Local Banks Let Funds Languish

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Los Angeles County banks have received more than $1.2 billion from the government’s financial rescue plan, but the program appears to be suffering the same problem here as it nationally: Few banks are using the money to boost much needed lending.

Instead, many of the local institutions have said they intend to build a “fortress balance sheet,” insulating them from future losses on bad loans; others have begun eyeing potential acquisitions.

“If you think that the purpose was to get money out to generate loans, obviously it hasn’t worked at all,” said Alan Rothenberg, chief executive of 1st Century Bancorp, a Century City-based bank holding company that decided not to apply for the program because it has sufficient capital. “The money has been going into banks and just staying there.”

Known as the Troubled Asset Relief Program, the $700 billion program was hastily approved by Congress in October with the goal of stabilizing the banking system and easing the credit crunch. But despite billions of dollars flowing out to banks nationwide, the program has barely caused a ripple in the credit markets, leading many to question its effectiveness.

Lawmakers are pressuring banks to deploy the money, but most institutions said that they will remain cautious about lending for fear that a continued downward slide in the economy could sour any quickly made loans and put the institutions in serious trouble.

“There’s a tremendous misnomer about Tarp and what the banks are doing,” said Barry Uzel, chief executive of Ncal Bancorp, the L.A.-based parent of National Bank of California, which received $10 million in Tarp funds in December. “It seems as though there’s commentary suggesting that money’s being given to the banks and nothing is being done with it.

“What I want to do is find ways to lend in the community. The problem is trying to find these people that not only need the money, but deserve the money. I can’t just willy-nilly, in today’s environment, give the money to anybody and not be assured of its repayment.”


Lenders cautious

The $1.2 billion received by L.A. County banks is a fraction of the $200 billion so far distributed nationwide. Half of the Tarp funds nationally went to the country’s nine largest banks, none of which are based in Los Angeles. The largest local institution, Beverly Hills-based City National Corp., received $400 million.

The cash infusions improve the banks’ capital accounts, which can be thought of as the money in banks that actually belongs to the banks. Banks generally do not lend their capital. However, greater capital amounts allow them to use more deposits for lending.

Former Treasury Secretary Henry Paulson said when the program was passed that banks should put the money to use and not hoard it.

Many executives at the institutions say they are ready to make loans so long as the borrower is able to repay the bank. And that’s become more difficult in the recession.

“City National is actively engaged in expanding its lending to existing clients and to new clients who are creditworthy in this environment,” said Russell Goldsmith, chief executive of City National.

In the fourth quarter of 2008, City National increased its loan portfolio by about 2 percent to more than $12.4 billion. But as more institutions release their quarterly earnings reports, City National has largely been an exception as many large and midsized banks saw their loan volumes fall.

Pasadena-based East West Bancorp Inc., for example, reported a more than 2 percent drop in its fourth quarter loan volume from the previous quarter despite a $306 million Tarp infusion.

But the drop in loan volume, some experts say, is not such a bad thing.

“Frankly, we don’t want our banks to be making loans to anyone who walks through the door. Otherwise we’ll be doing another bank bailout in two years,” said Robert Klingler, an attorney with Bryan Cave LLP, which is assisting banks nationwide in Tarp-related transactions. “The lending capacity is there; unfortunately, in this economy, there are fewer creditworthy borrowers than there were three years ago.”

Indeed, as the economy has plunged head first into a recession, the United States has lost hundreds of thousands of jobs as companies in virtually every industry have cut back. In Los Angeles County, the unemployment rate rose to 9.9 in December, the highest level in 15 years

Until the economy begins to recover, some experts believe that banks’ loan portfolios will remain at or near their current levels. In that case, the effectiveness of Tarp may not be known for months.

“It’s going to be slow. I think it’ll probably take the better part of 2009,” said Joseph Gladue, a B. Riley & Co. Inc. stock analyst who tracks several local banks. “They may now have money to lend and everyone wants them to do that, but are there good borrowers out there?”

As a result, some banks are turning to alternative uses for the capital.

On Jan. 23, First California Financial Group Inc., the Westlake Village-based parent of First California Bank, purchased the deposits of 1st Centennial Bancorp after the Redlands-based institution was seized by the Federal Deposit Insurance Corp.

First California Chief Executive C.G. Kum said he was absolutely encouraged by regulators to use the bank’s $25 million Tarp investment to make the acquisition.

“They want stronger banks like ours to take the money and deploy it,” Kum said. “They’ve sensed that there will be quite a few distressed problem banks in Southern California. And rather than the FDIC and therefore the taxpayers being stuck with the bill, they wanted stronger banks to step in and basically take over these problem institutions.”


