"Given the precipitous drop in the economy, bankers now want a higher margin of safety going forward," said Chris Nichols, Chief Executive Officer of BIG. "This abundance of caution has prompted community banks to re-evaluate their initial reluctance to consider TARP funds. Because many banks want to position themselves to withstand another Depression era-type shock and still make loans to their communities, TARP capital has become an attractive option."
Banks surveyed by BIG said TARP capital would be deployed as follows: 29% plan to use it to support organic growth, 28% said it would create a buffer against future loan losses, 11% said it would help improve capital ratios, and 8% said the funds would support M&A activity. The remainder were either undecided or had not yet identified a specific use for the capital.
"With many quality banks agreeing to use TARP funds, the stigma of government capital is largely gone," Nichols said. "While BIG urges institutions to perform a thorough financial analysis before accessing the TARP facility, we believe banks seeking to build a fortress balance sheet should take government capital. At a cost of 5% to 9% depending on the redemption period, TARP capital is relatively inexpensive compared to a cost of 12% or more for other forms of capital, if they are even available."
