Banks Find Tarp Exit Tough Without Shareholders

Privately held companies that received money from the Troubled Asset Relief Program are starting to worry about paying it back.

Though the companies will not face higher dividend payments under the program for four years, many are considering exit strategies now because their inability to tap the public markets will make it tough to repay the Tarp funds.

"It is expensive money, so we are certainly thinking and talking about what point we are going to be giving it back," Andy Salk, the president and chief executive officer of the $320 million-asset First Eagle Bancshares Inc. in Chicago, said in an interview. "We are not giving it back today … , but we certainly don't expect to have it for the full five years."

So far, four privately held banking companies have repaid Tarp funds, according to data from Carson Medlin Co. Overall, 707 companies participated in Tarp's Capital Purchase Program, including 289 privately held companies, the data show. In total, $152.2 billion has been repaid by 64 institutions, $30.8 million of it from privately held companies.

Because the smaller, privately held banks do not have the option to raise capital through a public stock offering, their options are limited. Companies are considering repaying the funds with capital raised via private placements, earnings, debt issued by their holding company or a combination of these strategies.

Salk said economic uncertainty and the few opportunities to raise capital are leading First Eagle Bancshares to hold on to its Tarp money a while longer. "The public banks are giving it back because they can go into the market and raise equity," he said. "Private banks can't. Maybe in a couple years the market will be better for raising options."

The Tarp funds were intended to be a temporary source of capital. As such, dividend payments will rise to 9%, from the current 5%, for subchapter C corporations at their five-year anniversary. Subchapter S corporations will face an increase to a 13.8% rate, from 7.7%, at the five-year mark. Some bankers at privately held institutions said they are in no hurry to repay Tarp funds, which they called less expensive than other loans. Others said they want to repay as soon as possible, for reputational as well as financial reasons.

United Labor Bank in Oakland, Calif., is one of the four privately held companies to repay its Tarp money. It paid the Treasury $4.9 million in late April 2009, just three months after receiving the funds.

"When I talked to our regulator when it first came out, I asked if we wanted to be part of it, and he said, 'Yeah, it is only for the good banks,' " Malcolm Hotchkiss, the president and chief executive of the $275 million-asset United Labor, said in an interview. "Then it became a reputation risk, in our opinion, and we didn't want to be associated with a troubled institution."

The company had not leveraged the funds, so it did not need to raise capital to repay the money.

The three other privately held companies that repaid their Tarp money are the $1.3 billion-asset Centra Financial Holdings Inc. in Morgantown, W.Va., which repaid $15 million; the $73 million-asset Midwest Regional Bancorp Inc. in Festus, Mo., which repaid $700,000; and the $1.1 billion-asset Midland States Bancorp Inc. in Effingham, Ill., which repaid $10 million.

Unlike United Labor, most privately held companies have used the money and thus need to find another way to raise funds to repay the Tarp infusion.

The $99 million-asset Financial Services of Winger Inc. in Minnesota is planning to repay its Tarp funds before the five-year mark in four increments using earnings, said Mark Finstad, the company's chief financial officer. "There is an interest rate increase at the end of five years, and that is a motivator for us," he said.

Finstad said the bank focuses on agricultural lending, which has held up well in recent years, so the company has been able to leverage the capital into loans and remain profitable.

Yet some banks that accepted Tarp money are not profitable and will have to seek outside capital for repayment. Small banks, though, have an option that larger banks don't, and it involves how capital is allowed to be treated by the Federal Reserve, said Jeffrey Gerrish, a partner in the Gerrish McCreary Smith PC law firm in Memphis.

Gerrish pointed out that the Fed's small-bank holding company policy applies to bank holding companies with less than $500 million of assets. "The Federal Reserve won't test the capital on a consolidated basis. The only test will be at the bank level," he said. "So you can do whatever you want at the holding company to generate the cash. Borrow the money — it doesn't matter if it is debt or equity, as long as you generate the cash and dump it into the bank."

Another repayment strategy is being targeted by Gateway Bancshares Inc. in Ringgold, Ga. — using future profits and a bank holding company loan. Robert G. Peck, the president and chief executive officer of the $265 million-asset company, said in an interview that it expects to be profitable this year. Still, it probably will not have enough profits to repay the $6 million in Tarp money before the five years expire.

"Ours will be a combination," he said. "Part of it will come through profits as we go through this cycle and get to a more profitable period of time. We would probably prefer to borrow some through a holding company loan so we wouldn't dilute the ownership of shareholders."

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