Treasury nudges banks on TARP

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: December 7, 2011 - 3:07 PM

Most lenders have paid back bailout funds they got several years ago, but now the government wants the rest of the money back.

The Treasury Department is ratcheting up efforts to wean banks off the financial relief the government provided during the 2008 financial crisis.

In an e-mail letter dated Nov. 30, the department encouraged the 380 banks that remain in the bailout program to repay the outstanding $17 billion, saying that it has hired investment adviser Houlihan Lokey Capital Inc. "to explore options for the management and ultimate recovery" of the money.

Most U.S. lenders have paid back their share of the $245 billion in bank bailout funds. But those that haven't include 13 of the 19 Minnesota banks that were in the bank-assistance effort, part of the Troubled Asset Relief Program, or TARP.

Industry experts say the collection effort could put pressure on small banks struggling with a difficult economy and weak loan demand, and could drive more bank mergers. Dick Bove, a veteran bank analyst with Rochdale Securities in Florida, said he doesn't see any real need for the U.S. Treasury Department to pressure small banks to repay the remaining amounts outstanding.

"It's now obviously an annoyance to Treasury to have this stuff on its books," Bove said. "It's perceived to be a negative program, even though it was one of the most brilliant programs the country has ever seen."

Under the bailout, the government purchased preferred stock in the lenders, but the investments are largely seen as bailout loans. The funds typically carry a 5 percent interest rate for the first five years and 9 percent after that.

Banks ultimately determine what to pay and when to repay it, a Treasury spokesman said in an interview, and they aren't under obligation to repay the TARP funds. However, if a bank misses six of its quarterly dividend payments to the Treasury, the department can take actions that include appointing board members.

Minnesota received relatively little TARP money relative to the high number of community banks in the state. But 19 lenders in the state accepted the bailout funds in 2008 and 2009, which pumped about $7.1 billion into the local financial system.

Six lenders have repaid the debts, including U.S. Bancorp of Minneapolis and Wayzata-based TCF Financial Corp., the two largest borrowers. U.S. Bancorp paid off its $6.6 billion in 2009, and TCF paid off its $361.2 million that year as well.

But the 13 remaining Minnesota banks are among 380 around the country that haven't reimbursed the Treasury. American Investors Bank and Mortgage in Eden Prairie, which received $1 million under the TARP program, called the e-mail letter a non-issue. The bank plans to pay off the loan before the interest rate jumps to 9 percent in 2013, said David Coauette, president of Bank Financial Services Inc., the bank's holding company.

"Our goal is to pay one-third, one-third, one-third and be out by that 2013 timeframe," Coauette said.

Coauette said he expects someone from Houlihan to visit within the next 30 days to get some feedback on the bank's long-term capital plan. The bank primarily makes residential mortgages.

In contrast, Home Federal Savings Bank in Rochester has missed three of its quarterly dividend payments on the TARP money, one of a handful of Minnesota lenders to miss payments, according to the Treasury. The bank accepted $26 million from the government, but it has lost $3.2 million so far in 2011. Earlier this year, federal regulators ordered Home Federal Savings to clean up its balance sheet.

"We have a budget in place," said Bradley Krehbiel, president of Home Federal Savings. "We don't have any immediate plans to repay TARP."

Krehbiel said he had received an early call from Houlihan Lokey to let him know the e-mail notice was coming. Otherwise, he said, "We didn't find that there's any kneecap-busting going on there."

Jennifer Bjorhus • 612-673-4683

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