Banks in second TARP round in the clear
By Danielle Douglas,
As the Treasury Department accelerates the wind down of the Troubled Asset Relief Program through a series of auctions, one cohort of fund recipients is not feeling the pressure.
The 82 credit unions and banking companies that tapped the agency’s Community Development Capital Initiative, an offshoot of TARP, are subject to far different terms than banks in the original program. And that means they are not worrying about who will purchase their shares at auction or scrambling to repay the debt before the dividend rate nearly doubles.
The CDCI program, started two years after TARP in 2010, was designed to provide less expensive capital to community development financial institutions certified by the Treasury Department. Such institutions dedicate about 60 percent of their lending to fund development in underserved communities.
Whereas banks in the original TARP round had to pay 5 percent annual interest on the preferred shares they exchanged for funding, those in the second only had to pay 2 percent. Participants in CDCI have six years before that 2 percent rate soars to 9 percent, but their counterparts will face the hike in 2013 or 2014.
“We’re able to have a more patient and deliberate strategy around capital raising, both for the satisfaction of the CDCI funds prior to the rate jump and the overall growth of the bank,” said Brian E. Argrett, president and chief executive of City First Bank of D.C., which received $5.7 million from the CDCI program in September 2010.
Argrett, who took the helm in November, said his predecessor, Dorothy J. Bridges, was reluctant to participate in the program because of the stigma of TARP. However, she was won over by the terms and the prospects of making more loans. Within a year of receiving the investment, City First, with $168 million in assets, increased lending by 22 percent.
“Having increased capital allows us to have a little higher risk tolerance and put money on the street, while maintaining comfortable capital levels,” Argrett said. “It has been very positive in increasing our productivity.”
Banks staring down the near-term rate increase are grappling with the dilemma of paying substantially more or diluting their shares through a capital raise. Institutions are especially wary of the capital markets as most bank stocks are trading below their value.
“A lot of banks, a lot of controlling stock holders, are unwilling to accept today’s market realities,” said banking analyst Bert Ely. “With smaller, closely held banks, where there is very little trading of the stock, they’re going to take quite a hit in raising capital.”
There are other options. Banks, he said, could always shrink their balance sheets to raise capital ratios and generate excess capital to repurchase the shares. Or, they could merge with a larger bank for access to more capital.
“What we might see with the government auctioning off shares is banks ending up with partners that increase the pressure for them to sell,” Ely said. “This is a tough situation.”
CDCI recipients are not immune from the concerns of their counterparts.
“If you wait until the end, you may have the same issues that everyone has now,” Argrett said.