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Who's In? Who's Out? Triad bankers consider implications of using, or rejecting, offer of capital
Journal Graphic by Jeremy Boyd
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Published: November 1, 2008
To apply or not to apply -- that is the multimillion-dollar question for banks serving the Triad.
Boards of directors for most of those banks are trying to determine whether to join the U.S. Treasury Department's $250 billion capital-purchase program, which is aimed at providing industry stability and spurring consolidation. Banks have until Nov. 14 to apply.
The available capital is based on up to 3 percent of a bank's risk-weighted assets, which ranges from $3.1 billion for BB&T Corp. -- which has been preliminarily approved by the department -- to as low as a few million dollars for some startup community banks.
The offer appears to be a no-brainer: pay a 5 percent dividend rate on preferred shares to the department for the capital. Access to such capital in the open market likely would require an interest rate twice as high, if the capital were available at all.
Most banks, large and small, are expected to apply.
Yet, most banking executives are conducting as much due diligence on the program as they would a bank purchase. They are weighing whether they need the capital in the first place. They also know that taking the capital, turning down the offer, or worse -- being rejected by the department -- could send a wanted or unwanted message to customers about
their financial stability.
"The perception could go either way with this program," said Scott Anderson, the chief executive of Bank of Granite Corp. Anderson said that the bank is considering applying in the 2 percent range of its risk-based assets, primarily to gain capital "to bolster its lending activity."
"Some people will look at applying and being approved as getting the Good Housekeeping Seal of Approval by the Treasury Department," Anderson said. "Some might look at it and question your financial status if you need this help."
The Treasury Department said that even though it will identify those banks that are approved for the capital infusion, it will not identify those that are rejected or withdraw their application.
"For boards that are reluctant to sell because they feel they won't get a good offer for the franchise, the turn-down notice from the Treasury is like a whack in the head with a 2-by-4," said Tony Plath, a finance professor at UNC Charlotte.
Six have been approved
At least six banks serving the Triad have been approved or preliminarily approved -- Bank of America Corp., BB&T Corp., First Community Bancshares Inc., Regions Financial Corp., SunTrust Banks Inc. and Wells Fargo & Co.
Four others have said they have applied or intend to apply -- BNC Bancorp, NewBridge Bancorp, Southern Community Financial Corp. and Yadkin Valley Financial Corp. Most of the others are considering the offer.
Only two have turned it down -- First Citizens BancShares Inc. and Piedmont Federal Savings Bank. Both said they don't need the capital infusion because they are well-capitalized, and First Citizens said that its strategy is to expand through opening branches in new markets rather than by buying banks.
FIG Partners LLC said in a note to community banks that being approved for the capital "implies that the institution received the ‘blessing' of the Treasury Department and regulators. Investors are likely to perceive the companies taking advantage of the capital program as survivors."
Mark Severson, the chief financial officer of FNB United Corp., said that the opposite could be true as well. The bank, based in Asheboro, is considering applying for the maximum 3 percent capital infusion.
"For those banks who try to participate and get turned down, that's basically a sign that you're done," Severson said.
The likelihood that most community banks will find themselves in that scenario is slight, said Gray Medlin, the managing partner of The Carson Medlin Co., an investment-banking group with an office in Raleigh.
"Most banks will know from talking with their regulator whether their application would be approved before they apply," Medlin said.
Some criticism in Congress
The Federal Deposit Insurance Corp. grades banks on six regulatory factors during an examination: capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk.
Each factor is scored on a scale from 1 (excellent) to 5 (poor). The FDIC provides a weighted average score that summarizes all six individual ratings.
"There is some thought that every strong bank will apply," said Paul Stock, the executive vice president and counsel for the N.C. Bankers Association. "There are a good number of strong institutions that still don't know whether they should apply.
"There is so little detail available that it is difficult to view any decisions as final at this point."
Some legislators in Congress, as well as analysts, criticize the program for being geared more toward helping healthier banks buy weaker banks rather than providing more loans and credit for consumers.
For example, on Oct. 24 PNC Financial Services Group Inc. was approved to receive $7.7 billion. At the same time, PNC said it was buying beleaguered National City Corp. for nearly $5.6 billion.
"Funds made available under the economic-rescue package should not be used to pay for bank acquisitions, raises and executive bonuses," wrote U.S. Rep. John Boehner, R-Ohio, the Republican leader in the House.
However, Medlin said he believes that the need to generate revenue to pay the 5 percent dividend rate to the Treasury Department will spur increased lending within at least a year by participating banks.
Bill Long, the chief executive of Yadkin Valley, said that the bank is applying for the maximum amount of capital it can receive, $36 million. It intends to use half that amount toward its $92 million cash and stock purchase of American Community Bancshares Inc. of Charlotte.
"We don't have to do this program," Long said. "But we're in business for the long run, and any capital we can raise at a reasonable rate, we're going to do it."
John Mendez, the chief executive and president of First Community, said he believes that applying for the capital is a sign of a bank's financial strength, not weakness. The bank has been approved temporarily for $42.5 million for what Mendez called "general bank purposes."
"We know that the Treasury is very much encouraging participation by eligible banks," he said.
The capital infusion could provide "a safety net" for some banks regarding their credit issues, said Swope Montgomery Jr., the president and chief executive of BNC Bancorp. The bank has plans to apply for the maximum amount of capital it is eligible for -- about $30 million.
"This offer could hit the sweet spot for accomplishing some of our goals," Montgomery said. "It could help us attract good banking people in good banking markets that previously we weren't able to take advantage of."
Plath said that the executives also are studying hard the other cost to their bank -- diminishing control that they and the board experience when they accept government equity into their business.
"Granted, the government's investment is nonvoting," Plath said. "But don't think for a moment that Congress won't ask for certain, additional business changes in the banks where it now owns a significant quantity of the bank's equity."
In many cases, taking the capital would make the federal government the banks' largest shareholder, he said.
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
Capital stance
Six banks serving the Triad have been fully or preliminarily approved for the U.S. Treasury Department's capital-purchase program.
• APPROVED: Bank of America Corp. ($15 billion in capital); BB&T Corp. ($3.1 billion); First Community Bancshares Inc. ($42.5 million); Regions Financial Corp. ($3.5 million); SunTrust Banks Inc. ($3.5 billion); Wells Fargo & Co. ($25 billion).
• APPLIED: BNC Bancorp (about $30 million); NewBridge Bancorp ($52 million); Southern Community Financial Corp. ($42 million); Yadkin Valley Financial Corp. ($36 million).
• CONSIDERING: Bank of the Carolinas Corp.; Bank of Granite Corp.; Carolina Bank; FNB United Corp.; RBC Bank; TriStone Community Bank.
• NO, THANKS: First Citizens BancShares Inc.; Piedmont Federal Savings Bank.
Source: Bank executives, U.S. Treasury Department
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