News Column

U.S. Breaking Even on its Bank Bailouts

March 17, 2011

Patricia Sabatini

Banks

Nearly 2 1/2 years after the federal government began handing out billions in bailout funds to rescue the banking industry, the U.S. Treasury Department says enough banks have kept up with the interest payments or have repaid the funds in full that taxpayers have broken even on their investment.

The Troubled Asset Relief Program provided $245 billion to banks during the financial crisis and, so far, has recovered $243 billion through repayments and other income, according to the department.

As the government winds down the controversial program, it is launching another bank funding program meant to prop up the economy by encouraging community banks to lend to small business.

To date, 105 financial institutions have returned their TARP funds out of 763 that received the aid, said Linus Wilson, finance professor at the University of Louisiana at Lafayette, who has been tracking the program.

Locally, two of the nine Western Pennsylvania-based banks that received help have returned the funds: PNC Financial Services Group, Downtown, and FNB Corp. in Hermitage.

In the Pittsburgh region and nationwide, the biggest banks have been in a rush to repay the money because of the caps on executive pay that came with the aid and the stigma attached to taking public money.

Six of the seven local banks still holding TARP funds say they intend to pay off the loan before the interest payment is slated to rise. Payments are made in the form of quarterly dividends on preferred shares that the treasury department purchased. The dividend rate was set at 5 percent for the first five years, jumping to 9 percent after that.

A spokesman for S&T Bank in Indiana, Pa., was less specific about the bank's plans, saying it would repay its $108.7 million in TARP money "when we determine that the time is right."

Executives at most of the local banks said they were considering paying off the TARP funds with money borrowed from a new $30 billion federal program set up to spur community banks to lend more to small businesses and boost the economy.

The program, called the Small Business Lending Fund, is open to banks with less than $10 billion in assets. Banks have until the end of the month to apply. Bankers are expecting that in order to participate, they will be required to repay TARP with the proceeds.

"We are considering participating in that fund," said Jeffrey Stopko, chief financial officer at Ameriserve Financial, based in Johnstown. "If we would do that, we would utilize those funds to repay TARP."

Parkvale Financial's chief financial officer, Gil Riazzi, said the Monroeville-based institution had already applied for a piece of the new lending fund. "We fully expect to refinance TARP with the proceeds," he said this week.

Under that program, the quarterly dividend rate starts at 5 percent but can drop to as low as 1 percent if the bank meets benchmarks for loan growth. Banks that don't increase lending will see the dividend rate climb to up to 9 percent.

Critics say the program could encourage risky loans.

"The program is mostly about offering subsidies to bankers," said Mr. Wilson, of the University of Louisiana. "It has very little to do with increasing lending to small businesses."

Two local TARP banks, Enterprise Bank in Hampton and TriState Capital Bank, Downtown, will not take part in the small business lending program, officials there said.

Enterprise Bank, which does a large volume of loans backed by the U.S. Small Business Administration, won't participate because the new lending program excludes SBA loans when calculating new loan volume, said Enterprise CEO Chuck Leyh.

TriState Capital passed on the program because the bank focuses on lending to midsize businesses rather than small businesses, CEO Jim Getz said.

As for TARP, the Treasury Department is projecting an eventual profit of $20 billion on the $245 billion in bailout funds it provided to banks. (The projections don't include rescue money that went to insurer AIG, General Motors, Chrysler or other nonfinancial institutions under TARP. All together, the program passed out $411 billion, of which $150 billion remains in private hands.)

Although the department expects a profit on the bailout funds to banks, the number of banks missing dividend payments has been steadily rising.

Overall, 164 banks skipped quarterly dividend payments due in February worth about $85 million, according to Mr. Wilson's analysis. That's up from 140 in November, 127 in August, 101 in May and 82 in February a year ago.

The "deadbeats" as Mr. Wilson calls them, included three banks in Pennsylvania, all in the eastern part of the state.

The Congressional Oversight Panel for the Troubled Asset Relief Program said in a report Wednesday that TARP "provided critical support to markets at a moment of profound uncertainty" but also created a "moral hazard."

The report, available online at http://cop.senate.gov/reports/library/report-031611-cop.cfm, said that by protecting large banks from insolvency and collapse, "very large financial institutions may now rationally decide to take inflated risks because they expect that, if their gamble fails, taxpayers will bear the loss."

The Congressional Budget Office estimated that TARP will cost taxpayers $25 billion, far below the initial estimate of $356 billion, "in part because it will accomplish far less than envisioned for American homeowners." The report noted that TARP's public stigma is based on the perception that while it restored stability to the financial sector, it did "little for the 13.9 million workers who are unemployed, the 2.4 million homeowners who are at immediate risk of foreclosure or the countless families otherwise struggling to make ends meet."


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Source: Copyright (c) 2011, Pittsburgh Post-Gazette. Distributed by McClatchy-Tribune Information Services.


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