Six banks that owe Treasury walk TARP tightrope

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Six of the 17 Indiana banks that relied on the federal government to shore up their balance sheets in the recession have yet to repay, and the U.S. Treasury isn’t going to wait forever.

Treasury officials are looking to wind down the Troubled Asset Relief Program, which gave banks capital infusions in return for preferred stock, by auctioning that stock to private investors.

Most of the 343 U.S. banks still holding TARP money are small community lenders that don’t have the resources or name recognition to raise money from the capital markets on their own. While auctions will get the government out of the bank-investing business, the move puts pressure on executives to pay off their TARP money in a hurry, or take their chances with the new shareholders.

montel-joe-mug.jpg Montel

“It is not something that gives us great hope because purchasers of assets for profit will likely manage those assets more aggressively,” said Joe Montel, president of Bank of Indiana, an Indianapolis-based bank with $100 million in assets that’s holding $1.3 million in TARP funds.

Bank of Indiana is still working to gain solid financial footing, and it’s deferred two quarterly dividend payments to TARP, Montel said. After six missed payments, holders of preferred stock, whether that’s the government or private investors, would have a right to nominate two board members.

But the auctions, which will likely pool shares of multiple banks, might not be bad news for banks with stronger balance sheets. They could take the opportunity to buy back the shares at a discount to what they otherwise would have paid.

Another benefit to exiting TARP is that banks escape the program’s restrictions on executive pay. As long as they hold TARP funds, banks aren’t allowed to give their executives cash bonuses or stock options.

Treasury didn’t disclose which banks received its June 19 notice about the auctions, which are planned for the fall. Banks have until Aug. 6 to opt out by making a bid to repurchase all the shares, or designating an outside investor or group of investors to make a bid, according to the notice.

Other Indiana banks still using TARP funds are Fidelity Federal Bancorp of Evansville, FFW Corp. of Wabash and Universal Bancorp of Bloomfield.

“Each of these banks are in a relatively tough position with respect to being able to pay back TARP in the near term,” said Mike Renninger, principal of Renninger & Associates LLC, a banking consulting firm in Carmel.

Two other financial institutions, Heartland Bancshares Inc. of Franklin and Indiana Community Bancorp of Columbus, are soon to be acquired by larger banks that will finance their exit.

Healthy banks have enough reserves to cover 100 percent of non-performing assets (in other words, bad loans), but the Indiana banks still in TARP have reserves ranging from 18 percent to 26 percent, Renninger said.

tarp-table.gifIndiana banks received $663 million from TARP and $544 million of that has been repaid, or is expected to be repaid as the result of mergers.

Most of the repayment gap stems from last year’s failure of Integra Bank Corp. of Evansville, which took $83.6 million.

Even accounting for bank failures and shares auctioned at a discount, Treasury officials say taxpayers will come out ahead with TARP, a $245 billion program, because of the quarterly dividends banks have paid. Treasury has collected $264 million through TARP so far.

The dividend rate is set to zoom up from 5 percent to 9 percent after five years, and banks will have to pay it whether the government or private investors own the shares.

MainSource Financial Group of Greensburg was planning to repurchase its shares sometime in 2013, Chief Financial Officer Jamie Anderson said, but Treasury decided to unload them through an auction in March. The government received $52.3 million, a 7-percent discount on the $57 million value.

MainSource bought $21 million of the shares itself, but that still leaves a large chunk that will be subject to the dividend hike in 2014.

“So for us, now it creates a different decision process,” Anderson said.

MainSource has plenty of reserves, Anderson said, and it’s looking to grow. The bank recently said it will jump into the Indianapolis market with a high-profile location in the Barnes & Thornburg building at Meridian and Washington streets downtown.

TARP gained a bad reputation as a big-bank bailout, Anderson said, “But I would tell you, overall, the program did what it was supposed to do. It bolstered the capital of the banking industry at a time when it needed it. It helped us be able to sleep at night.”

Several other Indiana banks exited TARP by transferring to another federally subsidized program, the Small Business Lending Fund.

Horizon Bank of Michigan City, which is buying Heartland Bank of Johnson County, replaced half of its $25 million in TARP money with Small Business Lending Funds.

Chief Financial Officer Mark Secor said the bank doesn’t need help covering non-performing assets.

“It’s a low-cost capital source,” he said.

The SBLF money has an interest rate of 5 percent for the first 36 months, but the interest can drop if a bank grows its small-business loan portfolio. Horizon’s SBLF terms will drop from 3.4 percent on June 30 to 2 percent by Sept. 30 because of its pickup in lending, Secor said.

Secor said he anticipates paying back the $12.5 million out of earnings over the next several years.

“More of what we’re maintaining it for is to do transactions such as Heartland,” he said.

Horizon will look at banks still holding TARP funds because they might be more willing to strike deals, Secor said.

First Merchants Corp. of Muncie converted a portion of its TARP money to the Small Business Lending Fund in September 2011. CEO Mike Rechin doesn’t think the bank’s small-business loan portfolio will grow until it sees stronger demand from customers.

In the meantime, the fund gives First Merchants more options for deploying capital. In the last quarter, the bank boosted its dividend, Rechin noted.

Plus, he said, the economy isn’t strong enough to encourage banks to hurry up in repaying.

“It wasn’t that long ago, three years ago, when all banks were wondering if they had enough capital,” he said.•

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