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Banks use new Treasury funds to retire TARP debts

August 4, 2011 |  5:42 am

Trade in that nagging Troubled Asset Relief Program debt for a better deal with Uncle Sam.

That's the aim of most of the community banks participating in a U.S. Treasury investment program designed to increase loans to small businesses.

Redwood Capital Bank As reported here Wednesday, the holding companies for Redwood Capital Bank in Eureka, Calif., and Pacific Coast Bankers' Bank in San Francisco are taking part in the Treasury's Small Business Lending Fund program.

And both used some of the money they received to retire debts to the Treasury they had incurred through the Troubled Asset Relief Program, the financial crisis-era program with the acronym TARP, aka the bank bailout.

The new program designed to stimulate small-business loans works like this: Uncle Sam buys preferred stock in the bank, which initially pays the government a 5% annual dividend but can reduce that to as little as 1% in return for increased business lending.

That's a better deal than the 5% dividend banks must pay the Treasury every year for their TARP funds. TARP also reined in executive pay sharply, enough so that an expansion-minded small bank might not be able to hire a first-rate but pricey CEO, said Anaheim banking consultant Gary Findley.

The small-business lending fund "doesn't have the same draconian restrictions as TARP," Findley said. "And where else are you going to get capital at 1%?"

The new program, which has $30 billion to invest in banks with less than $10 billion in assets, began letting go of the money in late June.

A Treasury report Wednesday said that so far it had invested $590.5 million in 43 banks. They included five in California: Redwood Capital Bancorp, Pacific Coast Bankers' Bancshares, First California Financial Group Inc. of Westlake Village, Security Business Bancorp of San Diego and Founders Bancorp of San Luis Obispo.

All but Founders had been TARP recipients, a Treasury accounting report shows. Redwood got $7.3 million in new funds and paid off its $3.8-million TARP debt. Pacific Coast received $11.9 million and paid off $11.6 million in TARP funds. First California paid off $25 million in TARP money with a fresh infusion of $25 million. Security Business received $8.9 million in new funds and repaid a TARP debt of $5.8 million.

Banks have to be in reasonably good financial shape to qualify for the more attractive small-business lending program, Findley noted. That means certain banks that received TARP funds and then were roughed up in the Great Recession "are out of luck," he said. "They're stuck carrying that TARP investment on their backs until they can find another way to pay it off."


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Photo: Redwood Capital Bank repaid its $3.8-million TARP debt to the U.S. Treasury with a $7.3-million investment from a separate Treasury program. Credit: Redwood Capital Bancorp.