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Printed from the Charlotte Observer - www.CharlotteObserver.com
Posted: Thursday, Oct. 30, 2008

Smaller banks get on bailout bandwagon

By Christina Rexrode
Published in: Business
  • The banks sell preferred shares to the U.S. Treasury. The banks must pay a dividend rate of 5 percent on those shares for the first five years, and 9 percent thereafter, if they have not bought the shares back by then.

    The Treasury's shares will not have voting power, except in one major loophole: The Treasury reserves the right to vote its shares in “class voting rights on matters that could adversely affect the shares.”

    Banks can receive between 1 and 3 percent of their total risk-weighted assets, or a maximum of $25 billion. The government released a report Wednesday showing it had purchased $125 billion in shares of the nine large banks that originally signed up for the program, as planned. The Treasury has set aside $250 billion total for the capital purchase program.

    Participating banks have to agree to follow certain government guidelines on executive compensation and other areas. For example, for the first three years, a bank cannot increase the dividend payout on its common shares without the Treasury's permission.

    The Treasury has decided to let banks announce their participation as they choose, rather than the Treasury announcing which banks are participating.

    Banks have until Nov. 14 to apply. The Treasury has made clear that this program is intended for healthier banks.


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    The government's offer to buy shares in the country's financial firms sounds enticing to many of the Charlotte area's community banks.

    It's the cheapest way to raise capital right now, they say, and the stigma originally associated with the plan – which has morphed in the public's vernacular from “bailout bill” to “capital injection” – has largely disappeared.

    Kim Price, who is chief executive of Gastonia's Citizens South Banking Corp. and chairman of the N.C. Bankers Association, estimated Wednesday that 70-80 percent of the state's roughly 125 banks will apply for the program, which allows the federal government to directly purchase preferred shares in the banks.

    The government announced the program two weeks ago, requiring nine mega-banks – including Charlotte's Bank of America Corp. and Wells Fargo & Co., which is buying Wachovia Corp. – to sign up for it. Wednesday, the U.S. Treasury said it had followed through with its pledge to purchase shares of those banks, which means federal money is now starting to work its way through a wounded banking industry.

    The Treasury is allowing other banks to announce their participation in the $250 billion program on their own timing. In the past week, at least a dozen regional banks said they had signed up, including Winston-Salem's BB&T Corp.

    Though banks large and small may have groused a month ago about the scope of the government's intervention in their industry, most now seem to think it's a foregone conclusion, at least for the time being.

    “It is a seismic shift,” said Jim Bolt, the CEO of Charlotte's First Trust Bank and a self-described free-market capitalist. “But if you lose trust in the banking system, like with what happened to Wachovia, then it takes a long time to rebuild that.”

    Bolt said his bank is considering applying for the government injection, although it's already well-capitalized so he's not sure what it would do with the additional money.

    Bryan Kennedy, the CEO of Park Sterling, says his Charlotte bank is seriously considering the government injection, which it would use to increase its lending. He thinks the government's stipulations , such as limits on executive compensation, are “not unreasonable,” considering the cheap cost of the capital.

    Also, many of the costs normally associated with raising capital, such as marketing and legal expenses, virtually disappear with the government plan, he said.

    “If you were thinking about raising capital anyway, which we were, then this looks like a good alternative,” Kennedy said.

    As credit dries up and questions about the industry's health continue, the free market is loathe to inject much money into banks. Still, SCBT Financial Corp. of Columbia, which is about to buy Charlotte's The Scottish Bank, raised $28 million from selling shares in the open market on Tuesday.

    John Stedman, CEO of The Scottish Bank, declined to comment on whether his bank would apply for the capital program, but he noted that the capital is being offered at a good price. “It's a lot cheaper than private equity, it's cheaper than trust preferred securities, and frankly right now in the market, it's pretty hard to issue common shares,” Stedman said.

    Stigma fades

    The cost savings isn't the only reason the government plan is gaining popularity.

    For one thing, the original stigma associated with the bailout bill has faded because the Treasury has required healthy banks to participate in the capital program. In fact, the government has since made clear that the program is only for the healthier banks. National City Corp., for example, reportedly was turned down from the capital program before it sold itself to PNC Financial Services Group last week.

    That, however, could have an ironic and unintended consequence: Some banks that don't want the capital injection could apply for it anyway, just to prove to shareholders that they do qualify.

    Most of the banks say they want the capital so they can make more loans, though some could also have an eye on buying up other firms. BB&T's CEO, John Allison, hinted at that possibility on Monday, when BB&T announced its $3.1 billion infusion.

    “For us, the additional capital will not only extend and strengthen our lending capacity, but provide other strategic options as well,” said Allison, who is famous in the banking world for his opposition to government intervention.

    Scott Anderson, the CEO of Bank of Granite in Granite Falls, noted the herd mentality appearing among bankers.

    “If everybody else is gonna do it,” he said, “then you've got to do it or you're not going to have the same competitive advantage.”

    He said Bank of Granite is considering applying for the program, and would use the extra money to shore up its financial position and increase lending.

    Still, some banks could be dissuaded by the resulting dilution of their equity, or by the government's stipulations on participating banks. Said Anderson: “You worry about the strings that are attached, but it's such a good deal.”

    Also, logistics could make the capital program more trouble than it's worth for some smaller banks, which might not have bylaws in their charters for how to issue preferred shares or meet other requirements of the plan.

    In Congressional testimony last week, the Treasury's Assistant Secretary Neel Kashkari said, “We are working hard to finalize and publish the required legal documents so private banks can participate as well on the same economic terms as public banks.”

    Staff writer Rick Rothacker contributed.

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