BusinessTN

Think of it as an offer one can refuse. Or at most, temporarily accept.

That’s the approach some Tennessee bank officials seem to be taking toward the federal government’s Troubled Assets Relief Program (TARP).

Driven by concerns stemming from public criticism (think "bailout") and recent restrictions placed on TARP monies, these state bankers are deciding against participation in a key segment of the Feds’ overall economic stimulus package, known as the Capital Purchase Program (CPP). Industry officials say the rejection will require time to assess. Of those that have participated, many did so only after significant consideration or before the institution of additional restrictions on TARP by Congress.

In its original form, TARP carried some key restrictions that are often overlooked today, according to attorney Steven J. Eisen, a shareholder in the Nashville office of Baker Donelson Bearman Caldwell & Berkowitz, and an expert in financial law.

These restrictions included four different categories of executive compensation standards; dividend and redemption restrictions regarding other outstanding equity securities; and the right of the government to select two members of the board of directors of each TARP recipient that failed to meet certain conditions of the Capital Purchase Program.

"Long before the political outcry over Merrill Lynch or AIG bonuses spurred additional restrictions on TARP recipients," Eisen says, "both Treasury and the federal banking regulators were issuing rules and policy statements and examining more closely the financial institutions under their wings that had accepted government funds."

Nonetheless, that political outcry has forced those financial institutions to reevaluate matters. At last count, for example, at least four Memphis-area banks had decided to return the millions invested in their institutions through the program.

"It was only after the program started that Congress began to add mandates focused on specific lending accountability, compensation limits and expense prohibitions," explains Timothy L. Amos, senior vice president and general counsel for the Tennessee Bankers Association. "Banks use capital as a base to raise deposits, which they can then lend. Here is the misperception: Banks lend deposits; they do not lend capital."

R.B. Summitt II, a member of the Sevier County Bank board of directors, says he has concerns about the Capital Purchase Program. 

"Knowing why Sevier County Bank chose to not participate, I don’t blame anyone for trying to get out from under the ever-worrisome and increasing regulatory burdens of being a TARP recipient," Summitt says. “Most of us know how difficult it is to try to deal with any governmental entity, especially the federal government bureaucracy.”

As of April 3, and according to U.S. Treasury Department statistics, 20 Tennessee financial institutions had taken TARP CPP monies. The most recent is Kingsport-based TriSummit Bank, which took about $2.76 million. Lynn Shipley, TriSummit chairman and CEO, says for community banks, “it’s a different ballgame than the money-center banks that have been getting the ‘bailout’ money.”

“The big banks have gotten this additional capital due to credit or investment losses,” Shipley says. “For community banks, it’s the opposite end of the spectrum. We have to be very sound to participate in the program.”

The three Tennessee-based financial institutions that have taken the most CPP monies are Memphis-based First Horizon National Corp.  ($866.54 million), Nashville-based Pinnacle Financial Partners ($95 million) and Greeneville-based Green Bankshares ($72.278 million).
Dave Miller, First Horizon senior vice president of investor relations, says the institution, in the first quarter of 2009, continued to “leverage the Capital Purchase Program investment to facilitate lending.”

“Given our strong capital position, we consider it an ongoing responsibility to support our core banking markets by extending credit to consumers and businesses,” Miller says. “For example, we originated about $244 million of new and renewal small business and commercial loans last quarter (Q1 2009).”

Jim Adams, senior vice president and CFO of Green Bankshares (GreenBank), says the reaction to the TARP CPP program among Tennessee bankers “is clearly mixed, to say the least.”

No doubt, the issue of participating in the program can be a sensitive matter—so much so that a number of CPP participants contacted by BusinessTN for this story declined comment, including First Capital Bank, Magna Bank and Pinnacle.

According to reports, as of early April, almost 2,000 financial institutions had not yet heard from Treasury whether their application to participate in the Capital Purchase Program—the largest piece of the $700 billion TARP effort—had been accepted. Nationwide, approximately 600 banks had opted as of April 3 to participate. Specifically, TARP has the federal government invest in preferred stock of those participating banks. Because the banks are expected to buy back their shares, with interest, to call the program a “bailout” is misleading, according to some. In short, banks approved for participation in the Capital Purchase Program distribute a special class of preferred stock to the U.S. Treasury Department. These banks pay a 5% dividend annually on the stock to the Treasury for the first five years. Beginning in the sixth year, the banks pay a 9% dividend on the stock, an increase meant to spur the financial institutions to buy back the shares from the Feds.

Jeff K. Davis, a bank analyst and director of research for the Nashville office of Chicago-based Howe Barnes Hoefer & Arnett (of which Vining Sparks is a major shareholder), says some banks that are participating in the program “view their decisions as a mistake given what has happened with the politicization of TARP capital.”

“Many banks that intend to return TARP early may wait to see how the economy plays out, even though their capital position may look fine,” Davis says. “Pinnacle probably is in this group, even though the company continues to be profitable, while First Horizon will need to hold onto the capital until  (a.) the economy and real estate values stabilize then improve, thereby allowing FHN to become profitable again; and/or (b.) FHN can tap the capital markets for replacement common equity capital.”
Mary Neil Price, an attorney with the Nashville office of Miller & Martin and a specialist in legal matters involving private equity and debt financing, says banks should strongly consider the ramifications of participating or not participating. “If you think you’re going to need additional capital in the next six to 18 months for sustained growth,” Price says, “and you aren’t confident that you can raise additional capital from existing investors, then you should seriously consider participating in the program.”