The federal government's desire to end the politically unpopular bank bailout program could change how a number of Charlotte-area community banks pay back their share.
As the nation heads into a presidential election year, the U.S. Treasury has begun communicating with community banks around the country as it plans an exit from the Troubled Asset Relief Program.
The government cannot force banks to repay TARP, under the terms of the capital investments brokered at the height of the financial crisis. To extricate itself, the Treasury is considering selling its stakes to third parties or restructuring their terms, said a Treasury official who asked not to be named because the process has not been made public.
Charlotte-area bank executives said they don't expect the initiative to bring dramatic changes. They've already weighed an exit as the investments are set to become more costly to the banks.
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But depending on how aggressive the government decides to be, the Treasury's moves could mean local banks will be able to put the bailout behind them at a discount.
The Treasury could also auction off its TARP investments to private equity firms or push community banks to merge.
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.
Bank of America received $45 billion, which it repaid by the end of 2009. Wells Fargo got $25 billion, paid off about the same time.
But as of last month, about $16.8 billion in TARP capital purchase program principal remained to be repaid from about 370 banks, according to the U.S. Treasury. Most of them are community banks. Two dozen North Carolina-based banks had $409 million still on the books.
Despite the outstanding investment, the program has been profitable, according to reports from the U.S. Treasury and the General Accountability Office. Income received from full repayments, dividends and interest, and other payments exceeded the total the government laid out. The GAO estimates the program will earn $13 billion over its lifetime.
But the government has been under increasing pressure to end its involvement. The most recent quarterly report from the Special Inspector General for the TARP program pushed for a concrete plan to unwind investments in community banks to remove uncertainty in the market. It said the Treasury's next steps would be critical.
In late November, the Treasury sent a letter to all banks still in the TARP program, saying the government had hired Houlihan Lokey Capital Inc. for $4.5 million as a consultant to explore options about the "management and ultimate recovery" of the Treasury's investments, according to the letter.
A few weeks later, Houlihan Lokey consultants began calling bank executives around the country, including a number in the Charlotte area, asking about their plans for the TARP investments and whether repayment could come soon.
"I told them no," said Wes Sturges, CEO of Charlotte-based Bank of Commerce. "We're in no rush to pay it off."
His bank received $3 million in January 2009 and has made the 5 percent dividend payments required. He said the bank plans to reconsider its options. Many community banks around the country still struggle with loan losses, making swift repayment unlikely.
A more likely result is that the government would sell its TARP stakes, possibly at auction, said B.T. Atkinson, a partner at corporate law firm Bryan Cave LLP, which represents community banks. Bryan Cave attorneys believe the Treasury could move forward as early as the third quarter, which, not coincidentally, overlaps with November's presidential election.
Charlotte-area bank executives said they are not overly concerned about that prospect. They maintain that seeing the government transfer its investment to a third party would not represent a major change.
"If they sell it, they're really selling an instrument," said Roger Dick, CEO of Uwharrie Capital Corp., which has $10 million in TARP remaining. "The instrument is already specified, whether the Treasury holds it, or an investor holds it."
But it would also transfer the rights to name directors to the bank's board after six missed dividend payments to the third-party buyer. Banks would also be freed from the restrictions on executive compensation that came with the TARP investment.
At a crossroads
Banks were already re-examining their future in TARP as the program nears a major inflection point. Beginning late in 2013, five years after the investments were made, the quarterly dividend payments will increase to 9 percent from 5 percent.
That alone will be a big driver of TARP repayments, said Rick Callicutt, president of Thomasville-based Bank of North Carolina. His bank still has $31 million from the program, and said paying it back is a priority in the next year.
While acknowledging the political advantages of ending TARP, he believes the Treasury is more likely to make its moves next year as the re-pricing point approaches. It will also provide an attractive rate of return for a firm buying those investments.
The Treasury does not have a timeline for making a decision, spokesman Matt Anderson said.
The Treasury has already restructured or altered a number of TARP investments around the country. Last year, for example, Asheboro-based FNB United was allowed to merge with Bank of Granite, with the government's stake converted to common stock at a 75 percent discount.