Not All Banks Want to Bail Out of Bailout Program

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As several of L.A.’s biggest banks begin looking to cash out of the government’s increasingly maligned financial rescue program, a divide is growing between larger institutions and smaller community banks.

Pressure is mounting on larger regional banks to exit the Troubled Asset Relief Program after moves by the nation’s largest financial institutions to shed the stigma and restrictions of being a TARP bank. But a number of community bankers say the criticism is unfair, and the program is actually helpful during an uncertain economic time.

“The conversation is all about TARP (hurting the) largest institutions, but it’s a totally different world in the community bank space,” said Tamara Gurney, chief executive of Mission Valley Bancorp in Sun Valley, which has accepted $5.5 million in TARP money.

Last week, Los Angeles County’s largest commercial bank, City National Bank in downtown Los Angeles, announced that it has repaid half of the $400 million it received under the program. Meanwhile, the county’s second largest bank, East West Bank in Pasadena, which took more than $300 million in government aid, said it expects to exit TARP as early as the third quarter.

The program, created during the financial crisis in late 2008 to ensure that banks had sufficient capital, has put downward pressure on quarterly earnings, raising anxiety among shareholders. It also comes with restrictions on executive pay.

With the nation’s largest banks, including Citigroup Inc. and Wells Fargo & Co., repaying government money, there is more pressure on the next tier of banks to follow suit, said Bert Ely, a bank consultant in Alexandria, Va.

“Continued TARP investment is a negative,” Ely said. “As more and more pay it back, those who haven’t will be looked at a little more critically. Some are now trying to pay back quickly.”

In September 2008, amid the financial crisis, the U.S. Treasury announced that it would commit as much as $700 billion to fortify the nation’s financial services industry, with the bulk of the money going to Citigroup, Bank of America Corp. and nearly 20 other large companies. City National was the first local institution to enter the TARP fold.

But almost from the beginning, banking executives worried about the restrictions of the program, including the pay limits, as well as the cost of the aid. To participate in the program, banks sold preferred shares to the government that typically required a 5 percent quarterly dividend for the first five years, followed by 9 percent after that. That’s perhaps twice as expensive as a healthy bank would expect to pay to raise capital today.

According to a Business Journal analysis of publicly available data, banks headquartered in the county paid more than $58 million in dividend payments to the government through the first three quarters of 2009.

City National alone paid about $20 million before announcing last week that it would pay back $200 million, a move prompted by the bank’s strong capital position, executives said.

“Holding TARP is expensive,” said Chief Executive Russell Goldsmith. “Since we don’t need the capital and it’s expensive, the prudent thing to do is to pay it down.”

Goldsmith said the pay restrictions have affected some City National executives, but it was not a factor in the bank’s decision. More of a concern was the changing perceptions of TARP, initially seen as a “badge of honor” because it targeted the strongest banks expected to weather the financial storm. Since then, however, investors have come to dislike its depressing effect on earnings while the public views it as a sign of weakness.

To help it get out of the program, City National last month raised $250 million by publicly issuing trust-preferred securities.

The bank expects to pay back the remaining $200 million later in 2010.

East West, too, said it is sensitive to the public relations concerns of being a TARP bank. Through spokeswoman Emily Wang, Chief Executive Dominic Ng said the bank is looking to exit the program as soon as the third quarter of 2010, once the institution has integrated United Commercial Bank, which East West recently acquired.

“Right now we’re focused on the integration with United Commercial Bank (and) we’re looking at Q3 or Q4 to return the TARP money,” she said.

Staying put

But many smaller banks have no intention of getting out of TARP in the near term. Of the roughly 20 L.A. banks that took government aid, more than half are small and received less than $20 million each.

Broadway Federal Bank, a savings and loan in Los Angeles that received $9 million through TARP in late 2008, recently went back for a second infusion, this time for $6 million.

Paul Hudson, chief executive of parent Broadway Financial Corp., said since its stock is trading below book value, it would be relatively expensive to raise capital by issuing new stock, which could dilute share prices further.

As a result, he said, TARP provides the cheapest capital. The new infusion would be used to support asset growth.

“We were growing faster than our capital was growing,” he said.

TARP is allowing other banks to hunker down during a time of uncertainty.

For example, Cathay General Bancorp, parent of Cathay Bank of Los Angeles, has no plans to get out of the program anytime soon. Heng Chen, the holding company’s chief financial officer, said rising nonaccrual loans have forced its hand.

“It will be a while” before we repay TARP, he said. “Right now, we’re just waiting for the economy to recover.”

Chris Stulpin, a stock analyst with D.A. Davidson & Co. who follows Cathay, Center Financial Corp. and a number of other local banks, pointed out that many L.A. banks have outsized exposure to commercial real estate, which could prove to be a major headache in 2010. As a result, many institutions are holding on to the capital they have, including TARP money.

“They have to really squirrel away capital until that commercial real estate storm passes through,” Stulpin said.

Gurney, of Mission Valley, said the credit quality issues many smaller banks are facing have made access to capital tougher.

“Capital is difficult to come by,” she said, which makes TARP something of a lifeline for many community banks.

Even if banks want to exit TARP, the tight capital markets could prevent that for some time. Most of the big banks that have repaid TARP have done so with new capital raised through equity offerings, a move that could prove difficult for a number of smaller institutions.

“(Repayment is) probably going to be more of a 2011 event,” said Stulpin. “Most have expressed the desire, but I don’t think it is in the cards in the near term for many of the small banks I cover in California.”