Area banks apply for bailout funds

Despite strings, the pair couldn't pass up cheap money

At least two Triangle-based community banks have decided to apply for an infusion of cash from the federal government, while a host of others are studying the pros and cons.

The money is relatively cheap and is designed to boost lending to businesses and consumers, although banks can use the money for other purposes such as acquisitions.

But taking the money means the banks will gain the government as a shareholder, diluting the holdings of existing investors as well as pushing them into unchartered territory. Privately held banks, meanwhile, say it's still unclear how the program applies to them.

Two Raleigh-based banks, Capital Bank and Paragon Commercial Bank, are applying for government money even though they say they're in good shape without it. The U.S. Treasury has set aside $250 billion for the program, and regulators are encouraging banks to use the money to expand their lending.

"If you're a healthy institution, this is a way to get a capital infusion in the short run" at a time when it's difficult for banks to raise capital elsewhere, said Grant Yarber, CEO of Capital Bank.

Capital and Paragon plan to use the money to provide more loans.

Capital is eligible for between $13.6 million and $40.8 million under the government formula that calls for banks to receive cash ranging from 1 percent to 3 percent of their risk-weighted assets, such as loans and investments. Capital had $1.36 billion in risk-weighted assets as of June 30, according to the Federal Deposit Insurance Corp.

Paragon is eligible for as much as $28.9 million.

Paragon CEO Bob Hatley said that even though his bank just raised $11.75 million in subordinated debt this week, the money is too attractively priced to pass up.

"Every banker I know in North Carolina is going to be applying for it, with a couple of exceptions," he said.

No free lunch

The U.S. Treasury will receive preferred stock that pays a 5 percent annual dividend for the first five years, and 9 percent per year after that. The government also will receive warrants for common stock.

Capital Bank has never sold preferred stock and plans to have a special shareholders' meeting to authorize such a sale. That will cost the bank $20,000 or more, Yarber estimated.

Three large regional banks with a presence in the Triangle -- BB&T, SunTrust and Regions Bank -- already have received preliminary approval for billions of dollars in government cash.

Raleigh-based First Citizens said it's not interested in the government program.

Raleigh attorney Tony Gaeta, who represents a number of community banks, said he is urging his clients to at least apply for the money.

"There is no requirement that, by applying, you take it," he added. The application deadline is Nov. 14.

Gaeta said banks face a dilemma with regard to the federal money.

If they accept federal cash, they may have to overcome the erroneous perception that they desperately needed the money. In reality, he said, banks have to be rated healthy by federal regulators to receive the cash infusion. Those ratings are confidential.

Many still on fence

At the other extreme, banks that refuse the money could prompt questions about whether they were healthy enough to qualify. Gaeta said he's counseling banks that that apply for the money but ultimately decide not to accept it to go public with their decision.

"I think they should proactively market [themselves] as saying, 'the money was available to us but we did not feel we should dilute shareholders and take it,' " Gaeta said.

Community banks that say they are considering applying include: Raleigh's North State Bank, Capstone Bank and TrustAtlantic Bank; Crescent State Bank of Cary; and Durham's Mechanics and Farmers Bank and KeySource Commercial Bank.

"I don't know that we have enough information yet to make a decision," said Capstone CEO Steven Ogburn.

One issue that's still unclear, said Ogburn, is how the government would value warrants in a privately held bank like Capstone. Executives at privately owned KeySource and TrustAltantic are considering the same question before applying.

Another sticky point is having the federal government as a shareholder.

Although the government has said "they don't want to micromanage banks, is there the potential, once you take their money, for them to micromanage your bank?" asked Gaeta, "Yes, there is. How much of a potential? You tell me."