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Most local Washington area banks have yet to fully repay TARP funds

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By Danielle Douglas
Capital Business Staff Writer
Sunday, December 12, 2010; 3:56 PM

A majority of Washington area community banks that tapped the federal Troubled Asset Relief Program have yet to repay their balances, while several of their larger counterparts are closing out their debts.

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According to a monthly summary recently released by the Treasury Department, 10 of the 11 small banks based in the metropolitan region have $3 million to more than $41 million in outstanding debt from the program. Even as profits at these institutions rebound, many are still contending with mounds of troubled commercial and residential loans that weigh heavily on their books.

Deep-pocketed banks that benefited from the government's largess were in a rush to hand back the funds, and had the financial means to do so. Citigroup, for instance, repaid $20 billion of the $45 billion it owed at the end of last year. Treasury converted the remaining balance to an ownership stake that it has been selling off since last spring, and stands to make a $12 billion profit on the deal. A few other big banks, such as Bank of America, turned to the public markets to raise the capital to settle up.

Bethesda-based EagleBank concluded its stock offering in September, which garnered $51.8 million in proceeds, $15 million of which was used to pay down its TARP bill. The bank has yet to pay the remaining $23.2 million, even as it has strengthened its capital position. At the end of the third quarter, Eagle had posted net income of $4.8 million, up 74 percent from a year earlier. The amount of troubled loans, however, have hovered around $29.2 million for the past two quarters.

"The cost of capital is still very low and $23 million isn't a lot of money," said Ronald D. Paul, chairman and chief executive of Eagle. "We can raise $23 million just around the board table, but right now we're playing out all of the alternatives."

Paul said he is entertaining several options. He said he might tap private equity, apply for Treasury's new $30 billion small-business lending fund, or issue another stock offering. "When the timing is right, we'll pull the trigger," he said.

Eagle was not the only local community bank to pay down a portion of its TARP debt. Sandy Spring Bancorp in Olney, which received $83 million, handed back about half of that amount in July. At the time, the bank's president and chief executive, Daniel J. Schrider, who did not return calls, said Sandy Spring would "continue to work with the Treasury to secure their approval for repayment of the remaining balance in the coming months."

Sandy Spring completed a common stock offering in March that set it on the road to repayment with $101 million in proceeds. The institution, however, is still coming out of a rough patch. Sandy Spring had roughly $103.6 million in troubled loans on its books in the third quarter, down from $150.2 million 12 months earlier. The bank also closed out the previous quarter with $6.4 million in net income, compared with a net loss of $14.8 million a year prior.

"I would suspect that if it doesn't happen this quarter, you're likely going to see TARP repaid in the near term," P. Carter Bundy, an analyst at Stifel Financial, said of Sandy Spring. The bank raised money in a stock offering "so they are in a much better situation to repay TARP."

Some industry observers posit that regulators, who must approve any repayment, will not likely allow many of these small banks to pay off their balances, out of concern for their level of capitalization.

"It's my sense that the banks that are able to pay back TARP, pay back TARP," said John K. Delaney, chief executive of financial firm CapitalSource, which itself took over a troubled bank in California. "Many banks are still undercapitalized."

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