Although the U.S. Treasury’s Troubled Asset Relief Program is commonly referred to as a bailout of the financial industry, banking experts say it’s no giveaway. TARP money extended to banks carries a 5 percent annual dividend rate, payable quarterly. The dividend rate increases to 9 percent after five years.
“There are a lot of banks simply not interested in this money because of the cost,” said Jerry Swords, president of Kansas City-based bank consultant Swords Associates Inc. “There are banks that really need capital, and they are going to take it.” Swords said 5 percent is considered pretty expensive money these days, with a 3 percent rate more in line with the current market. He said that having the TARP rate turn to 9 percent can spell real trouble for banks that can’t repay the investment.
“Taking the funds is comparable to me paying 5 percent for a certificate of deposit in my market, with total regulatory approval,” said Rick Viar, president of Lee’s Summit-based Summit Bank of Kansas City. “That’s probably an acceptable expense, but I would be under the gun to make sure that was repaid in five years to avoid the penalty of paying 9 percent. I don’t know if it’s worth all the sleepless nights I’d have, making certain I had the liquidity to pay that off in time.”
Viar said that he’d have to lend the money at 8 percent to get a return and that it would have to be a return available in time to pay off the TARP investment within the five-year span. Gregg Whittaker, professor of finance and economics at William Jewell College, said small banks like Summit Bank have different considerations. He said many small banks are flush with cash, as investors fled large banks for well-run, smaller banks.
“So a lot of small banks already have the funds and can get them a lot cheaper than 5 percent,” Whittaker said. He said that a bigger problem right now is a low demand for loans. That makes it even harder for banks to make money, especially at higher rates. So TARP money mainly appeals to banks with liquidity concerns, Whittaker said.
“I know part of the discussion some bankers have is, if they pass on the money and then subsequently have liquidity problems, then what do they say to depositors and shareholders,” he said. “So there is some thought out there that you may not really need the money, but if you don’t take it, you could be in a world of hurt if something down the road goes wrong.”
Dickinson Financial Corp. said it was being prudent when it announced Jan. 20 that it had accepted $146 million in TARP funds. Kansas City-based Dickinson is the holding company for $4.2 billion-asset Bank Midwest and five other banks. “Clearly, banks who choose to take the TARP money and have approval granted think that bolstering capital levels, even if you’re already well capitalized going into it, is just a prudent thing to do,” said Rick Smalley, president and CEO of Dickinson. “I think banks look at the immediate point in time of the economic cycle we’re in as certainly a more difficult environment than we’ve had in several years. In a three- to five-year period for paying back these TARP funds, hopefully all these uncertainties will be behind us.”
Smalley said his organization doesn’t view the funds as similar to CD money that requires a one-to-one investment. Instead, it is seen as liquidity, bolstering required capital levels and allowing the bank to free up as much as $9 in lending for each $1 invested. That leverage makes it easier to make the margins work and have TARP funds be a profitable investment. He said the capital also cushions the organization against loan-loss provisions that eat up earnings.