Richmond-based First Market Bank might be in the mood for granting more loans after receiving a $34 million loan from the federal government.
On Tuesday, the U.S. Treasury announced it provided 28 banks with $238.6 million as part of the Capital Purchase Program, which is intended to increase lending among healthy banks. First Market Bank, which is privately held, received $33.9 million. In exchange, the government got preferred stock.
The capital infusion is part of the $700 billion financial rescue plan passed by Congress last year, which allows the Treasury to purchase shares of preferred stock from banks.
David Fairchild, chief executive of First Market Bank, said the money would increase the bank’s available capital by a factor of one third.
“We felt like it made sense even though we have always been well capitalized,” Fairchild said. “With additional capital, it will give us a better opportunity to make loans available.”
The government money will expand First Market’s lending capacity between $100 million and $200 million, Fairchild said.
So far, 19 other Virginia banks have already taken advantage of the Capital Purchase Program. Union Bankshares, based in Bowling Green, borrowed $59 million, and Community Bankers Trust, based in Glen Allen, borrowed $17.7 million.
Banks applying for the Capital Purchase Program were eligible to receive 1 percent to 3 percent of their risk-based assets. Like most banks, First Market applied for the maximum amount. The Treasury has given $195.5 billion to banks under the Capital Purchase Program; about $50 billion allocated for the program has yet to be disbursed, according to several news stories.
But the funds aren’t free: Banks that receive the money will have to pay it back with interest. For starters, they are required to pay a quarterly dividend of 5 percent, and they can’t pay off the principal until three years after receiving the funds. If the funds aren’t paid back after five years, the quarterly dividend jumps to 9 percent.
In addition, private banks such as First Market also have to pay a one-time equity warrant of 5 percent when they pay off the Treasury. That means if First Market pays back the money at the end of the three years, they will owe the Treasury about $6 million.
“The Treasury is getting a pretty good return,” Fairchild said. “This is not a giveaway program by any means.”
Fairchild said First Market would use the money to expand lending across all categories, including mortgages, business loans and lines of credit. But he also said that quality loans are not easy to find in this environment.
“Lending money is what we are supposed to do best, which means lending prudently to the right geography and the right industries,” Fairchild said. “You have to be a little more art than science. That’s why it is hard to define exactly how and where the money goes.”
First Market will report to federal banking regulators every quarter on lending levels and the nature of new loans. Other than that, there isn’t much oversight from the government, Fairchild said.
Bruce Whitehurst, president of the Virginia Banker’s Association, said banks accepting the government money have to consider whether they can use the extra capital to make more loans and receive a return on those loans that make the cost of borrowing worthwhile.
One reason healthy banks are accepting the Treasury money is because finding private capital to fuel expansion is difficult right now.
“It’s very common to see banks go out with capital offerings, but the source of capital has really gone away in the last six months,” Whitehurst said.
Whitehurst added that it might take a little bit of time before the capital infusions translate into an increase in lending.
“One of the things getting simplified out of Washington is that you get more capital today you ought to make more loans tomorrow,” Whitehurst said. “The growth of deposits and loans are not going to be as robust as it will be when we are in recovery.”
Whitehurst said there has been some public misunderstanding of the Capital Purchase Program. He said it is different from the handful of instances where relief money has been invested in struggling banks and auto manufacturers who asked Congress for help.
“It’s a good return to taxpayers,” Whitehurst said. “Where else do you find a 5 percent dividend?”
You can see the full list of banks that have received money here.