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Big Lessons in Finance From a Little Bank You've Never Heard Of

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By Steven Pearlstein
Wednesday, February 11, 2009

Wall Street is not pleased.

Hunkered-down executives and hyperactive traders were more than a little disappointed with what they heard from our straight-shooting new Treasury secretary as he unveiled his plans for Bank Bailout 2.0.

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Not enough clarity, they complained. Still no light at the end of the tunnel, bemoaned others. Like spoiled, petulant children, they demonstrated their dissatisfaction by driving stock prices down another 5 percent.

By now, I hope you've learned enough not to be taken in by the self-serving floor patter. These guys won't be happy until the government agrees to relieve them of every last one of their lousy loans and investments at inflated prices, recapitalize every major bank and brokerage and insurance company on sweetheart terms and restore them to the glory days, so they can once again earn inflated profits and obscene pay packages by screwing over their customers and their shareholders.

For the Wall Street wise guys, bailout politics is just another game to be played, another market to be manipulated, another set of risks to be arbitraged.

Later today, nine Titans of Finance will testify before the unwieldy House Financial Services Committee about the fine mess they have got us into and how the first $350 billion in bank bailout money was used. The chief executives have probably wised up enough to know to leave the Gulfstream back home and fly in commercial with the hoi polloi. But don't hold your breath waiting for an expression of contrition or gratitude, let alone any clarity on their own plans for using the government's bailout money.

In that regard, the committee probably would have learned more if they'd left the big boys to wallow in their gilded bunkers and invited Kim Price up from Gastonia, N.C.

Price is the president of Citizens South, a 104-year-old community bank with about $800 million in assets, 15 offices and 150 employees that operates in the shadow and under the radar of the big national banks -- Bank of America and Wachovia -- headquartered across the river in Charlotte.

Citizens is among the stronger and more conservative banks in the Charlotte market. Despite setting aside $3.2 million last year for expected loan losses, the bank managed to post a profit of $3.1 million, down from $5.7 million the year before. Citizens never got into subprime lending or 100 percent loans, and for its caution lost a lot of business during the go-go years. Now, however, its reward is that its nonperforming loans are less than half of 1 percent of all its loans.

Like many healthy banks, Citizens late last year figured it was in for a tough couple of years with the national recession and the continued turmoil in financial services, which anchors the regional economy. So it applied and won $20.5 million in bailout funds from the Treasury Department on the usual terms requiring a 5 percent annual dividend payment to the government. A few weeks ago, while reading a newspaper article, Price came up with an ingenious plan for how to use it.

The article was about the reluctance of people to buy a house in the current market, and what kinds of incentives had been used successfully by builders and bankers to get them to close a deal. Two stood out: lower rates and the waiving of closing costs. And that got Price to thinking: What if Citizens were to use its federal bailout money to offer below-market mortgage rates with no closing costs to consumers who would buy a house, or a house lot, from builders and developers who had borrowed money from Citizens?

Price asked some of his loan officers to check with the builders and developers, who not surprisingly were excited enough about the project to be willing to chip in some money to help cover a portion of the forgone closing costs. So last week, Citizens launched its marketing campaign for the $20.5 million program, in collaboration with its builder-developer customers, offering 30-year loans with an initial teaser rate of 3.5 percent for the first two years, rising to a fixed 5.5 percent rate (the current market rate) for the balance of the loan.

"As we see it, it's a win-win-win situation all round," Price explained to me. The builders and developers win by having a tool to help move their unsold inventory. The consumer wins by getting a cut-rate loan. And Citizens wins because it lowers the risk that it will have to write off even more of its commercial loans while taking a modest step to help stimulate the local economy. And, of course, the public relations bump isn't bad either.

What's striking, however, is the attitude Price expresses in talking of the new program. He's enough of a profit-making businessman to know that when the government is offering 5 percent equity money, he'd be a damn fool not to take it, even if his bank is already well capitalized. And yet he's sensitive enough about obligation that he feels comes with taking taxpayer money that he was anxious to use it in a visible way to benefit his community and his customers, as well as his shareholders.

In truth, Citizens won't literally be using its federal bailout money to make these mortgage loans. In fact, no bank would -- using money that costs 5 percent to make 5.5 percent loans won't get you very far in the banking business. But what each dollar of government capital does for Citizens, or any other bank, is give it the ability to go out and borrow another $9 from depositors or the Federal Home Loan Bank at a rate of 2.5 percent or less.

By the way, Kim Price would have had no trouble meeting the Obama administration's new $500,000 salary cap for executives at banks taking bailout money. His total pay package last year was $456,146, including a base salary of $250,000; a bonus of $64,800; $63,920 worth of Citizens stock; and $33,415 in other perks, including country club membership and a company car (driver not included).

And get this: Somehow the directors of Citizens South managed to attract and retain a chief executive who turned in respectable profits during good times and bad, and yet was able to pay him only 10 times the salary of the average employee. Pretty neat, huh?

So here's a question the House Financial Services Committee might put to the Titans of Finance: How is it that Kim Price, a community banker with an undergraduate degree from Appalachian State University, a tiny executive staff and a pay package that you would consider insulting, somehow managed to come up with a more creative use for his government bailout money than any of you?


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