Banking stimulus 101
Steamboat banks in the federal Capital Purchase Program, or CPP:
Alpine Banks of Colorado:$70 million
Millennium Bancorp: $7.26 million
Wells Fargo Bank: $25 billion
- What's the CPP?
The CPP is a voluntary program that banks applied to by December 2008. Under the program, the U.S. Treasury Department purchases senior preferred shares in the lending institutions. The investment is essentially a loan from the treasury. By investing in the banks, the government, in theory, gives them the room to leverage the investment against their assets and increase their comfort with lending more money.
"This becomes capital to the bank," said Paul Clavadetscher, president of Millennium Bank in Steamboat Springs. "It's one piece of how much you can lend. The whole idea is to invest in healthy banks so they have the ability to meet the needs of the community."
Clavadetscher is emphatic that CPP is not a bailout.
The banks agree to pay a 5 percent dividend in the first five years. The rate provides a margin intended to allow them to profit from the loans. After five years, the annual dividend jumps to 9 percent. It's a strong incentive to make the loans promptly, and repay the original investment.
- Does CPP relate to TARP?
Three Steamboat Springs banks are participating in the U.S. Treasury department's Capital Purchase Program, intended to stimulate loan availability nationwide by increasing the capital base of healthy financial institutions.
Nationally and locally, bankers have distinctly diverging outlooks on the program. They even disagree on whether the CPP money represents dollars from TARP - or the federal Troubled Assets Relief Program - or is something else entirely.
Pete Waller, CEO of First National Bank of the Rockies and a member of the Board of Directors of the American Bankers Association, participated in a conference call on the subject with former Secretary of the Treasury Hank Paulson.
Of the original $250 million in TARP money, Waller said, the first $125 million essentially was forced on nine institutional banks in a determined effort to stabilize the national banking system. Wells Fargo was among them.
"They were told, 'You will take it,'" Waller said.
The remaining $125 million was set aside for the CPP program, to help healthy banks feel more confident about lending on the local level.
On the 'Net
For a federal take on economic recovery efforts, visit www.financialstability.gov
Steamboat Springs A couple of Steamboat Springs bankers are enthusiastic about their plans to put federal stimulus dollars to work locally. Others don't want to touch the government funds.
"We did not apply for it; we have no desire to participate ever. We don't want it, can't use it," Terry Jost said. "We just don't need the government more involved in our bank than they already are."
Jost is chairman of the board and CEO for all four locations of Mountain Valley Bank.
In contrast to Jost's position, Adonna Allen, president of Alpine Bank in Steamboat Springs, is optimistic her company's 37 locations can leverage $70 million in federal investments to reinvigorate the real estate and construction industries in the region.
"Our economy is so dependent on some of these industries," Allen said. "We think we can help start the whole cycle again."
The program she is excited about is the federal Capital Purchase Program. It's an outgrowth of TARP, the federal Troubled Assets Relief Program. But instead of aiming federal stimulus dollars at toxic assets, CPP is meant to increase the capitalization of healthy banks all across the country, giving them the means to lend more freely.
It's clear that only a minority of bankers see the value of the program. Only about 400 of 8,400 financial institutions have signed up.
Pete Waller is CEO of First National Bank of the Rockies and a member of the Board of Directors of the American Bankers Association. He said his banks, including one in Steamboat, signed up for the CPP before the December 2008 deadline. He now feels it is unlikely they will accept the federal investment.
"We didn't know, at the time, how bad this economic situation was going to get," he said. "The credit markets were all frozen up. We have a lot better idea now that we aren't facing financial Armageddon. While the (the economy) is not good, it's not as bad as it might have been. I don't believe we'll take the money."
Jost said his bank already is well-capitalized and able to make loans.
"We aren't carrying any sub-prime loans, and we don't have any toxic assets on our books," he said.
Allen said her company sees an opportunity to use the CPP money to do some creative lending that it thinks will meet specific needs in its communities.
"We'll hopefully start to unroll some student loans," Allen said. "It's not something we've done in the past."
Alpine also wants to use a portion of its CPP capital to make loans to help small businesses. It also may hold back some of the lending capacity in case the federal government asks it to acquire some struggling institutions.
However, a prime focus is on jump starting the real estate, construction and home buying sectors of its business. Notably, Alpine Bank intends to begin underwriting some of its own mortgage lending business.
But the cycle begins, Allen said, with some of Alpine's existing clients around the Western Slope who have developed building lots that aren't selling. The developers have done a great job, she said, but in some cases, interested buyers are unable to acquire the lots and build a house because loans aren't available. Through an incentive-laden lot-buyer program, Alpine Bank intends to offer terms, conditions and interest rates that start the ball rolling.
In theory, lot sales will lead to construction loans, and construction loans will lead to mortgage lending, whether they're generated by completed spec homes or custom homes.
Jill Leary, president of Wells Fargo Bank in Steamboat, said her company's involvement in federal recovery programs really hasn't made any difference in day-to-day lending in the Steamboat bank.
"It's not like Wells Fargo says, 'OK, Steamboat gets $10 million.' That's not how it works," Leary said. "We make loans as we see people being qualified. We still are being responsible lenders, verifying income, and doing the things we've always done."
Wells Fargo in Steamboat has its own mortgage lending department, which can turn to Wells Fargo underwriters to back the mortgages it initiates. In many cases, Wells Fargo -nationally - underwrites mortgages for smaller banks.
Since Wells Fargo took on $25 billion in TARP money in October 2008, the company has loaned $225 billion nationally, according to a corporate spokeswoman.
Capital not enough
Paul Clavadetscher, president of Millennium Bank in Steamboat Springs, said his company's willingness to take on a little more than $7 million in CPP investment was a calculated decision based on confidence that its banks in six communities can leverage the capital to make good loans.
With five years, before the dividend rate goes up to an unattractive 9 percent, the pressure is on the bank to make loans that will allow it to pay the dividend and repay the federal investment while still realizing a profit, Clavadetscher acknowledged. Otherwise, it will have been a bad decision to accept the CPP investment.
"This can be a very significant opportunity for the community," he said.
In the end, Waller predicted, the mere injection of capital into community banks isn't enough by itself to stimulate the economy.
"Capital, in and of itself, won't create loan demand," Waller said. "That's been the weakness (of CPP) from my point of view. You have to have credible borrowers with good business plans that have a good use for the money. And they have to have a legitimate means to make a profit and repay the bank."
Allen said Steamboat is blessed to have as many healthy banks as it does and that the diversity among those banks is an added strength.