Banks line up for second round of TARP
Under regulatory pressure and facing few capital-raising options, some small lenders are looking to the government for help. Again.
NEW YORK (CNNMoney.com) -- For some banks, the grim reality is that another dose of TARP may be their best shot at salvation.
Overwhelmed by loan losses, some hard-hit lenders are hitting up the Treasury Department for even more money from the Troubled Asset Relief Program.
Last week, Midwest Banc Holdings (MBHI), a community bank based just outside of Chicago, outlined an extensive capital raising initiative after suffering its second consecutive quarterly loss. The bank said it had applied for as much as $138 million under Treasury's Capital Assistance Program, or CAP, an extension of the original TARP. The bank received $84.7 million in TARP funds last December.
Citizens Republic Bancorp (CRBC), a Flint, Mich.-based bank that has suffered along with the local automotive industry, revealed in late June that it too was considering tapping up to $290 million from CAP, part of which would be used to redeem a portion of the Treasury's original $300 million investment made last December.
Experts say it seems certain that more small banks will follow the lead of Midwest and Citizens Republic.
"I think we have only started to hear about the applications for CAP," said Eileen Rooney, an analyst with Keefe, Bruyette & Woods.
A combination of factors are driving banks to seek even more government assistance. Banks are facing intense pressure from regulators to raise new capital, particularly in the form of stock, which boosts a firm's closely-watched tangible common equity levels, a key gauge of their capital health.
Complicating matters further is the fact that many community and regional lenders are having a difficult time attracting fresh funds from the private markets. Investor demand for new stock and debt from smaller banks has tapered off significantly over the past two years.
As a group, banks and thrifts have raised just $306 million in subordinated debt so far this year, according to research firm SNL Financial. That's a fraction of the $12.7 billion during the same period in 2007.
"You have got a lot of banks and boards of banks who are really between a rock and a hard place," said Lawrence Kaplan, a former attorney for the Office of Thrift Supervision who now focuses on bank regulatory issues for the law firm Paul Hastings.
Widespread credit problems aren't helping small banks either, particularly the rapidly deteriorating commercial real estate market. Roughly one third of all loans held by regional banks, on average, are tied to commercial real estate in some way, according to Moody's.
So far, Treasury has invested $204 billion in more than 500 different financial institutions through TARP as of the end of July. Treasury has not revealed how many lenders have submitted applications for funds under CAP. Banks have until November 9 to apply to the program.
This time around however, experts anticipate the government will be a little more selective about who they approve for more funding.
With the U.S. financial system and broader economy no longer on the brink of collapse, regulators arguably have a better sense of how the different corners of the nation's banking industry are faring than they did during the panic-stricken days of last fall.
In addition, lawmakers and the Obama administration alike have become increasingly wary about committing ongoing aid to troubled financial institutions at the expense of American taxpayers.
Last month, the White House rebuffed requests for aid from CIT (CIT, Fortune 500), prompting the commercial lending giant to seek help from its bondholders.
But if Treasury specifically uses CAP to target wobbly community and regional lenders, the government may be able to provide aid without fear of a public backlash, said Douglas Elliott, a fellow at the Brookings Institution.
Unlike large Wall Street firms such as Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) that continue to play the role of public pariah, small banks boast a much friendlier relationship with local borrowers. At the same time, they avoided the hot-button issue of big bonuses that has incensed taxpayers.
"The political landscape is a lot more favorable for [community banks]," Elliott said.
Talkback: Should the government concentrate more on helping smaller, community banks instead of giants like Citigroup and Bank of America? Share your comments below. 
