Consolidation continues to play a small but growing role in the resolution of the Troubled Asset Relief Program.

In the past two weeks, acquiring banks have agreed to resolve the unpaid Tarp funds of target institutions, bringing the number of such deals to 16 with the vast majority taking place since mid-2010.

Observers believe there will be more opportunities for such arrangements in the months ahead as the ranks of Tarp participants shrink to only those with the greatest need of capital.

"A lot of small banks are trading at very steep discounts, and their options for capital-raising are limited," said David Darst, an analyst at Guggenheim Partners. "One option is to sell the entire franchise. If they do that, they will receive more of a franchise premium, rather than a recapitalization … at a significant discount."

There were at least nine acquisitions involving Tarp payoffs last year, according to data from KBW Inc.

The pace of deals that include Tarp repayment has remained steady this year, with five unveiled through June 28.

Those include F.N.B. Corp.'s agreement to buy Parkvale Financial Corp., which has $31.8 million of Tarp funds, and Mission Community Bancorp's agreement to resolve $4 million owed by Santa Lucia Bancorp.

Acquirers have repaid about $3 billion of Tarp funds since March 2009 under agreements to buy other banks.

Acquirers include large banks, like the $50 billion-asset M&T Bank Corp. of Buffalo, N.Y., and community banks such as the $108 million-asset Carlile Bancshares of Fort Worth, Texas.

Including Tarp repayment in an acquisition deal gives the Treasury Department a chance to avoid possible losses, Darst said.

The Treasury has frequently offered a discount to acquirers, allowing them to pay less than the total balance in order to facilitate a sale.

"It does create an opportunity for Treasury to recoup some of its investment rather than zero," Darst said.

The failure of Superior Bancorp of Birmingham, Ala., highlights the risk the Treasury faces, SNL researchers wrote in their April report. The agency could be hit with a total loss from Superior, which received $69 million of Tarp funds in late 2008. The company's thrift unit, Superior Bank, failed in April.

Taking into account all Tarp paybacks, not only repayment agreements in merger and acquisition deals, the amount of outstanding Tarp debt in the Treasury's Capital Purchase Program has declined by about 87% since its inception, said Brian Olasov, a managing director at McKenna, Long & Aldridge who has testified before the Tarp oversight panel.

While the total Tarp bill has significantly decreased, many institutions still owe funds. SNL Financial estimated in an April report that about 600 institutions remain in the program.

Most remaining Tarp participants are "smaller banks, most of which received less than $100 million in funding," Olasov said.

A significant number of the remaining banks have missed several Tarp dividend payments, Darst said. For that reason, the Treasury is likely to continue to discount the total amount of Tarp money acquirers must repay, to avoid total losses on Tarp investments, he said.

"In order to get the highest possible return on its investments in these struggling banks, the Treasury has increasingly shown its willingness to work with buyers and the Tarp participants themselves by allowing discounted redemptions," SNL researchers wrote in April.

Discounts have ranged from 84.7% that Carlile received to repurchase $3 million of preferred stock belonging to Treaty Oak Bancorp, to just 11.3% on the $44 million of Cadence Financial Corp.'s preferred stock that Community Bancorp LLC agreed to repurchase.

Several acquisitions were not discounted, according to data from SNL Financial.

Mission Community's Monday agreement to buy Santa Lucia underscores how Tarp and capital issues are bringing banks together.

Struggling Santa Lucia, in Atascadero, Calif., had planned to raise $5.9 million through a stock offering. Instead, it decided to sell to Mission Community, in San Luis Obispo, Calif., withdrawing its plan for a capital raise, according to a regulatory filing.

Details on a possible Tarp discount in the Mission Community-Santa Lucia transaction — if any is planned — have not been disclosed.

There have been other acquisitions this year that featured a Tarp payoff. In May, Bear State Financial Holdings bought First Federal Bancshares of Arkansas Inc., agreeing to pay off its $17 million of Tarp funds. Bear State received a 63.6% discount on the repayment, according to data from SNL.

There were at least nine such deals in 2010, with the biggest Tarp debt, at about $1.18 billion, belonging to Marshall & Ilsley Corp. Bank of Montreal, through its U.S. unit Harris Bank, agreed to pay the tab when it cut a deal in December to buy the Milwaukee banking company.

Another big exit took place when M&T Bank Corp. agreed to redeem Wilmington Trust Corp.'s $330 million of Tarp preferred stock.

Other large-scale deals involving big Tarp exits included Toronto-Dominion Bank's agreement to address $347 million in Tarp money for South Financial Group Inc.; and Hancock Holding Co.'s agreement to repay Whitney Holding Corp.'s $300 million Tarp bill.


Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access