No free lunch

More than a half-dozen banks nationwide have acquired other institutions after receiving the funds. The Treasury has indicated that it would support banks using the money for mergers and acquisitions, though Congress has said it does not want the money used that way.

That kind of uncertainty has led to a disconnect between public expectations and the reality of the program. Largely viewed as a no-strings-attached bailout, Tarp has generated criticism from lawmakers who say the money should be deployed by banks immediately.

But banks counter that the funds are anything but no strings attached. The Treasury is charging interest on the Tarp loans and has demanded warrants from publicly traded banks.

“Too many people think this is free money and it’s not. In the short run, it’s an expense that will be absorbed by our shareholders,” Goldsmith said. “The government is receiving 5 percent plus the value of the warrants, so it’s probably effectively a 7 or 8 percent yield.”

He said City National will pay about $21.5 million in preferred dividend payments to the Treasury in 2009. Already, the institution recorded a $2.4 million hit due to Tarp dividend payments in its fourth quarter earnings.

For the baker’s dozen of local banks participating in the program, there could be more than $60 million in payments this year to the government. For some institutions, the costs are just too high.

California United Bank, which received approval for a capital infusion of $8.3 million, raised eyebrows last month when it declined the money. In a statement issued by the Encino-based institution, Chief Executive David Rainer said management decided that Tarp’s “features and costs are not consistent with our strategic goals, and that participation in the (program) would not be in the best interests of the company and its shareholders.”

Rainer did not return calls requesting comment.

Experts expect more banks to reject the funds due to the somewhat onerous conditions. In addition to the cost to banks, the program puts restrictions on executive pay and dividend payments. What’s more, the government reserved the right to change conditions after banks have accepted funds.

“Typically in a contract, you know what you are signing up for,” said Tamara Gurney, chief executive of Mission Valley Bancorp, a bank holding company based in Sun Valley that received $5.5 million from the Treasury. With the Tarp program, “we don’t know what could come down the road.”


Documenting funds

Another concern some banks have, Gurney added, is that the Treasury intends on having institutions document how the funds are being used, which bankers say is difficult.

Currently, banks are not required to disclose what they do with the funds, a point that has generated criticism in Washington. But Neil Barofsky, the Treasury’s special inspector general for the Tarp program, wrote a letter dated Jan. 22 saying that banks will soon be required to account for the use of the funds.

“Tarp agreements generally do not require recipients to report or even to track internally the use of Tarp funds,” Barofsky said in the letter. “If the American taxpayer is to be expected to fund this extraordinary effort to stabilize the financial system, it is not unreasonable that the public and its representatives in Congress have some understanding as to how those funds have been used by the recipients.”

The problem with that, many bankers said, is that the cash goes into the bank’s capital reserves and it then becomes nearly impossible to determine exactly how each dollar was used.

“It would be like me saying, ‘Hey, two years ago you received a paycheck from your employer tell me again what you bought with that,'” said Brian Kelley, chief executive of Pacific Commerce Bank, a downtown L.A.-based institution that received $4 million in Tarp funds. “I don’t think it would benefit from more accountability.”


Covered with Tarp

Thirteen L.A. County banks have received Troubled Asset Relief Program funds, boosting their total risk-based capital ratios. The ratio measures total capital to total assets while adjusting for varying loan risks. A bank is considered well capitalized if it has a ratio topping 10 percent.


City National Corp. Beverly Hills

Tarp Funds: $400 million

Total Risk-Based Capital Ratio: 13.4


East West Bancorp Inc. Pasadena

Tarp Funds: $306 million

Ratio: 15.83


Cathay General Bancorp Los Angeles

Tarp Funds: $258 million

Ratio: 13.88


Nara Bancorp Inc. Los Angeles

Tarp Funds: $67 million

Ratio: 16.08


Wilshire Bancorp Inc. Los Angeles

Tarp Funds: $62 million

Ratio: 17.09


Center Financial Corp. Los Angeles

Tarp Funds: $55 million

Ratio: 14.13


First California Financial Group Inc.

Westlake Village

Tarp Funds: $25 million

Ratio: 16.91



Pacific City Financial Corp.

Los Angeles

Tarp Funds: $16 million

Ratio: NA


NCAL Bancorp

Los Angeles

Tarp Funds: $10 million

Ratio: NA


Broadway Financial Corp. Los Angeles

Tarp Funds: $9 million

Ratio: 11


Mission Valley Bancorp Sun Valley

Tarp Funds: $6 million

Ratio: NA


Pacific Commerce Bank Los Angeles

Tarp Funds: $4 million

Ratio: NA


Manhattan Bancorp El Segundo

Tarp Funds: $2 million

Ratio: 38.8

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