Banks that opted to take part in the Troubled Asset Relief Program got some well-publicized government strings attached along with their money. What’s less clear, however, is what exactly happens when institutions buy TARP recipients.
The issue hasn’t surfaced much in the past year because of a slow national merger market, but more banks are now encountering the TARP question when it comes to doing deals.
The acquiring bank can either arrange to have the money repaid – with treasury approval – or it can transfer the money to its own coffers. The snags come when the latter type of buyer must figure out how much leeway it gets under traditional TARP rules.
One thing that is certain is that those banks that keep the cash don’t fall under executive compensation rules, said Robert Klingler, a TARP expert with New York-based law firm Bryan Cave. For everything else, the requirements are less clear.
“The executive [compensation] area is the one area where there’s an explicit rule,” he said. But although that’s the most well-known requirement inherent in taking government money, it’s not the only reporting rule TARP banks must follow. TARP banks must not, for example, increase dividends on common stock without the Treasury’s approval.
But as far as acquiring banks go, Klingler says, “I honestly don’t know whether that would apply or not.”
That ambiguity is one factor that prompts most acquiring institutions to say, “no thanks” when weighing whether or not to hang on to TARP money.
In Connecticut, Danbury’s Union Savings Bank was confronted with this question in its acquisition of First National Bank of Litchfield, which had accepted $10 million in TARP funds.
“It’s something that, as a mutual bank, we can’t hold it – don’t want it, don’t need it,” said John Kline, president of Union Savings Bank. First National is a public bank with differing TARP rules, anyway, so a direct transfer wouldn’t have been possible.
But the combined institutions have no need of that extra capital, Kline said, so First National will transfer the money back to the federal government as soon as the ink is dry on the merger.
Federal officials don’t want Union Savings’ TARP money back ahead of time, according to Kline, because they want to keep First Litchfield’s capital levels healthy right until the deal is done, which should happen around the end of the first quarter of 2010.
In the meantime, Kline said, “the dollars are doing what they were intended to do, which is to keep the bank well-capitalized. Once you extract them, it changes the capital ratios pretty substantially.”
William P. Mayer, a partner with Boston-based Goodwin Procter, said most banks he’s worked with on the issue are choosing to repay the money with some combination of money from the two institutions.
Bankers just don’t want to deal with the uncertainties surrounding TARP rules, Mayer said, concurring with Klingler’s assessment on the wide-ranging gray areas the program holds for acquiring banks.
Treasury Department spokesman Andrew Williams didn’t know how many such mergers had affected the more than 600 banks nationwide that took TARP money, nor did he know the exact protocol in those cases.
To Klingler’s knowledge, relatively few banks have had to deal with this complication because merger activity has been slow. Still, more banks will soon have to wrestle with the issue as it arises.
“Each one will be a unique fact pattern…because each acquirer’s circumstances are going to be slightly different,” he said.
