 million to $70 million, with fees of 6% to 8%. …

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Tarp Funds Handcuff Small Banks by Accident
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