The Treasury Department awarded an extra $2 million in aid to a TARP recipient last month, even though the bank hasn't been paying taxpayers the dividends they are already owed from an earlier TARP investment.
Last month, Treasury granted Community Bank of the Bay, in Oakland, Calif., $2.31 million in aid through the Community Development Capital Initiative, a TARP program that provides funds to banks, thrifts and credit unions that serve low-income or hard-hit areas.
Treasury invested more than $570 million in 84 financial institutions that qualified for the program
Community Bank of the Bay got some of the money in spite of the fact that it has failed to pay four quarterly dividend payments, worth $72,500, that were a condition of it receiving nearly $1.75 million in January 2009 through TARP's Capital Purchase Program.
The Capital Purchase Program was the main bank bailout program, and provided aid to 707 institutions.
In addition to receiving the extra $2.31 million, the bank's original aid was converted to the CDCI program, which has more attractive finanicla terms for participants. Now, the annual dividend rate on the full amount of the money that Community Bank received has been reduced from 5 percent to 2 percent, despite the bank's previous non-payments.
The situation would seem to suggest that, rather than taking steps to rectify the bank's non-payments, the Treasury Department is putting even more faith -- and dollars -- into an institution that is unable to pay taxpayers money they're owed.
"Doubling up on your losses is not a strategy to make money," said Linus Wilson a finance professor at the University of Louisiana - Lafayette, who said the Oakland bank is the first institution that has been given more TARP aid through CDCI after failing to make payments owed under the original bailout program.
Wilson said Treasury should be "ashamed" of making the additional investment. "A four-time TARP deadbeat is a bank that could care less about returning its obligations to taxpayers," Wilson said.
Community Bank told BailoutSleuth that it can easily afford to pay the dividends, but has been precluded ftom doing so by regulators.
Treasury officials declined to comment on the decision to provide more funds to Community Bank. But they noted that the move would have required a positive recommendation from the bank's primary federal regulator -- in this case, the FDIC.
The FDIC did not respond to BailoutSleuth's request for comment Tuesday.
Community Bank skipped dividend payments that were due to Treasury in February 2009, May 2009, November 2009 and February 2010, according to data compiled by SNL Financial. It made payments in August 2009, May 2010 and August 2010. Its next payment is due Nov. 15.
In its news release announcing the new funds, the bank's president and chief operating officer, William Keller, said that the switch from the old program to the new one demonstrates that regulators "have confidence in the bank and our ability to appropriately utilize the capital to benefit the communities we serve in the long term."
The aid will complement $7.7 million the bank raised earlier this year from local investors.
The new capital is expected to help the bank further its lending efforts in the communities around Oakland, Danville and San Jose.
Community Bank's chief executive, Brian Garrett, defended his bank in an interview with BailoutSleuth, saying it has suffered a negative stigma due to its reputation as a TARP "dividend deadbeat.''
Garrett explained that the bank has tried to make all the quarterly TARP dividend payments, but both the FDIC and the California Department of Financial Institutions have repeatedly denied its requests to use capital for that purpose. The CDFI could not immediately confirm to BailoutSleuth that it had denied the bank's request to make the payments, since it does not typically comment on individual, active banks.
Garrett said he doesn't know why the regulators have allowed him to make some of his dividend payments but not all of them.
His bank isn't alone. Many bankers have complained that they're unable to make dividend payments because of regulatory restrictions. Under California state law , banks with negative retained earnings must get approval from the California Department of Financial Institutions to pay dividends on stock, and the FDIC has a similar policy.
The rationale is that prohibiting dividend payments in those situations will help promote soundness of a bank by preserving its capital levels.
"When you try to explain to them that $7,000 a month is a non-event, they won't even listen," Garrett said, referring to what the $72,500 his bank owes would equate to if paid monthly (in fact, it would be even less).
"My compliance cost is higher than the old dividend payments," Garrett said, noting that the bank spends thousands of dollars on legal fees and printing costs to get shareholder approval to make the dividend payments -- which they have always granted -- only to have regulators prohibit the payments.
"Am I pissed off?" Garrett says. "Yes."
Garrett said he came to the bank in 2002 when it was failing. That year, the bank was under strict enforcement orders from the FDIC that were eventually lifted in 2004. The bank hasn't gotten into trouble with regulators since then. "We recapitalized," Garrett said, but after six years it had more than $6 million in losses and negative retained earnings.
"We had become pretty profitable until the world collapsed in 2008," he said.
Community Bank still isn't profitable. It had net operating losses of $1.1 million in the first half of 2010, compared to losses of nearly $2.1 million in the first half of 2009. But the losses are not a surprise, as the bank has added staff and opened offices this year.
Although that growth is hurting earnings in the short-term, Garrett says it is part of a long-term growth plan that is already working.
The bank's assets were $108.8 million as of June 30, up more than $42 million from that point a year ago, according to its latest earnings report. Its net loans totaled $70.8 million, up $26.1 million. Independent bank analysts BauerFinancial give the bank a relatively solid rating of 3 on its 0 to 6 scale.
Garrett anticipates that the bank will return to profitability in the second half of the year.
"The reason we didn't make the payments had nothing to do with the amount of the dollars," Garrett explained, adding that he could afford to pay the dividends out of his own pocket. "My cost of compliance is over $100,000, and my actual divided is (about) $70,000. I could've paid it out of my checkbook. I've got the money."
And he knows that the being labeled a TARP "deadbeat" has caused his institution to take a public-relations hit. The damage could become even worse, now that his bank has accepted another round of funding. "I'm as much a victim as anybody else," Garrett said. "It became a political liability," he added.
In fact, Garrett says, accepting CPP aid was the worst business decision he ever made -- a message he has repeated often to other media outlets.
So if that's the case, why sink even deeper into TARP by taking more aid through CDCI?
Banks must get regulators' permission to pay their loans and exit TARP, and based on his institution's state, he doesn't expect regulators to let him do that for at least a year anyway.
Being a banker, it didn't take Garrett long to realize that if he was going to be stuck in TARP, he may as well take out more money and switch to a vastly lower interest rate.
As Garrett says, "If I'm going to be pregnant, I may as well have twins."
He anticipates the bank will exit TARP in 18 months.