Smith has confirmed however that the U.S. Treasury had notified the bank of its intention to exit the Troubled Assets Relief Program, TARP. The government is trying to sell off its holdings of preferred stock of the remaining smaller banks.
River City Bank originally received $8.9 million from the TARP Capital Purchase Program. The money River City took from the government came in the form of a stock purchase.
Smith said most of the institutions, which have not repurchased their preferred stock, are smaller community institutions that can’t tap the large public capital markets like a large regional or national bank can. “They can’t go to Wall Street and raise capital,” Smith said.
“To raise $8.9 million to $10 million dollars is not something you do overnight,” Smith said.
In order to access those capital markets on behalf of the smaller markets, Treasury has begun selling preferred stock investments in a series of auctions. “This would have no impact on the bank, its Board of Directors or management,” Smith said. “It’s stock; it’s tradeable,” Smith said.
“We’ve spent a good bit of time strategically, trying to figure out which way to go for the bank,” Smith said.
Specifically, River City’s plan is that sometime in the next 24-36 months it will take money out of its capital account and repurchase the preferred stock.
The one complicating factor could involve multiple purchasers of the stock if the Treasury Department auctions it in pools. “They’re splitting the banks preferred stock up, so how does the bank figure out how to exit that?” Smith said. “What happens if five institutions purchase portions of the stock? Who do you pay off first?”
The ideal scenario would be for a single purchaser to make an undervalued bid of, for example $6 million and Treasury accepts it. Smith said that if that were the case it would be his hope that within 24-36 months River City could go to those folks and make a slightly higher offer to repurchase the stock. That would essentially allow River City to participate in the discount. “If that happens, then it’s beneficial to our existing shareholders,” Smith said.
“We’re sitting on about 12.5 Tier One capital because we have TARP, but even without TARP we have enough to exceed the regulatory requirements,” Smith said. “It’s a timing game as to when is the most opportune time for us to repurchase the stock and under what conditions.”
“The bank was offered the TARP money three years ago and agreed to take it as a safety net. “Wall Street caused this economic debacle. Main Street didn’t,” Smith said. “It has worked extremely well; we have weathered the storm and we are on our way now to better places.”
Smith said that strategies thus far have including cleaning up the bank’s problem loans, maintaining a very strong capital account and to some degree allowing the institution to shrink as the bad loans are purged. Evidence of that comes from the latest FDIC report for the period ended June 30, 2012, that indicates that River City deposits had dropped by $29 million over the preceding 12 months and total assets were down by almost $37 million over the same period.
According to the American University School of Communication, River City’s Troubled Asset Ratio has fallen from 81.4 percent in September of 2011 to 63.9 percent at the end of June 2012. The troubled asset ratio is determined by combining loans that are 90 days or more past due, loans in non-accrual status and other real estate owned (primarily those obtained through foreclosure) and dividing that by the bank’s capital and loan loss reserves. River City was able to put another $978,000 into its loan loss reserves through the first three quarters of 2012.