With the recent exit of a New York-based depository, only two banks and two credit unions are still participating in TARP, which has included 763 institutions since it was launched in 2008 to recapitalize the industry in the wake of the credit crisis.
Carver Bancorp Inc. became the latest to exit the Troubled Asset Relief Program after completing the repurchase of shares from the Treasury in August. The remaining banks are Boston-based OneUnited Bank and Baltimore-based Harbor Bank of Maryland, while the credit unions are Berkeley, Calif.-based Cooperative Center FCU and Washington, D.C.-based DC FCU.
Like Carver, OneUnited and Harbor Bank are among the few remaining FDIC Black-owned minority-designated institutions. Carver's mission to assist minority and women-owned businesses in New York helped it attract the funding for the exit.
To buy the shares, Carver used a $2.5 million grant from Morgan Stanley, whose Chairman and CEO James Gorman said it was a critical time to help Carver because the communities it serves have been disproportionately impacted by the public health crisis, according to a July news release.
Others have also supported Carver. On June 17, the company saw its stock price skyrocket, a jump some attributed to the social media campaign "buy Black" and the bank's popularity on Robinhood Markets Inc.'s investment app.
Carver did not respond to requests for comment, but exiting the program frees it up from some restrictions. The most significant change is that executive compensation will no longer face limitations, according to lawyers familiar with TARP. This can help the bank with recruitment, said James Stevens, a partner at Troutman Pepper Hamilton Sanders LLP.
"It's a very competitive environment out there when you're trying to bring in the talent you need to run a bank," Stevens said in an interview. "The first thing that you'll see when a bank comes out of this is they will revisit their executive compensation arrangements."
In addition to executive compensation, TARP also restricts dividend payments, requires banks to pay interest on securities held at the Treasury, grants the government the ability to appoint board directors if the bank does not follow the rules, and allows for the possibility of other additional oversight at the bank.
"It's going to free them up from having the government in your shop; you always have that risk when the government is invested in the bank," said Michael Rivera, a partner at Bass Berry & Sims PLC and former Chief Investigative Counsel for the Office of the Special Inspector General for TARP.
But those in TARP can see some benefit from the program, which is typically the source of cheaper funding relative to the market, Stevens said. Of late, the pricing on the TARP funds is less compelling as the fallout from the COVID-19 pandemic led to the Fed reducing rates, Stevens said.
Still, banks in the program may not find themselves in a position to raise the capital to buy back their shares, said Allen McConnell, a partner at Sheppard Mullin Richter & Hampton LLP in an interview. "I suspect that the last few out there will continue to be out there for a while," he said.
Compared to many peers, Harbor Bank and OneUnited Bank have a lower common equity Tier 1 capital ratio. As of June 30, Harbor Bank of Maryland disclosed a common equity Tier 1 capital ratio of 10.27% and OneUnited Bank reported a CET1 capital ratio of 7.09% while the median CET1 ratio is 14.65% for banks with under $10 billion in total assets.
The Treasury's investments in financial institutions that remain under TARP are relatively small compared to the overall size of the program. Each of the "Big Four" banks, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase & Co. received investments of $25 billion in the program. By comparison, Harbor only received $6.8 million, with $5.3 million now outstanding, while there is a $12.1 million investment outstanding in OneUnited.
Rivera noted that it's possible the government could force an exit of the remaining institutions as Treasury has auctioned TARP shares in the past. "The government could figure out a way to get them out if they wanted to," said Rivera.