Tarp Repayment and Investment Opportunity
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Banks who have not paid back their TARP loans may want to start getting repayment approval as quickly as possible. In November 2013, the Federal Government, looking to wind down the Troubled Asset Relief Program (Tarp), is raising the interest rate from 5% to a hefty 9%.
But a funny thing happens when banks repay their Tarp loans: sometimes their stock price goes up.
Bridge Capital Holdings (NASDAQ: BBNK) repaid their $24 million Tarp loan on March 16, 2011, and saw their stock price increase by 22% from the March 15th price of $9.20 to a May 13th price of $11.75. The stock is currently trading at $15.79 which is near their 52-week high of $16.43. Lakeland Bancorp (NASDAQ: LBAI) repaid $40 million of their $59 million Tarp loan on March 16, 2011, and likewise saw a 17% increase from their March 15th stock price of $9.51 to a high of $11.50 on April 27, 2011. They paid the remaining $19 million on February 8, 2012, and the stock continues trading near the 52-week high of $10.68. More recently, Regions Bank (NYSE: RF) repaid their $3.5 billion Tarp loan on April 4, 2012, and saw a 35% increase in their stock price from a January 3, 2012 low of $4.35 to $6.74 on June 20, 2012. The stock continues to trade at $6.74, which is near their 52-week high of $6.98.
Of the 707 banks who received Tarp funds, over 300 banks still have outstanding loans with the Fed. Two of those banks warrant closer scrutiny as potential candidates for their stock price to jump due to Tarp repayment. Both banks were selected for their similarities: they have yields of 9% or higher, have a Standard & Poors rating of a “B-” rating or better, have posted positive net income in the last 3 consecutive quarters, and have resumed their dividend payments.
Synovus Bank (NYSE: SNV) took $968 million in Tarp money on December 19, 2008, and the full amount remains outstanding. The bank has made progress turning itself around and recently paid their latest dividend on June 12, 2012. Synovus has a market cap of $1.46 billion, an EPS of -0.01, pays a dividend of $0.04, and offers a dividend yield of 2.20%.
In first quarter 2011, the bank reported a loss of $93.7 million, or -$0.11 per share. In contrast, Synovus posted a first quarter 2012 net income amount of $21.4 million or 2 cents a share, which marked the third consecutive quarter in which it posted a profit.
The Tarp loan is held as a note under the symbol SNV-PT on the NYSE, and has a “B-” rating from Standard & Poors. Synovus Bank is headquartered in Columbus, Georgia.
Zions Bancorporation (NASDAQ: ZION) took $1.4 billion in Tarp money on November 14, 2008. On March 28, 2012, the bank repaid $700 million, leaving $700 million outstanding. The bank has significantly cleaned up its balance sheet and improved its income statement over the past year. Zions has a market cap of $3.45 billion, an EPS of $0.89, pays a dividend of $0.04, and has a dividend yield of 0.20%. The bank paid a $0.04 dividend on May 22, 2012.
In first quarter 2012, the bank reported a net income of $25.5 million, or $0.14 per share; in the first quarter of 2011, Zions announced a net income of $14.8 million, or $0.08 per share. The bank has posted a profit for the last four quarters and, reflecting the banks improved financial condition, analysts have raised their ratings to “market perform” and “buy.”
The Tarp loan is held as a note under the symbol ZB-PC on the NYSE, and has a “BB” rating from Standard & Poors. Zions Bancorporation is headquartered in Salt Lake City, Utah.
Debt repayment is usually seen as a positive sign for a financial institution, especially if it entails getting rid of the Tarp monkey. But although the link between Tarp repayment and higher stock price is intriguing, banks may still be holding risky assets, have weak ratios or be resolving other significant problems. Bridge Capital Holdings, Lakeland Bancorp and Regions Bank are examples of the income potential possible when banks repay their Tarp loans. Investors may want to keep an eye on Synovus and Zions as the November 2013 deadline nears to determine if the potential for gain warrants an investment.
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