Report: Florida's Banks and TARP
Take It or Leave It?: Time will tell which banks made the right choice in seeking TARP funds -- or avoiding them.
“I think the government is going to make a pile of money on the program.”
— Gideon Haymaker, CEO,
Talk to CEOs at the 18 Florida-based banks that have accepted money from the government’s Troubled Asset Relief Program and you’ll hear something very similar to what C. Andrew Lawrence, CEO of Marine Bank & Trust in Vero Beach, says — that TARP isn’t a no-strings-attached bailout. “People think somehow we don’t have to give it back,” he complains.
To receive TARP funds, banks sell the government non-voting senior preferred shares, in an amount equal to from 1% to 3% (soon to be raised to 5%) of the company’s risk-weighted assets. Bankers have to pay the U.S. Treasury a 5% dividend on their TARP funds for the first five years and 9% after that. Since the dividend is paid with after-tax money, the actual borrowing cost depends on the bank’s tax situation. Some pay not much more than 5%; others around 7.5%. Ultimately, the banks pay back the TARP loan by buying back their stock from the U.S. Treasury.
Florida bankers say that borrowing the money is cheap compared to the regular cost of a stock offering in normal times. Sid Spiro, CEO of Davie-based Regent Bank, calculates that his bank will pay 7.6% per year on the money for five years and, if it hasn’t bought back the shares after that, will still pay less than the 15% cost of raising equity capital through an offering.
Bush administration Treasury Secretary and former investment banker Hank Paulson, on whose watch the program was created, structured the terms like a good investment banker should: To make money for his client, the government. When the government makes TARP loans to widely held, publicly traded companies, it also gets the rights to buy common stock with a market price equal to 15% of the TARP money invested — so that the taxpayers can get some upside as bank stocks appreciate. As of June, the government-owned warrants wouldn’t generate a return at most, if not all, banks. The rules are different for privately held banks, but the government still gets a kicker. “I think the government is going to make a pile of money on the program,” says Gideon Haymaker, CEO of Seaside National Bank & Trust in Orlando.
A few of the Florida banks that have borrowed TARP funds expect to be able to buy back the government’s shares using their profits, but most predict they’ll use capital raised through private stock offerings or private borrowing. Most banks aim to buy back the government’s shares within five years — before the dividend rate they pay jumps from 5% to 9%.
“We can write the check tomorrow,” says Rudy Schupp, CEO of 1st United Bank in Boca Raton, of his “hyper-clean, low-problem-asset bank.” But less-healthy institutions may not be able to attract investors when the capital markets ease — leaving them with the government as a shareholder indefinitely, he says.