Banks cash in on fed funds | Maine banks take advantage of a $250 billion federal stimulus package
Last October, in the face of a freezing credit market, the federal government made an unprecedented move. Congress passed a $700 billion rescue package, intended to keep the country’s financial industry from sinking under the weight of bad mortgages and declining consumer confidence.
Only two weeks later, the U.S. Treasury announced another bold tactic: allocating $250 billion of those rescue funds to buy preferred non-voting stock in healthy U.S. banks, a move intended to boost their capital and allow them to increase business and consumer lending. So far, three Maine-based banks — The First Bancorp in Damariscotta, Northeast Bancorp in Lewiston and Bar Harbor Bankshares in Bar Harbor — have received approval to participate in the program for a total capital infusion of nearly $48 million.
What will this additional capital mean for Maine? While Maine bankers describe the program as a win-win for both financial institutions and consumers, some are concerned that
simply increasing the amount of available capital won’t be enough to spur lending and alleviate the pangs of the recession. Local businesses in turn will look for more loan approvals and lower rates. How lending in Maine will be affected is yet to be determined. All three banks say they plan to use the money to raise additional capital to help increase lending in both the commercial and consumer sectors. For every dollar of capital, the banks can leverage $10 in loans.
Bank executives are quick to point out that the Capital Purchase Program is not a bailout, but a capital infusion for already strong banks. Though often confused, the funds allocated to the nation’s struggling financial giants are not the same funds being doled out to community banks. Executives at the three banks all said that, though they don’t need the capital to survive, the opportunity to get inexpensive capital in a tight market was too good to pass up. “It’s a source of strength in a very weak market,” says Joseph Murphy, president and CEO of Bar Harbor Bankshares.
Trickle-down theory
Since early December, Northeast Bancorp in Lewiston, parent company of Northeast Bank, received $4.2 million in capital, and The First Bancorp in Damariscotta, parent company of The First N.A., received $25 million in capital. And on Jan. 7, Bar Harbor Bankshare’s shareholders approved a similar deal for the bank to receive $18.75 million from the Treasury. Other Maine banks are considering following suit, says Lloyd LaFountain, superintendent of the Maine Bureau of Financial Institutions, which regulates state-chartered institutions and had to approve Bar Harbor Bankshares and Northeast’s applications for the federal program. The First is federally regulated.
Bank executives say the program is appealing because it offers relatively cheap capital when securing it on the private market is challenging and costly. Raising additional capital by issuing new shares or borrowing long term from an investment company, for example, “would be very difficult” in this market, says LaFountain. Banks could pay as much as 10%-12% in dividends to shareholders by selling preferred stock on the private market, whereas banks only have to pay the Treasury a 5% dividend for those stocks for the first five years. Then, the dividend increases to 9% as a way to encourage banks to pay back the investment in five years.
On the national level, the program has been criticized by government oversight agencies, academics and financial experts for failing to adequately regulate how banks are using the funds, besides putting limits on executive compensation. That critcism led the Federal Deposit Insurance Corp. this month to ask banks to document how they use the money. Critics also claim the additional capital has not boosted lending, or done enough to help homeowners facing foreclosure.
The effect of this increased liquidity in Maine still remains to be seen. Lack of capital hasn’t prevented Maine businesses from getting get loans, says Mark Delisle, state director of the Maine Small Business Development Centers. Money has always been available, but the credit crunch has led bankers to take “an even more conservative approach” to approving loans, he says. “I don’t know if increasing availability of capital [will affect lending] unless banks get more aggressive putting capital out there,” he says.
But banks don’t plan to relax their lending standards any time soon. “One reason we’ve stayed healthy and were able to quality for this additional capital is because we don’t believe it helps anyone by lending them money if they can’t afford to pay it back,” says Jim Delamater, president and CEO of Northeast.
Delamater says Northeast Bank will take a needs-based approach to doling out the $4.2 million depending on the demands of customers, who will likely see savings passed along to them in the form of rate reductions and other concessions. Dan Daigneault, president and CEO of The First Bancorp, says the bank will use roughly half of the $25 million in additional capital for small business loans, and the other half for mortgages and municipal lending. Bar Harbor Bankshare’s Murphy says the extra $18.75 million will allow the bank to loan more to its active borrowers and reach out to new consumer and commercial borrowers.
Additional capital will help banks deal with current lenders by increasing their ratio of available capital to poor-performing loans, one important performance indicator for bank regulators, says Daigneault. “It allows banks to be more patient with small businesses. The more capital we have, the more forgiving we can be and the more leeway we can have with customers who are struggling and businesses who are falling behind on payments,” he says.
An increase in loans in Maine would likely have a trickle-down effect for the rest of the state, says LaFountain. An increase in loans for new home construction and business expansions, for instance, would create work for the state’s general contractors, electricians and plumbers. “It would ultimately impact the entire state economy,” he says.
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