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Smaller banks lining up, too BILLIONS AND MILLIONS

December 18, 2008 12:36 am

BY HOWARD OWEN

The government's $700 billion rescue plan for banks isn't just for the big boys.

It isn't even just for the poor boys.

Part of the plan, $250 billion worth, has been set aside for capital injections for well-capitalized institutions, including a lot of regional and community banks.

"This is a program for healthy banks, not a bailout," said G. William Beale, president and CEO of Union Bankshares Corp. "They're helping us try to take capital to stimulate the economy."

This is how much some banks in our area are in line to get, with final action expected by the end of the year:

StellarOne, based in Christiansburg, with 40 branches, all in Virginia, and with assets of $2.97 billion: $30 million.

Eastern Virginia Bankshares, based in Tappanhannock, with assets of $1.03 billion: $24 million.

Union Bankshares Corp., based in Bowling Green, with assets of $2.3 billion: $59 million.

Virginia Commerce Bank, with assets of $2.66 billion: $71 million.

If your bank is well-capitalized, why participate? After all, the money isn't a gift.

The government buys preferred, non-voting stock, and the bank gives a 5 per- cent annual dividend for three to five years. The bank is supposed to buy back the stock between three and five years into the deal, and if it doesn't buy it back after five years, the interest rate goes up to 9 percent. Banks can ask Treasury for an amount equal to 1 percent to 3 percent of their total assets.

"It was available; it was cheap. We can pay it back," said O.R. Barham Jr., president and CEO of StellarOne.

"It will accelerate our ability to lend money. Liquidity is a big issue for all banks. We'll use it to make loans."

Beale, whose bank announced its intention to participate on Monday, said the open market rate is 10 percent to 12 percent, as opposed to Treasury's 5 percent. He said that his bank is competing with others "in desperate need of capital," which drives up the interest rate for everyone.

Still, some smaller banks are opting not to take the money. Patricia G. Satterfield, president and CEO and the Virginia Association of Community Banks, estimated that more than 50 percent of community banks with whom she was familiar were not taking part in the program.

An irony of the program is that shakier banks, those needing capital the most, are not eligible for it, but in many cases, very stable smaller banks are just saying no.

"Many community banks are very well capitalized, very secure in their business strategy for the future," Satterfield said. "They weighed the pros and cons, and they decided it was more advantageous not to participate."

Also, the terms "can be changed by Treasury at any time for any reason," she added. "When Congress gets back, it will want to take a look at this program."

"We're concerned that they could change the rules," Beale said, "but I don't think it would be on pricing. I think it would be somewhere else."

And, he added that he is comforted by the fact that all of Congress would have to agree to some changes.

"I feel that, if the entire Congress had to approve, there would be some reasoning, not a knee-jerk reaction."

One bank that won't be taking part is Fredericksburg's new Virginia Partners Bank. Virginia Partners is what is called a "de novo" bank, said William Young, its CEO. That means it has been in business three years or less.

One of the restrictions on de novo banks, said Young, is that they can't pay dividends. One of the requirements of the institutions accepting the government money is that they pay those annual dividends.

The smaller banks insist they will be using the money to increase liquidity.

"In the last two weeks, we have seen a pickup in mortgage requests and approvals," Barham said. "We've been sending out mailers, inviting people to come in and refinance because the rates are so low."

Many banks have found the generous rates irresistible, no matter how solvent they are.

"If you're well-capitalized," Barham said, "how can it hurt to have more capital?"

Are the bankers concerned about what customers and other citizens think about healthy institutions getting generous public loans?

"I think I would be naive to think that wasn't a concern," Beale said. He added that Union Bank was sending out letters to shareholders this week "to explain why we did this."

Barham and the other CEOs insist that the money isn't gone forever:

"You're not just kissing the money goodbye. The government should come out OK on this."

Satterfield said the community banks "have done exceptionally well--no subprime loans, no Ninja loans. They're not what created all the chaos, but they got thrown under the bus like everybody else."