Why some small banks still love TARP

With the traditional means of accessing the capital markets closed, small banks have little choice but to seek federal aid.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Ellis, CNNMoney.com staff writer

When Wall Street nearly collapsed
Would panic prevail? That was the question gripping the world in the days surrounding the fall of Lehman Brothers on Sept. 15, 2008. One year after that terrifying Monday, the people who struggled to cope with the financial crisis share what they were thinking as chaos broke out.
New Orleans: A snapshot
Key financial firms received a wide range of assistance during the past year. But scroll over their stocks and you’ll find few winners – and plenty of losers. More

NEW YORK (CNNMoney.com) -- When it comes to TARP, it's better late than never for some banks.

Many community banks are still seeking funds through the government's controversial Troubled Asset Relief Program -- despite all the baggage that comes with a TARP loan.

Last week, the Nebraska-based State Bank of Bartley became the latest recipient of the program, accepting $1.7 million in government aid, according to the latest Treasury Department's transaction report.

And in late August, a trio of privately-held firms heralding from rural Louisiana, Detroit and Hilton Head Island, S.C. all issued preferred stock and warrants to the government in exchange for a combined $40 million in fresh capital.

So far, Treasury has invested more than $204 billion in about 600 different financial institutions through TARP. Roughly two thirds of those lenders are community banks, according to estimates by the American Bankers Association.

Banking experts said a main reason for the continued interest in TARP is because small banks are facing intense pressure from regulators to raise new capital to withstand future loan losses.

Unfortunately for many of these lenders, it is still difficult to secure private capital through traditional means.

Closely-held institutions, for example, have had little luck convincing existing stakeholders to invest more, particularly as loan losses continue to climb.

And while TARP is hardly cheap, for many lenders it is the "least worst" option, especially since other capital-raising methods, such as issuing trust-preferred securities or subordinated debt, are just not feasible.

"It's not the cost we wanted to pay [for capital], but it was an acceptable amount," said one community bank CEO whose firm accepted TARP funds earlier this year, but who declined to speak publicly on the matter.

"If you did go to the capital markets, it would be extremely expensive," the CEO added.

As a group, banks and thrifts have raised a little over $300 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.

That has left many lenders with little choice but to ask for TARP funds.

"A good chunk of the banks are being asked to have higher capital levels than the regulations require," said Doug McClintock, a partner at law firm Sonnenschein Nath & Rosenthal.

TARP and its troubles

The rush to ask for more TARP funds by small banks comes at a time when larger rivals are looking to exit the program and the Treasury Department is talking of winding down some of the support for the financial services sector.

Many big banks have expressed concerns about the price of government support. Others worry that regulators could change the terms tied to taking TARP loans as they saw fit in the future. Specifically, there were plenty of fears about the compensation restrictions on banks accepting bailout funds.

Once the government outlined the terms for TARP repayment this spring, several banks raced to pay it back. JPMorgan Chase (JPM, Fortune 500), BB&T (BBT, Fortune 500) and Capital One (COF, Fortune 500) led the charge.

Chris Cole, senior regulatory counsel at the Independent Community Bankers of America, said many small banks have also resisted TARP out of fear of similar restrictions and due to the program's unpopularity with taxpayers.

"Some customers don't like it," he said. "Banks have responded to that by saying we don't want to turn to TARP because of what the response will be."

Despite this, there has been talk in Washington of broadening the program even further to help banks that might otherwise be rejected for a loan because of their poor health. Under that proposal, banks would be eligible for TARP funds as long as they could raise matching funds from private investors.

This initiative, which appears to have the backing of community banking industry, would expand the list of program recipients. And as more banks realize they have few other options than government aid, it almost seems certain that the number of TARP takers will only climb from here. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.