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[November 09, 2008]
Banks consider working with Federal Reserve on financial rescue
(Omaha World-Herald (NE) Via Acquire Media NewsEdge) Nov. 9--Hod Kosman didn't figure his bank, the Platte Valley Bank in Scottsbluff, would need rescuing by the federal government. It has plenty of capital and good loan demand from its healthy regional economy.
"We figured it was for the bigger banks with other issues," especially those with problems related to subprime mortgage loans, Kosman said of the $700 billion bailout.
But then he got a call from regulators at the Federal Reserve, who suggested Kosman consider applying for what they called the Capital Purchase Program.
"They said they would like all of their good banks to participate," Kosman said.
In fact, Federal Reserve officials suggested Platte Valley Bank use a federal investment of between $4.5 million and $13 million to acquire another bank that is "a little bit under the weather," Kosman said.
"We may not have looked at this (acquisition) quite as strongly as we would with these dollars available. It probably did pique our interest in this particular case."
The federal government is encouraging Platte Valley Bank and hundreds of other financially solid banks to apply for injections of money.
Many will do so; others are considering it. Some, though, are resisting because participation would make the government partial owner, at least temporarily, and give it a say in operation of the banks.
Healthy institutions like Platte Valley Bank initially ruled themselves out of the bailout, which was presented to Congress as a way to buy up worthless mortgage-backed securities. These banks had plenty of capital, money to lend, good customers to borrow, and no toxic securities on their books.
But now the Treasury Department and bank regulators are implementing other tactics to accomplish their goal of stabilizing the nation's financial system.
Gordon Karels, a banking professor at the University of Nebraska-Lincoln, said Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke likely knew from the start that they would need a broad approach to restore confidence in the financial system.
Focusing on the troubled mortgage-backed securities and weak financial institutions helped win approval from Congress, Karels said.
Now Paulson wants "broad participation by healthy institutions" and urged banks to "deploy, not hoard" their money. The added capital is intended to do just that, Karels said.
Karels said federal regulators want the healthy banks to use the money to increase lending, to pay off higher-cost debt and to acquire financially weak banks.
A purchase is preferable to the government closing a bank, which causes problems for customers and claims to the Federal Deposit Insurance Corp., he said.
The application deadline for banks is Friday, although the industry has asked for more time because officials still are clarifying the rules.
Not every banker is interested, including James Fitl, chief executive of Omaha's Mid City Bank. The bank has twice the level of capital required by federal regulations, Fitl said, and that's not the only reason.
"If I go with them, I'm going to have some pinhead sitting next to me telling me what to do," Fitl said. "I couldn't take that."
Some banks aren't saying what they will do.
First National Bank of Omaha, the state's largest locally owned bank, declined to comment.
American National Bank of Omaha, which also has strong capital and money to lend, will consider the program once its details are defined, said Chief Executive John Kotouc.
The goal of helping strong banks acquire weaker banks is aimed at stabilizing the banking system, he said.
"We're an active acquirer."
Jeff Schmid, CEO of Mutual of Omaha Bank, said he has no plans to apply for the program because the bank has the capital it needs to acquire banks and to make loans.
Publicly traded West Bancorporation, whose West Bank has locations in Des Moines and Iowa City, will hold a shareholder vote Dec. 10 on whether to change its bylaws so it can participate, if desired.
Doug Gulling, chief financial officer, said the bank and its holding company are well-capitalized, not in financial trouble and not short of funds.
But West has an obligation to its shareholders to be prepared to apply if it would benefit the company, he said. West Bancorporation would be eligible for between $12 million and $36 million, Gulling said.
San Francisco-based Bank of the West, which has significant banking and mortgage business in the Midlands, is awaiting details about the program's conditions, said Robert Dalrymple, regional executive vice president.
Even if it takes part, he said, the bank wouldn't change its standards for making loans.
Under the federal program, a bank would sell preferred stock to the government and pay 5 percent annual interest. The rate would rise to 9 percent after five years. Banks apparently couldn't deduct the annual payments as a business expense, which raises the cost of the money to them.
Those terms would spur banks to repay the money as quickly as possible, Dalrymple said.
Omaha State Bank CEO Michael Dahir said he doesn't plan to apply because having more capital would make no difference in the bank's lending practices. The bank has denied some real estate loan applications it might have approved a few years ago.
"We're not going crazy being conservative, but we're in a world where you've got to manage risk rather than take risk," he said.
Chris Murphy, CEO of First Westroads Bank, said there are too many questions about how the program would work.
Besides preferred stock, the government would receive warrants giving it the right to buy bank stock at a certain price. Murphy said it's unclear how the warrants would work with privately owned banks like First Westroads.
"If I was going to make a decision today, the answer would be no," Murphy said. "I think there are many questions that are going to have to be answered."
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