Community Banks Change Course, Opt for TARP Capital

Over the past month, community bankers have reversed their view of the federal government’s Troubled Assets Relief Program (TARP), and a majority now plan to use government capital to strengthen their balance sheets, according to a nationwide survey of community bankers conducted by Banc Investment Group (BIG) of San Francisco. When polled in October, 66 percent of the 188 bankers surveyed said they either were unlikely to use or definitively against the idea of accessing TARP capital, and only 8 percent said they would probably use TARP.  In a survey completed Friday, 56 percent said they would now opt for TARP capital.  Additionally, 3 percent of the banks surveyed have already been approved for TARP.  Banks that are privately held must make a decision whether to utilize TARP funds by Dec. 8, 2008. “Given the precipitous drop in the economy, bankers now want a higher margin of safety going forward,” said Chris Nichols, chief executive officer of BIG.  “This abundance of caution has prompted community banks to re-evaluate their initial reluctance to consider TARP funds.  Because many banks want to position themselves to withstand another Depression era-type shock and still make loans to their communities, TARP capital has become an attractive option.” Banks surveyed by BIG said TARP capital would be deployed as follows: 29 percent plan to use it to support organic growth, 28 percent said it would create a buffer against future loan losses, 11 percent said it would help improve capital ratios, and 8 percent said the funds would support M&A activity. The remainder were either undecided or had not yet identified a specific use for the capital. “With many quality banks agreeing to use TARP funds, the stigma of government capital is largely gone,” Nichols said.  However, for banks seeking to build a fortress balance sheet, TARP funds may be the answer. At a cost of 5 percent to 9 percent depending on the redemption period, TARP capital is relatively inexpensive compared to a cost of 12 percent or more for other forms of capital — if they are even available. Write to Kelly Curran at [email protected] Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.