Local bankers are watching, waiting and weighing their options when it comes to a couple of new federal programs.

As part of the U.S. Treasury's $700 billion Troubled Asset Relief Program - known as TARP - financial institutions can participate in the Capital Purchase Program. Under the program, the Treasury will purchase up to $250 billion worth of senior preferred shares in U.S. financial institutions. No single institution can receive more than $25 billion or 3 percent of its total risk-weighted assets - whichever is less. At the same time, applicants must apply for at least 1 percent of the value of its risk-weighted assets.

In conjunction with announcing the program, the Treasury also revealed that nine of the largest financial institutions in the country would participate. The nine that will receive a total of $125 billion:

• Bank of America Corp., $15 billion

• Bank of New York Mellon Corp., $3 billion

• Citigroup Inc., $25 billion

• The Goldman Sachs Group Inc., $10 billion

• JPMorgan Chase & Co., $25 billion

• Merrill Lynch & Co. Inc., $10 billion

• Morgan Stanley, $10 billion

• State Street Corp., $2 billion

• Wells Fargo & Co., $25 billion

KeyBank also recently announced it would participate, selling $2.5 billion in preferred shares.



Price is right

Under the program, Northern Colorado banks could collect more than $232 million, if every locally based bank decided to take the maximum allowed. Most local bankers admit that the price is right. The cumulative dividend rate on the government's shares will be 5 percent for the first five years and 9 percent annually beyond five years. Capital at that rate, even in good times, is hard to come by.

"A program to bring in capital at 5 percent is very cheap," said Tom Chinook, president of Loveland-based Advantage Bank. "It's an exciting program."

Chinook said Advantage is keeping an eye on the program. He points out that all of the rules have not been completely ironed out.

"Each bank will have to analyze it," he said. Chinook points out that there are restrictions for banks that decide to participate, such as dividend payments. As long as the preferred shares are outstanding, no dividend payment can be made to other shareholders. Participating institutions also must adhere to executive compensation and benefits standards laid out in the Emergency Economic Stabilization Act, which eliminates "golden parachutes."

"There are downsides to everything, including doing business with the government," said Joe Tennessen, executive vice president of cultural enhancement for Greeley-based New Frontier Bank. The bank is going over the program with a fine-toothed comb before deciding whether or not to participate.

"As with anything else, we'll be very careful before we jump in," he said.

The sentiment seems to carry throughout community banks. Since the program was initially aimed at the large institutions, there is worry that smaller banks could fall victim to some unintended consequences.

"We're evaluating it really hard," said Darrell McAllister, president of Evans-based Bank of Choice. McAllister explained that the bank was looking at what it would do with the money as well as how it would help and/or hurt the bank. He added that there seem to be a lot of unanswered questions.



Liquidity program impact

In addition to analyzing the Capital Purchase Program, banks are also delving into an initiative headed by the FDIC. The Temporary Liquidity Guaranty Program has two elements - one to guarantee new senior unsecured debt and the other to extend insurance coverage to non-interest bearing accounts. The latter will have the biggest impact locally.

"This program addresses the pressing concern that many small business accounts, such as payroll accounts, frequently exceed the current maximum insurance limit of $250,000," explained FDIC Chair Sheila Bair in a statement. "Many smaller, healthy banks have been losing these accounts to their much larger competitors because of uncertainties in the financial system. This new, temporary guarantee - which runs until the end of next year - should help stabilize these accounts, and help us avoid having to close otherwise viable banks because of deposit withdrawals."

Many local bankers are planning to pay the premiums that will begin around the end of November.

"We almost feel we'll have to do it," McAllister said, explaining that offering the coverage is likely to become an industry standard. The cost of the program to Bank of Choice would be around $10,000 per month. The increased cost will be on top of rates for traditional FDIC insurance that will essentially double next year. McAllister said the expenses are likely to be handed down to the consumers through higher rates and fees.

"We're all living in some interesting times," he said. "I don't know if that's a blessing or a curse."



Kristen Tatti covers the banking industry for the Northern Colorado Business Report. She can be reached at 970-221-5400, ext. 219 or ktatti@ncbr.com.