When banking regulators rolled out the Troubled Assets Relief Plan in late 2008, the idea was relatively simple: The government would dip into its massive coffers to boost lenders’ capital, help them absorb losses and get through the recession. When things got better again, the banks would soon grow healthy enough to cut a check and get back to a more normal state of business.
Middle Tennessee’s community banking scene shows that carrying out that plan hasn’t always been so straightforward. And adding a sense of urgency for most of the institutions still in TARP is that the dividends they must pay will jump to 9 percent at the end 2013, up from 5 percent now.
Already out of the Capital Purchase Program — the program under the TARP umbrella that actually invested in the nation’s banking sector — are the parent companies of Pinnacle Bank and Avenue Bank in Nashville, as well as F&M Bank out of Clarksville.
Pinnacle took the most straightforward route out, repaying its $95 million from its retained earnings. The more than $16 million in dividends it paid over almost four years gave the Treasury Department a return on its Pinnacle investment of almost 18 percent.
Avenue, in September 2011, stepped into another government-backed program, the Small Business Lending Fund, which ties the dividends it will pay on its preferred stock to loan growth. The Treasury, i.e. we taxpayers, booked a profit of $1.4 million on the CPP investment in Avenue.
F&M took another path — and one not entirely of its own choosing. After it paid more than $3.3 million in dividends to the government, its preferred stock was sold via auction to private investors last month. The $18.1 million of debt sold at a 20 percent discount.
“It’s just like having regular preferred stock out there,” said Sammy Stuard, F&M president, who declined to disclose the identity of his new shareholders. “The payback terms are substantially the same.”
Other area lenders are seeing the end of the TARP tunnel. Chris Holmes, president of FirstBank, said his team has been talking to regulators about doing the same thing as Pinnacle before the end of this year. First South Bancorp, the parent of FirstBank, still owes about $37 million of the $50 million the Treasury invested. It has paid about $12 million in dividends and last year redeemed about a quarter of the government’s investment.
As soon as the appropriate permissions come in to pay back the remainder, Holmes said, a big check will go out the door.
“If we wanted to hang on to it longer, we could,” Holmes said. “But we’d rather get out of the program, and I think Treasury would rather wrap up the program, too.”
Here’s where things stand with the other local community banks in which the Treasury still has a stake:
• CedarStone Bank, based in Lebanon, has been faithfully paying its dividends but still owes the Treasury all of its $3.6 million if it wants to leave TARP. CedarStone’s profits have been small but climbing steadily, and its capital ratios are comfortably above regulatory requirements. The bank’s president, Bob McDonald, could not be reached last week for comment about his TARP payback plans.
• Community First Inc., the Columbia-based parent of Community First Bank & Trust, received $17.8 million from the Treasury in early 2009 and dutifully paid its dividends for two years. But when the Federal Reserve clamped down on the money-losing bank — total losses topped $10 million in 2009 and 2010 — it said CEO Louis Holloway and his team needed to halt those payments so that Community First could build up its capital cushion. (The dividend payments are still recorded on the bank’s books, but the cash has stayed at home.) At this point, preserving the bank’s future is more important than paying back the Treasury. Holloway, who did return a request for comment, has been shrinking his bank and dumping bad loans. Community First booked a first-half profit of $2.7 million.
• The parent of First Freedom Bank in Wilson County is headed for the exit and, like F&M, getting a new set of preferred stockholders. Treasury officials, who have invested $8.7 million in six-year-old First Freedom, on Halloween launched an auction for their stake. As of press time, the results of the auction were not yet available. President John Lancaster was traveling last week and unavailable for comment.
The Treasury has been taking some heat from Christy Romero, the special inspector general charged with watching the operations of TARP, over its increasing use of these auctions. Treasury officials have said they are at this point acting like private investors, but Romero sees risks in quickly shuffling community banks out of the program.
“Without analysis or consultation with banking regulators, it is unclear how Treasury can be assured that this exit strategy promotes financial stability or preserves the strength of community banks,” Romero wrote in a recent report to Congress. “Community banks are still feeling the effects of the crisis and have only just begun their recovery. Any TARP exit plan should ensure that the industry does not lose ground on that recovery.”
The looming jump in the dividend rate to 9 percent won’t make things any easier for small banks, which are finding it very difficult to raise new capital by themselves these days. One of their best hopes, said Bass Berry & Sims banking attorney Bob Thompson, may be to hope that Treasury officials agree to modify those terms somewhat — the nation’s community banks can be a powerful lobbying force in D.C. — or that private investors brought in through auctions will be more flexible. Either way, the journey back to true financial health for these institutions looks to be a long one.
“By and large, it’ll be a lot of having to figure it out by yourself,” Thompson said. “It will be a long-term workout, but not an impossible workout.”