In 2009, Central Virginia Bank took $11.3 million in TARP funds to cushion its capital reserves. As part of that deal, the U.S. Treasury took an ownership stake in the bank and said that if any TARP bank missed six dividend payments, it had the option to appoint two directors to a bank’s board.
Powhatan-based Central Virginia Bank is the first local bank to hit that threshold, having skipped more than six TARP payments for a total of almost $1 million as of Sept. 30. CVB, which is also under a written agreement with its regulators, said it has been in touch with the Treasury Department about the missed payments. The bank said that Treasury didn’t indicate whether it would elect two board members at the next annual shareholders meeting.
Herb Marth, CVB’s chief executive, said he could not comment on the bank’s dealings with the Treasury as they relate to TARP.
Treasury spokesman Matthew Anderson said the agency does not comment on its dealings with specific institutions.
CVB’s missed payments come at a time when many banks are trying to figure out where they’re going to find the cash they need to buy their way out of TARP.
Of the eight local banks that took money from the TARP program, none have completely paid their way out.
C&F Bank this year repaid half the $20 million it took from Uncle Sam in 2009.
The former Union Bank, one of the predecessors of Union First Market Bank, paid back $59 million to the Treasury in 2009. Union is still on the hook for $33 million more taken by its other predecessor, First Market Bank.
CVB is not the only local bank that has had to defer its TARP payments.
Community Bankers Trust, the Innsbrook-based parent company of Essex Bank, has deferred five TARP dividend payments. It said in a recent quarterly report that it would also defer at least its next payment. It took $17.6 million from the TARP program and owes a total of $1.1 million in deferred payments to the Treasury.
The program’s rules also call for the Treasury to have the option to send an observer to a TARP participant bank after five deferred dividend payments.
CVB said in its SEC filings that the Treasury is also not sending an observer. (An odd provision requires the Treasury to ask permission from the bank to send an observer.)
One reason both CVB and Community Bankers Trust deferred payments is that both banks are under written agreements with their regulator, the Federal Reserve. Those agreements prohibit a dividend of any kind. The Fed figures that capital is precious at a bank under written agreement and that paying dividends, whether to regular shareholders or the federal government, diminishes capital reserves.
EVB, which received $24 million from TARP, is also under written agreement and prohibited from paying dividends. Village Bank & Trust said recently that it would soon go under written agreement. It took $14.7 million in TARP money.
CVB’s specific situation illustrates the pickle some banks are in.
The TARP program was meant to give healthy banks an extra cushion of capital during the recession. But because some of those banks’ health has since deteriorated, they don’t have the cash to pay back TARP. Meanwhile, regulators are telling banks like CVB to raise more capital, a tough proposition when investors are skittish about the banking industry. Plus the prospect of a weakened bank having to raise capital solely to buy its way out of TARP isn’t enticing to investors.
“We’ve been told by a lot of people on the investment banking side: Unless you’re the size of a bank that needs [to raise] above $50 million in capital and you need it for offensive capital, there are very few investors willing to do that raise for you,” said Rex Smith, chief executive of CBTC and Essex Bank.
Essex, which has more than $1 billion in assets, is not required to raise capital under its written agreement.
But CVB’s written agreement specifically calls for it to raise capital. It has been unable to do that and shelved a $15 million raise in late 2010.
The last time the bank raised any sort of capital was when it received the $11 million in TARP money in January 2009.
The $400 million bank lost a combined $33 million between 2008 and 2010, fueled at first by losses on investments in stocks of Lehman Brothers, Fannie Mae and Freddie Mac and then by losses on tens of millions in troubled real estate and commercial loans.
One of its most notable troubled loans was to Roseland, a massive stalled real estate development that is trying to work its way out of bankruptcy.
CVB’s bottom line has shown signs of a slight turnaround in 2011. But without the prospect of a capital raise, some see its only option — other than just continuing to defer dividend payments and slowly trying to work its way out of its agreement — might be a merger or acquisition.
“If you’re one of those smaller guys and you’re stuck in that crack, you’re probably going to have to look at some sort of sale or merger,” Smith said.
But such a deal might be easier said than done, according to Tom Tullidge, who works bank M&A deals for Cary Street Partners.
“M&A is difficult today because the top quality banks don’t want to a take on a weaker bank,” said Tullidge. “There are those, like the situation CVB is in, that can’t raise capital, and they’re just flat stuck, and there are a good number of those.”
Should it decide it wants seats on CVB’s board, the Treasury keeps a list of qualified individuals that have financial industry experience. It does not send government employees to sit as directors.
Although CVB has crossed that line and Community Bankers Trust is approaching it, only a handful of banks have had directors appointed by the Treasury. Of the 81 banks that have missed six or more TARP payments, the Treasury has appointed a total of 10 directors at just six participant banks since the program’s inception.